96704 Federal Register / Vol. 81, No. 251 / Friday, December 30, 2016 / Proposed Rules

COMMODITY FUTURES TRADING contracts as non-enumerated bona fide Ann Duffy, Assistant General Counsel, COMMISSION hedges or enumerated anticipatory bona 202–418–6763, [email protected], Office fide hedges, as well as to exempt from of General Counsel, in each case at the 17 CFR Parts 1, 15, 17, 19, 37, 38, 140, position limits certain spread positions, Commodity Futures Trading 150 and 151 in each case subject to Commission Commission, Three Lafayette Centre, RIN 3038–AD99 review. Separately, the Commission is 1155 21st Street NW., Washington, DC reproposing to delay for DCMs and SEFs 20581. Position Limits for Derivatives that lack access to sufficient swap SUPPLEMENTARY INFORMATION: position information the requirement to AGENCY: Commodity Futures Trading establish and monitor position limits on Table of Contents Commission. swaps. ACTION: Reproposal. I. Background DATES: Comments must be received on A. Introduction SUMMARY: The Commodity Futures or before February 28, 2017. B. The Commission Construes CEA Section Trading Commission (‘‘Commission’’ or ADDRESSES: You may submit comments, 4a(a) To Mandate That the Commission ‘‘CFTC’’) is reproposing rules to amend identified by RIN number 3038–AD99, Impose Position Limits part 150 of the Commission’s by any of the following methods: C. Necessity Finding regulations concerning speculative • CFTC Web site: http:// II. Proposed Compliance Date III. Reproposed Rules position limits to conform to the Wall comments.cftc.gov; A. § 150.1—Definitions • Mail: Secretary of the Commission, Street Transparency and Accountability B. § 150.2—Position limits Act of 2010 (‘‘Dodd-Frank Act’’) Commodity Futures Trading C. § 150.3—Exemptions amendments to the Commodity Commission, Three Lafayette Centre, D. § 150.5—Exchange-set speculative Exchange Act (‘‘CEA’’ or ‘‘Act’’). The 1155 21st Street NW., Washington, DC position limits and Parts 37 and 38 reproposal would establish speculative 20581; E. Part 19—Reports by persons holding position limits for 25 exempt and • Hand delivery/courier: Same as bona fide hedging positions pursuant to agricultural commodity futures and Mail, above. § 150.1 of this chapter and by merchants option contracts, and physical • Federal eRulemaking Portal: http:// and dealers in cotton commodity swaps that are www.regulations.gov. Follow F. § 150.7—Reporting requirements for ‘‘economically equivalent’’ to such instructions for submitting comments. anticipatory hedging positions All comments must be submitted in G. § 150.9—Process for recognition of contracts (as such term is used in positions as non-enumerated bona fide section 4a(a)(5) of the CEA). In English, or if not, accompanied by an hedging positions connection with establishing these English translation. Comments will be H. § 150.10—Process for designated limits, the Commission is reproposing to posted as received to http:// contract market or swap execution update some relevant definitions; revise www.cftc.gov. You should submit only facility exemption from position limits the exemptions from speculative information that you wish to make for certain spread positions position limits, including for bona fide available publicly. If you wish the I. § 150.11—Process for recognition of hedging; and extend and update Commission to consider information positions as bona fide hedging positions reporting requirements for persons that may be exempt from disclosure for unfilled anticipated requirements, under the Freedom of Information Act, unsold anticipated production, claiming exemption from these limits. anticipated royalties, anticipated The Commission is also reproposing a petition for confidential treatment of services contract payments or receipts, or appendices to part 150 that would the exempt information may be anticipatory cross-commodity hedge provide guidance on risk management submitted according to the procedures positions exemptions for commodity derivative established in CFTC regulations at 17 J. Miscellaneous regulatory amendments contracts in excluded commodities CFR part 145. 1. Proposed § 150.6—Ongoing permitted under the revised definition The Commission reserves the right, responsibility of DCMs and SEFs of bona fide hedging position; list core but shall have no obligation, to review, 2. Proposed § 150.8—Severability referenced futures contracts and pre-screen, filter, redact, refuse or 3. Part 15—Reports—General provisions 4. Part 17—Reports by reporting markets, commodities that would be remove any or all of your submission from http://www.cftc.gov that it may futures commission merchants, clearing substantially the same as a commodity members, and foreign brokers underlying a core referenced futures deem to be inappropriate for 5. Part 151—Position limits for futures and contract for purposes of the definition of publication, such as obscene language. swaps, Commission Regulation 1.47 and location basis contract; describe and All submissions that have been redacted Commission Regulation 1.48—Removal analyze fourteen fact patterns that or removed that contain comments on IV. Related Matters would satisfy the reproposed definition the merits of the rulemaking will be A. Cost-Benefit Considerations of bona fide hedging position; and retained in the public comment file and B. Paperwork Reduction Act present the reproposed speculative will be considered as required under the C. Regulatory Flexibility Act V. Appendices position limit levels in tabular form. In Administrative Procedure Act and other applicable laws, and may be accessible A. Appendix A—Review of Economic addition, the Commission proposes to Studies update certain of its rules, guidance and under the Freedom of Information Act. B. Appendix B—List of Comment Letters acceptable practices for compliance FOR FURTHER INFORMATION CONTACT: Cited in this Rulemaking with Designated Contract Market Stephen Sherrod, Senior Economist, (‘‘DCM’’) core principle 5 and Swap (202) 418–5452, [email protected], Riva I. Background Execution Facility (‘‘SEF’’) core Spear Adriance, Senior Special Counsel, A. Introduction principle 6 in respect of exchange-set (202) 418–5494, [email protected], speculative position limits and position Hannah Ropp, Surveillance Analyst, The Commission has long established accountability levels. Furthermore, the 202–418–5228, [email protected], or and enforced speculative position limits Commission is reproposing processes Steven Benton, Industry Economist, for futures and options contracts on for DCMs and SEFs to recognize certain (202) 418–5617, [email protected], various agricultural commodities as positions in commodity derivative Division of Market Oversight; or Lee authorized by the Commodity Exchange

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Act (‘‘CEA’’).1 The part 150 position that are ‘‘economically equivalent’’ to SEFs to recognize certain positions in limits regime 2 generally includes three such contracts.8 In addition, the commodity derivative contracts as non- components: (1) The level of the limits, Commission proposed to require that enumerated bona fide hedges or which set a threshold that restricts the DCMs and SEFs that are trading enumerated anticipatory bona fide number of speculative positions that a facilities (collectively, ‘‘exchanges’’) hedges, as well as to exempt from person may hold in the spot-month, establish exchange-set limits on such federal position limits certain spread individual month, and all months futures, options and swaps contracts.9 positions, in each case subject to combined,3 (2) exemptions for positions Further, the Commission proposed to (i) Commission review. In this regard, that constitute bona fide hedging revise the definition of bona fide under the 2016 Supplemental Position transactions and certain other types of hedging position (which includes a Limits Proposal, certain of the transactions,4 and (3) rules to determine general definition with requirements regulations proposed in 2013 regarding which accounts and positions a person applicable to all hedges, as well as an exemptions from federal position limits must aggregate for the purpose of enumerated list of bona fide hedges),10 and exchange-set position limits would determining compliance with the (ii) revise the process for market be amended to take into account the position limit levels.5 participants to request recognition of alternative processes. In connection In late 2013, the CFTC proposed to certain types of positions as bona fide with those proposed changes, the amend its part 150 regulations hedges, including anticipatory hedges 6 Commission proposed to further amend governing speculative position limits. and hedges not specifically enumerated certain relevant definitions, including to These proposed amendments were in the proposed bona fide hedging clearly define the general definition of intended to conform the requirements of definition; 11 and (iii) revise the bona fide hedging for physical part 150 to particular changes to the exemptions from position limits for commodities under the standards in CEA introduced by the Wall Street transactions normally known to the CEA section 4a(c). Separately, the Transparency and Accountability Act of 12 trade as spreads. Commission proposed to delay for 2010 (’’Dodd-Frank Act’’).7 The On June 13, 2016, the Commission DCMs and SEFs that lack access to proposed amendments included the published a supplemental proposal to sufficient swap position information the adoption of federal position limits for 28 its December 2013 Position Limits exempt and agricultural commodity requirement to establish and monitor rulemaking.13 The supplemental position limits on swaps at this time. futures and option contracts and swaps proposal included revisions and additions to regulations and guidance After review of the comments 1 7 U.S.C. 1 et seq. proposed in 2013 concerning responding to both the December 2013 2 See 17 CFR part 150. Part 150 of the speculative position limits in response Position Limits Proposal and the 2016 Commission’s regulations establishes federal Supplemental Position Limits Proposal, position limits (that is, position limits established to comments received on that proposal, by the Commission, as opposed to exchange-set and alternative processes for DCMs and the Commission, in consideration of limits) on certain enumerated agricultural contracts; those comments, is now issuing a

the listed commodities are referred to as 8 reproposal (‘‘Reproposal’’). The enumerated agricultural commodities. The position See CEA section 4a(a)(5), 7 U.S.C. 6a(a)(5) limits on these agricultural contracts are referred to (providing that the Commission establish limits on Commission invites comments on all as ‘‘legacy’’ limits because these contracts on economically equivalent contracts); CEA section aspects of this Reproposal. agricultural commodities have been subject to 4a(a)(6), 7 U.S.C. 6a(a)(6) (directing the Commission federal position limits for decades. See also Position to establish aggregate position limits on futures, B. The Commission Preliminarily Limits for Derivatives, 78 FR 75680 at 75723, n. 370 options, economically equivalent swaps, and Construes CEA Section 4a(a) To certain foreign board of trade contracts in and accompanying text (Dec. 12, 2013) (‘‘December Mandate That the Commission Impose 2013 Position Limits Proposal’’). agricultural and exempt commodities (collectively, ‘‘referenced contracts’’)). See December 2013 Position Limits 3 See 17 CFR 150.2. Position Limits Proposal, 78 FR at 75825. Under the 4 See 17 CFR 150.3. December 2013 Position Limits Proposal, 1. Introduction 5 See 17 CFR 150.4. ‘‘referenced contracts’’ would have been defined as 6 See generally December 2013 Positions Limits futures, options, economically equivalent swaps, a. The History of Position Limits and the Proposal. In the December 2013 Position Limits and certain foreign board of trade contracts, in 2011 Position Limits Rule Proposal, the Commission proposed to amend its physical commodities, and been subject to the position limits to also encompass 28 exempt and proposed federal position limits. The Commission As part of the Dodd-Frank Act, agricultural commodity futures and options proposed that federal position limits would apply Congress amended the CEA’s position contracts and the physical commodity swaps that to referenced contracts, whether futures or swaps, are economically equivalent to such contracts. regardless of where the futures or swaps positions limits provision, which since 1936 has 7 The Commission previously had issued were established. See December 2013 Positions authorized the Commission (and its proposed and final rules in 2011 to implement the Limits Proposal, at 78 FR 75826 (proposed § 150.2). predecessor) to impose limits on provisions of the Dodd-Frank Act regarding 9 See December 2013 Position Limits Proposal, 78 speculative positions to prevent the position limits and the bona fide hedge definition. FR at 75754–8. Consistent with DCM Core Principle Position Limits for Derivatives, 76 FR 4752 (Jan. 26, 5 and SEF Core Principle 6, the Commission harms caused by excessive speculation. 2011); Position Limits for Futures and Swaps, 76 FR proposed at § 150.5(a)(1) that for any commodity Prior to the Dodd-Frank Act, CEA 71626 (Nov. 18, 2011). A September 28, 2012 order derivative contract that is subject to a speculative section 4a(a) stated that for the purpose of the U.S. District Court for the District of position limit under § 150.2, a DCM or SEF that is of diminishing, eliminating or Columbia vacated the November 18, 2011 rule, with a trading facility shall set a speculative position the exception of the rule’s amendments to 17 CFR limit no higher than the level specified in § 150.2. preventing specified burdens on 150.2. International Swaps and Derivatives 10 See December 2013 Position Limits Proposal, interstate commerce, the Commission Association v. United States Commodity Futures shall, from time to time, after due notice Trading Commission, 887 F. Supp. 2d 259 (D.D.C. 78 FR at 75706–11, 75713–18. 11 2012). See generally the materials and links on the See December 2013 Position Limits Proposal, and an opportunity for hearing, by rule, Commission’s Web site at http://www.cftc.gov/ 78 FR at 75718. regulation, or order, proclaim and fix LawRegulation/DoddFrankAct/Rulemakings/DF_ 12 See December 2013 Position Limits Proposal, such limits on the amounts of trading _ 78 FR at 75735–6. CEA section 4a(a)(1), 7 U.S.C. 26 PosLimits/index.htm. The Commission issued which may be done or positions which the December 2013 Position Limits Proposal, among 6a(a)(1), permits the Commission to exempt other reasons, to respond to the District Court’s transactions normally known to the trade as may be held by any person under decision in ISDA v. CFTC. See generally the ‘‘spreads’’ from federal position limits. contracts of sale of such commodity for materials and links on the Commission’s Web site 13 Position Limits for Derivatives: Certain future delivery on or subject to the rules at http://www.cftc.gov/LawRegulation/ Exemptions and Guidance, 81 FR 38458 (June 13, of any contract market as the DoddFrankAct/Rulemakings/ 2016) (‘‘2016 Supplemental Position Limits PositionLimitsforDerivatives/index.htm. Proposal’’). Commission finds are necessary to

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diminish, eliminate, or prevent such particular market participant.20 Because The court’s determination in ISDA v. burden.14 it interpreted the Dodd-Frank Act as CFTC that CEA sections 4a(a)(1) and (2), In the Dodd-Frank Act, Congress mandating position limits, the read together, are ambiguous focused on renumbered a modified version of CEA Commission did not make an the opening phrase of subsection (A)— section 4a(a) as section 4a(a)(1) and independent threshold determination ‘‘[i]n accordance with the standards set added, among other provisions, CEA that position limits are necessary to forth in [CEA section 4a(a)(1)].’’ The section 4a(a)(2), captioned accomplish the purposes set forth in the court held that the term ‘‘standards’’ in ‘‘Establishment of Limitations,’’ which statute. The Commission explained: CEA section 4a(a)(2) was ambiguous as provides that in accordance with the Congress directed the Commission to impose to whether it referred to the requirement standards set forth in CEA section position limits and to do so expeditiously. in CEA section 4a(a)(1) that the 4a(a)(1), the Commission shall establish Section 4a(a)(2)(B) states that the limits for Commission impose position limits only limits on the amount of positions, as physical commodity futures and options ‘‘as [it] finds are necessary to diminish, appropriate, other than bona fide hedge contracts ‘‘shall’’ be established within the eliminate, or prevent’’ an unnecessary positions, that may be held by any specified timeframes, and section 4a(a)(2)(5) burden on interstate commerce.25 If not, person. CEA section 4a(a)(2) further states that the limits for economically ‘‘standards’’ would refer to the provides that for exempt commodities equivalent swaps ‘‘shall’’ be established aggregation and flexibility standards (energy and metals), the limits required concurrently with the limits required by stated in CEA section 4a(a)(1) by which under CEA section 4a(a)(2) shall be section 4a(a)(2). The congressional directive position limits are to be implemented. established within 180 days after the that the Commission set position limits is further reflected in the repeated references to Accordingly, the court rejected both (1) date of the enactment of CEA section the limits ‘‘required’’ under section the Commission’s contention that CEA 4a(a)(2); for agricultural commodities, 4a(a)(2)(A).21 section 4a(a) as a whole unambiguously the limits required under CEA section mandated the imposition of position 4a(a)(2) shall be established within 270 ISDA and SIFMA sued the limits without the Commission finding days after the date of the enactment of Commission to vacate part 151 on the independently that they are necessary; CEA section 4a(a)(2).15 basis (among others) that, in their view, and (2) the plaintiffs’ contention that These and other changes to CEA CEA section 4a(a) clearly required the CEA section 4a(a) unambiguously section 4a(a) are described in more Commission to make an antecedent required the Commission to make such detail below. necessity finding. findings before the imposition of Pursuant to these amendments, the 26 b. The District Court Opinion position limits. The court stated that Commission adopted a position limits because the Commission had incorrectly rule in 2011 (‘‘2011 Position Limits As set forth in the Commission’s found CEA section 4a(a) unambiguous, Rule’’) in a new part 151.16 In the 2011 December 2013 Position Limits it could not defer to any interpretation Position Limits Rule, the Commission Proposal,22 the district court in ISDA v. by the Commission to resolve the imposed, in new part 151, speculative CFTC found that, on one hand, CEA section’s ambiguity. As the court limits in the spot-month and non-spot- section 4a(a)(1) ‘‘unambiguously observed, the D.C. Circuit has held that months on 28 physical commodity requires that, prior to imposing position ‘‘ ‘deference to an agency’s derivatives ‘‘of particular significance to limits, the Commission find that interpretation of a statute is not interstate commerce.’’ 17 Under the 2011 position limits are necessary to appropriate when the agency wrongly Position Limits Rule, part 151 used ‘diminish, eliminate, or prevent’ the believes that interpretation is compelled formulas for calculating limit levels that burden described in [CEA section by Congress.’ ’’ 27 The court further held are similar to the formulas used to 4a(a)(1)].’’ 23 On the other hand, the that, pursuant to the law of the D.C. calculate previous Commission- and court found that the Dodd-Frank Act Circuit, it was required to remand the 18 exchange-set position limits. The 2011 amendments to CEA section 4a(a) matter to the Commission so that it Position Limits Rule contained rendered section 4a(a)(1) ambiguous could ‘‘fill in the gaps and resolve the provisions in part 151 that implemented with respect to whether such findings ambiguities.’’ 28 The court instructed the statutory exemption for bona fide are required for the position limits that the Commission must apply its 19 hedging. It also provided account described in CEA section 4a(a)(2)— experience and expertise and cautioned aggregation standards to determine futures contracts, options, and certain that, in resolving the ambiguity in CEA which positions to attribute to a swaps on agricultural and exempt section 4a(a), ‘‘ ‘it is incumbent upon the commodities.24 agency not to rest simply on its parsing 14 7 U.S.C. 6a(a) (2006). of the statutory language.’ ’’ 29 The 15 CEA section 4a(a)(2); 7 U.S.C. 6a(a)(2). The Commission does not rest simply on Commission notes that it uses the defined term 20 Id. at 71651–55. A central feature of any ‘‘bona fide hedging position’’ throughout part 150, position limits regime is determining which parsing the statutory language, but any rather than ‘‘bona fide hedge positions’’ found in positions to attribute to a particular trader. The CEA interpretation necessarily begins with CEA section 4a(a)(2). CEA section 4a(c)(1) uses the requires the Commission to attribute to a person all the text, which is described in the next term ‘‘bona fide hedging transactions or positions’’ positions that the person holds or trades, as well as section. and CEA section 4a(c)(2) uses the term ‘‘bona fide positions held or traded by anyone else that such hedging transaction or position.’’ The Commission person directly or indirectly controls. 7 U.S.C. 2. The Statutory Framework for Position interprets all of these terms to mean the same. It 6a(a)(1). This is referred to as account aggregation. should be noted that the Commission previously In addition to account aggregation, Congress Limits imposed transaction volume limits on ‘‘the amounts required the Commission to set limits on all Before the Dodd-Frank Act, what was of trading which may be done’’ as authorized by derivative positions in the same underlying CEA section 4a(a)(1), but removed those transaction commodity that a trader may hold or control across then CEA section 4a(a) authorized the volume limits. Elimination of Daily Speculative all derivative exchanges. 7 U.S.C. 6a(a)(6). The Trading Limits, 44 FR 7124, 7127 (Feb. 6, 1979). Commission refers to this as position aggregation. 25 887 F. Supp. 2d at 274–76. 16 Position Limits for Futures and Swaps, 76 FR 21 Position Limits for Futures and Swaps, 76 FR 26 887 F. Supp. 2d at 279–80. 71626 (Nov. 18, 2011). As finalized, part 151 at 71626–628. 27 Id. at 280–82, quoting Peter Pan Bus Lines, Inc. replaced part 150. 22 International Swaps and Derivatives Ass’n v. v. Fed. Motor Carrier Safety Admin., 471 F.3d 1350, 17 Id. at 71665; see also id at 716629–30. United States Commodity Futures Trading Comm’n, 1354 (D.C. Cir. 2006). 18 Id. at 71632–33 (transition), 71668–70 (spot- 887 F. Supp. 2d 259 (D.D.C. 2012). 28 887 F. Supp. 2d at 282. month limit), 71671 (non-spot month limit). 23 Id. at 270. 29 Id. at n.7, quoting PDK Labs. Inc. v. DEA, 362 19 Id. at 71643–51. 24 Id. at 281. F.3d 786, 797 (D.C. Cir. 2004).

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Commission to set limits on futures for The 2010 Dodd-Frank Act aggregate the limits across exchanges for any exchange-traded contract for future amendments to CEA section 4a(a) equivalent derivatives, require the delivery of any commodity ‘‘as the significantly expanded and altered it. Commission to impose limits on swaps Commission finds are necessary to The entirety of pre-Dodd-Frank CEA that are economically equivalent to the diminish, eliminate, or prevent [the] section 4a(a) became CEA section physical commodity futures and options burden’’ of ‘‘[e]xcessive speculation’’ 4a(a)(1). Congress added six new subject to CEA section 4a(a)(2), and ‘‘causing sudden or unreasonable subsections to CEA section 4a(a)— permit the Commission to grant fluctuations or unwarranted changes in sections 4a(a)(2) through (7). And, exemptions from the position limits it the price of such commodity.’’ 7 U.S.C. outside of section 4a(a), Congress must impose under the provision: 6a(a) (2009 Supp.).30 CEA section 4a(a) imposed a requirement that the • Section 4a(a)(3) guides the also required the Commission to follow Commission study the new limits it Commission in setting appropriate limit certain criteria for aggregating limits imposed and provide Congress with a levels by providing that the Commission once it made that determination. And report on their effects within one year shall consider whether the limit levels: the Commission was authorized to of their imposition.32 (i) Diminish, eliminate, or prevent impose limits flexibly, depending on the The primary change at issue here was excessive speculation; (ii) deter and commodity, delivery month, and other the addition of new CEA section prevent market manipulation, squeezes, factors.31 4a(a)(2), which addresses position limits and corners; (iii) ensure sufficient on a specific class of commodity market liquidity for bona fide hedgers; 30 Under the heading of ‘‘Burden on interstate contracts, ‘‘physical commodities other and (iv) ensure that the price discovery commerce; trading or position limits,’’ 7 U.S.C. than excluded commodities’’: function of the underlying market is not 6a(a) (2006) provided that excessive speculation in any commodity under contracts of sale of such CEA section 4a(a)(2)(A) provides that disrupted; commodity for future delivery made on or subject in accordance with the standards set • Section 4a(a)(4) sets forth criteria to the rules of contract markets or derivatives forth in CEA section 4a(a)(1), with for determining which swaps perform a transaction execution facilities, or on electronic significant price discovery function for trading facilities with respect to a significant price respect to physical commodities other discovery contract causing sudden or unreasonable than excluded commodities, the purposes of the position limits fluctuations or unwarranted changes in the price of Commission shall establish limits on the provisions; such commodity, is an undue and unnecessary amount of positions, as appropriate, • Section 4a(a)(5) requires the burden on interstate commerce in such commodity. Commission to concurrently impose Title 7 U.S.C. 6a(a) (2006) further provided that for other than bona fide hedge positions, the purpose of diminishing, eliminating, or that may be held by any person with appropriate limit levels on physical preventing such burden, the Commission shall, respect to contracts of sale for future commodity swaps that are economically from time to time, after due notice and opportunity delivery or with respect to options on equivalent to the futures and options for for hearing, by rule, regulation, or order, proclaim the contracts. which limits are required; and fix such limits on the amounts of trading which • may be done or positions which may be held by any CEA section 4a(a)(2)(B), in turn, Section 4a(a)(6) requires the person under contracts of sale of such commodity provides that the limits ‘‘required’’ Commission to apply the required for future delivery on or subject to the rules of any under CEA section 4a(a)(2)(A) ‘‘shall be position limits on an aggregate basis to contract market or derivatives transaction execution contracts based on the same underlying facility, or on an electronic trading facility with established within 180 days after the date of enactment of this paragraph’’ for commodity across all exchanges; and respect to a significant price discovery contract, as • the Commission finds are necessary to diminish, ‘‘agricultural commodities’’ (such as Section a(a)(7) authorizes the eliminate, or prevent such burden. Additionally, 7 wheat or corn) and ‘‘within 270 days Commission to grant exemptions from U.S.C. 6a(a) (2006) stated that in determining the position limits it imposes.34 whether any person has exceeded such limits, the after the date of the enactment of this positions held and trading done by any persons paragraph’’ for ‘‘exempt commodities’’ In a separate Dodd-Frank Act provision, directly or indirectly controlled by such person (which include energy-related Congress required that the Commission, shall be included with the positions held and commodities like oil, as well as in consultation with exchanges, ‘‘shall trading done by such person; and further, such 33 limits upon positions and trading shall apply to metals). conduct a study of the effects (if any) of positions held by, and trading done by, two or more The other new subsections of CEA the position limits imposed’’ under CEA persons acting pursuant to an expressed or implied section 4a(a) delineate the types of section 4a(a)(2), that ‘‘[w]ithin twelve agreement or understanding, the same as if the physical commodity derivatives to months after the imposition of position positions were held by, or the trading were done by, a single person. Title 7 U.S.C. 6a(a) (2006) further which the new limits apply, set forth limits’’ the Commission ‘‘shall’’ submit stated that nothing in that section shall be criteria for the Commission to consider a report of the results of the study to construed to prohibit the Commission from fixing in determining the levels of the required Congress, and that Congress ‘‘shall’’ different trading or position limits for different limits, require the Commission to hold hearings within 30 days of receipt commodities, markets, futures, or delivery months, 35 or for different number of days remaining until the of the report regarding its findings. last day of trading in a contract, or different trading exempted positions held by or on behalf of the limits for buying and selling operations, or different United States, and CEA section 4a(e), which 3. The Commission’s Experience With limits for the purposes of paragraphs (1) and (2) of authorized exchanges to set limits so long as they Position Limits subsection (b) of this section, or from exempting were not higher than Commission-set limits and As explained in the December 2013 transactions normally known to the trade as made it unlawful for any person to hold limits in ‘‘spreads’’ or ‘‘straddles’’ or ‘‘arbitrage’’ or from excess of exchange-set limits. (Exchange-set limits Position Limits Proposal, position limits fixing limits applying to such transactions or are also addressed elsewhere in the CEA. E.g., 7 have a long history as a tool to prevent positions different from limits fixed for other U.S.C. 7(d)(5)). unwarranted price movement and transactions or positions. Moreover, 7 U.S.C. 6a(a) 32 15 U.S.C. 8307(a). Some parts of pre Dodd- volatility, including but not limited to (2006) defined the word ‘‘arbitrage’’ in domestic Frank CEA sections 4a(a) and 4a(b)–(e) were also markets to mean the same as a ‘‘spread’’ or amended by the Dodd-Frank Act. CEA section 4a(a) price swings caused by market ‘‘straddle.’’ It also authorized the Commission to is now CEA section 4a(a)(1) and was modified manipulation.36 Physical commodities define the term ‘‘international arbitrage.’’ 7 U.S.C. primarily to add swaps, CEA section 4a(b) updates underlying futures contracts are, by 6a(a) (2006). the names of applicable exchanges, and CEA definition, in finite supply, and so it is 31 There were four other subsections of CEA section 4a(c) requires the Commission to section 4a: CEA section 4a(b), which made it promulgate a rule in accordance with a narrowed unlawful for a person to hold positions in excess definition of bona fide hedging position as an 34 7 U.S.C. 6a(a)(3)–(7). of Commission-set limits; CEA section 4a(c), which exemption from position limits. 7 U.S.C. 6a(a)(1), 35 15 U.S.C. 8307(a). exempted positions held under an exemption for 6a(b)–(e). 36 December 2013 Position Limits Proposal, 78 FR bona fide hedges, CEA section 4a(d), which 33 7 U.S.C. 6a(a)(2)(B)(i) and (ii). at 75685.

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possible to amass or dissipate an exchange limits or accountability products.43 Proceedings leading up to extremely large position in such a way requirements to significant price the establishment of the limits as to interfere with the normal forces of discovery contracts traded on exempt commenced more than 13 months supply and demand. Speculators (who commercial markets.40 earlier, when the CEC issued a notice of have no commercial use for the As addressed in the December 2013 hearing regarding the limits.44 underlying commodity) are considered Position Limits Proposal, two aspects of Similarly, in September 1939, the CEC differently from hedgers (who use the Commission’s experience are issued a Notice of Hearing with respect commodity derivatives to hedge particularly important to the to position limits for cotton, but it was commercial risk). Speculators have been Commission’s interpretation of the not until August 1940 that the CEC considered a greater source of risk 45 Dodd-Frank Act amendments to CEA finally promulgated such limits. And because their trading is unconnected section 4a. The first is the Commission’s the CEC began the process of imposing with underlying commercial activity, experience with the time required to limits on soybeans and eggs in January whereas a hedger’s trading is calibrated make necessity findings before setting 1951, but did not complete the process to other business needs. In various limits, which relates to the time limits until more than seven months later.46 statutory enactments, Congress has contained in CEA section 4a(a)(2)(B). recognized both the utility of position In the Commission’s experience limits and the need to treat speculators The second is the Commission’s (including the experience of its differently from hedgers. experience in rulemaking requiring predecessor agency), it generally took Congress began regulating commodity exchanges to set limits in accordance many months to make a necessity derivatives in 1917, when Congress with certain ‘‘standards,’’ the term the finding with respect to one commodity. enacted emergency legislation to district court found ambiguous. The process of making the sort of stabilize the U.S. grain markets during a. Time to Establish Position Limits necessity findings that plaintiffs in ISDA the First World War by suspending v. SIFMA urged with respect to all wheat futures and securing ‘‘a voluntary Based on its experience administering agricultural commodities and all exempt limitation’’ of 500,000 bushels on position limits, the Commission commodities (and that some trading in corn futures.37 In 1922 preliminarily concludes (as stated commenters urge) would be far more Congress enacted the Grain Futures Act, preliminarily in the December 2013 lengthy than the time allowed by CEA in which it noted that ‘‘sudden or Position Limits Proposal) that Congress section 4a(a)(3), i.e., 180 or 270 days unreasonable fluctuations in the prices could not have contemplated that, as a from enactment of the Dodd-Frank of commodity futures . . . frequently prerequisite to imposing limits, the Act.47 Because of the stringent time occur as a result of speculation, Commission would first make limits in CEA section 4a(a)(2)(B), the manipulation, or control ....’’38 In antecedent commodity-by-commodity Commission concludes that Congress 1936, Congress strengthened the necessity determinations in the 180–270 did not intend for the Commission to government’s authority by providing for day time frame within which CEA delay the imposition of limits until it limits on speculative trading in section 4a(a)(2)(B) states that limits first made antecedent, contract-by- commodity derivatives when it enacted ‘‘required under subparagraph contract necessity findings. the CEA. The CEA authorized the [4a(a)(2(A)] shall be established.’’ 41 As CFTC’s predecessor, the Commodity described in the December 2013 43 See In the Matter of Limits on Position and Exchange Commission (CEC), to Position Limits Proposal, for 45 years Daily Trading in Wheat, Corn, Oats, Barley, Rye, establish limits on speculative trading. after passage of the CEA, the and Flaxseed, for Future Delivery Findings of Fact, Since that time, the Commission has Conclusions, and Order, 3 FR 3145, Dec. 24, 1938. Commission’s predecessor agency made 44 been establishing or authorizing See 2 FR 2460, Nov. 12, 1937. findings of necessity in its rulemakings 45 See Limitation on Buying or Selling of Cotton position limits for the past 80 years. As establishing position limits.42 During Notice of Hearing, 4 FR 3903, Sep. 14, 1939; Part discussed in the December 2013 that period, the Commission had 150—Orders of the Commodity Exchange Position Limits Proposal and prior jurisdiction over only a limited number Commission Findings of Fact, Conclusions, and rulemakings, this history includes Order In the Matter of Limits on Position and Daily of agricultural commodities. In orders Trading in Cotton for Future Delivery, 5 FR 3198, setting position limits beginning in issued by the Commodity Exchange Aug. 28, 1940. 1938; overseeing exchange-set limits Commission between 1940 and 1956 46 See Handling of Anti-Hog-Cholera Serum and beginning in the 1960s; promulgating a establishing position limits, the CEC Hog-Cholera Virus; Notice of Proposed Rule Making rule in 1981, later directly ratified by 16 FR 321, Jan. 12, 1951; Limits on Position and stated that the limits it was imposing in Daily Trading in Eggs for Future Delivery, 16 FR Congress, mandating that exchanges set each were necessary. Each of those 8106, Aug. 16, 1951; see also Limits on Positions limits for all commodity futures for orders involved no more than a small and Daily Trading in Cottonseed Oil, Soybean Oil, which there were no limits; allowing number of commodities. But it took the and Lard for Future Delivery, 17 FR 6055, Jul. 4, exchanges, in the 1990s, to set position 1952 (providing notice of a hearing regarding CEC many months to make those proposed position limits for cottonseed oil, soybean accountability levels for certain findings. For example, in 1938, the CEC oil, and lard); Limits on Position and Daily Trading financial contracts, such as futures and imposed position limits on six grain in Cottonseed Oil for Future Delivery, 18 FR 443, options on foreign currencies and other Jan. 22, 1953 (giving orders setting limits for cottonseed oil, soybean oil, and lard); Limits on financial instruments with high degrees 3013.H, and 3015.H, 56 FR 51687 (Oct. 15, 1991) 39 Position and Daily Trading in Onions for Future of stability; and later expanding (providing notice of proposed exchange rule Delivery; Notice of Hearing, 21 FR 1838, Mar. 24, changes; request for comments). The Government, 1956 (conveying notice of a hearing regarding 37 Frank M. Surface, The Grain Trade During the either through Congress, CEC or the Commission, proposed position limits for onions), Limits on World War, at 224 (Macmilliam 1928). has maintained position limits on various Position and Daily Trading in Onions for Future 38 Grain Futures Act of 1922, ch. 369 at section agricultural commodities since 1917. Delivery, 21 FR 5575, Jul. 25, 1956 (providing order 3, 342 Stat. 998, 999 (1922), codified at 7 U.S.C. 5 40 December 2013 Position Limits Proposal, 78 FR setting position limits for onions). (1925–26). at 75681–85; Significant Price Discovery Contracts 47 Although the Commission did not meet these 39 See Speculative Position Limits—Exemptions on Exempt Commercial Markets, 74 FR 12178 deadlines in its first position limits rulemaking, it From Commission Rule 1.61; Chicago Mercantile (March 23, 2009). completed the task (in which the Commission Exchange Proposed Amendments to Rules 3902.D, 41 December 2013 Position Limits Proposal, 78 FR received and addressed more than 15,000 5001.E, 3010.F, 3012.F, 3013.F, 3015.F, 4604, and at 75682–83 (citing 887 F. Supp. 2d at 273). comments) as expeditiously as possible under the Deletion of Rules 3902.F, 5001.G, 3010.H., 3012.M, 42 887 F. Supp. 2d at 269. circumstances.

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b. Prior Rulemaking Requiring The Commission thus directed the conference committee.59 In important Exchanges to Set Limits exchanges to set limits for all futures respects, the language of H.R. 977 contracts ‘‘pursuant to the . . . resembles the language the Commission The CFTC’s preliminary standards of rule 1.61,’’ without used in 1981, suggesting that the interpretation of the statute is also based requiring that the exchanges first make regulation’s text may have influenced in part on its promulgation of a rule in a finding of necessity.55 And rule 1.61 the statutory text. Like the 1981 requiring exchanges to impose incorporated the ‘‘standards’’ from then- Commission’s 1981 rule, H.R. 977 states limits on all contracts that did not CEA-section 4a(1)—an ‘‘Aggregation that there ‘‘shall’’ be position limits in already have limits. In that rulemaking, Standard’’ (46 FR at 50943) for applying accordance with the ‘‘standards’’ the Commission, acting expressly the limits to positions both held and identified in CEA section 4a(a).60 This pursuant to, inter alia, what was then controlled by a trader, and a flexibility language was included in CEA section CEA section 4a(1) (predecessor to CEA standard allowing the exchanges to set 4a(a)(2) as adopted. Also like the 1981 section 4a(a)(1)), adopted what was then 48 ‘‘different and separate position limits rule, H.R. 977 established (and the 17 CFR 1.61. This rule required for different types of futures contracts, Dodd-Frank Act ultimately adopted) a exchanges to set speculative position or for different delivery months, or from ‘‘good faith’’ exception for positions limits ‘‘for each separate type of contract exempting positions which are normally acquired prior to the effective date of for which delivery months are listed to known in the trade as ‘spreads, the mandated limits.61 The committee trade’’ on any DCM, including straddles or arbitrage’ or from fixing report accompanying H.R. 977 described ‘‘contracts for future delivery of any limits which apply to such positions it as ‘‘Mandat[ing] the CFTC to set commodity subject to the rules of such which are different from limits fixed for speculative position limits’’ and the 49 contract market.’’ The Commission other positions.’’ 56 Because the section-by-section analysis stated that explained that this action would ‘‘close Commission had already made the the legislation ‘‘requires the CFTC to set the existing regulatory gap whereby antecedent necessity findings, it appropriate position limits for all some but not all contract markets [we]re imposed tight deadlines for the physical commodities other than subject to a specified speculative exchanges to establish the limits. It is, excluded commodities.’’ 62 This closely 50 position limit.’’ accordingly, reasonable to believe that resembles the omnibus prophylactic Like the Dodd-Frank Act, the 1981 Congress would have structured CEA approach the Commission took in 1981, final rule established (and the rule section 4a(a) similarly, by first making when the Commission required the release described) that such limits the antecedent necessity determination establishment of position limits on all ‘‘shall’’ be established according to what on its own,57 then directing the futures contracts according to the Commission termed ‘‘standards.’’ 51 Commission to impose the limits ‘‘standards’’ it borrowed from CEA As used in the 1981 final rule and without making an independent section 4a(1). The Commission views release, ‘‘standards’’ meant the criteria determination of necessity, and then the history and interplay of the 1981 for determining how the required limits using the term ‘‘standards’’ just as the rule and Dodd-Frank Act section 737 as would be set.52 ‘‘Standards’’ did not Commission did in 1981 to refer to further evidence that Congress intended include the antecedent ‘‘necessity’’ aggregation and flexibility rather than to follow much the same approach as determination of whether to order limits necessity for the required limits. the Commission did in 1981, mandating at all. The Commission had already Indeed, legislative history shows position limits as to all physical made the antecedent judgment in the reason to believe that Congress’ choice commodities.63 rule that ‘‘speculative limits are of the word ‘‘standards’’ to refer to There is further evidence based on the appropriate for all contract markets aggregation and flexibility alone was 1981 rulemaking that Congress would irrespective of the characteristics of the purposeful and intended it to mean the have found the across-the-board underlying market.’’ 53 The Commission same thing it did in the Commission’s prophylactic approach attractive. In further concluded that, with respect to 1981 rule.58 The language that 1983, when enacting the Futures any particular market, the ‘‘existence of ultimately became section 737 of the Trading Act of 19982, Public Law 97– historical trading data’’ showing Dodd-Frank Act, amending CEA section 444, 96 Stat. 2294 (1983), Congress was excessive speculation or other burdens 4a(a), originated in substantially final aware that the Commission had on that market is not ‘‘an essential form in H.R. 977, introduced by ‘‘promulgated a final rule requiring prerequisite to the establishment of a Representative Peterson, who was then exchanges to submit speculative speculative limit.’’ 54 Chairman of the House Agriculture position limit proposals for Commission Committee and who would ultimately approval for all futures contracts traded 48 Establishment of Speculative Position Limits, be a member of the Dodd-Frank Act as of that date.’’ 64 Presented with 46 FR 50938, 50944–45, Oct. 16, 1981. The rule competing industry and Commission adopted in 1981 tracked, in significant part, the 55 Establishment of Speculative Position Limits. proposals to amend the position limits language of CEA section 4a(1). Compare 17 CFR 46 FR at 50942. 1.61(a)(1) (1982) with 7 U.S.C. 6a(1) (1976). statute, Congress elected to amend the 56 Id. at 50945 (§ 1.61(a)). Compare 7 U.S.C. 6a(1) 49 Establishment of Speculative Position Limits, (1976). 46 FR at 50945. 59 H.R. 977, 11th Cong. (2009). 57 As discussed in further detail regarding 50 60 Id. at 50939; see also id. at 50938 (‘‘to ensure congressional investigations, below, it is especially 7 U.S.C. 6. that each futures and options contract traded on a reasonable to infer that Congress had in fact made 61 Compare H.R. 977, 11th Cong. (2009) with designated contract market will be subject to such a determination based on the congressional Establishment of Speculative Position Limits, 46 FR speculative position limits’’). investigations that preceded these Dodd-Frank Act at 50944. 51 Compare id. at 50941–42, 50945 with 7 U.S.C. amendments. The fact that the Commission already 62 H.Rept. 111–385, at 15, 19 (Dec. 19, 2009). 6a(a)(2)(A). had the clear authority to impose limits when it 63 See Union Carbide Corp. & Subsidiaries v. 52 Establishment of Speculative Position Limits, deemed them necessary bolsters this inference, Comm’r of Internal Revenue, 697 F.3d 104, 109 (2d 46 FR 50941–42, 50945. because there was no need for these Dodd-Frank Cir. 2012) (explaining that when an agency must 53 Id. at 50941–42 (preamble), 50945 (text of Act amendments to the position limits statute resolve a statutory ambiguity, to do so ‘‘with the aid § 1.61(a)(2)). unless Congress, based on its own determination of of reliable legislative history is rational and 54 The Commission believes it likely that, given necessity, sought to direct the Commission to prudent’’ (quoting Robert A. Katzman, Madison the prophylactic purposes articulated in current impose limits. Lecture: Statutes, 87 N.Y.U. L. Rev. 637, 659 CEA section 4a(a)(1)(A), a similar view of position 58 The relevant broader legislative history is (2012)). limits underpins CEA section 4a(a)(2)(A). discussed in depth, below. 64 S. Rep. No. 97–384, at 44 (1982).

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CEA ‘‘to clarify and strengthen the opined that only the Commission could iii. 1981 Rulemaking: Some Commission’s authority in this area,’’ impose limits without any conflicts of commenters disagreed with the including authorizing the Commission interest due to the exchanges’ Commission’s consideration of the 1981 to prosecute violations of exchange-set imperative to maximize trading volume Rule. CME commented that the 1981 limits as if they were violations of the in order to maximize profit.70 Rule is inapposite because there the CEA.65 Thus, by granting the ii. Time to Establish Limits: No Commission was requiring DCMs to Commission explicit authority to commenters disputed the fact that it impose position limits based on an enforce the Commission-mandated took many months for the Commission ‘‘antecedent judgment’’ that limits were exchange-set limits, Congress in effect to make a necessity determination necessary and appropriate; a necessity ratified the 1981 rule, finding it before establishing limits. Some finding was not required there.74 The reasonable to impose position limits on commenters agreed with the Commission believes that CME’s an across-the board basis, rather than determinations the Commission observation is consistent with its following a commodity-by-commodity preliminarily drew from its interpretation. In the 1981 rule, the determination. This contributes to the experience.71 Commission made an antecedent Commission’s judgment that Congress Several commenters asserted that the judgment on an across-the-board basis reasonably could have followed a Commission’s reliance on the timelines that position limits were necessary, and similar approach here and, for the to support its view ignores other the exchanges then set them according reasons given elsewhere, likely did. qualifying language in the statute, such to specific standards. Here, Congress has c. Comments 66 as the terms ‘‘necessary’’ and made the antecedent judgment on an ‘‘appropriate.’’ 72 The Commission across-the-board basis that position i. Commission’s Experience: No disagrees, because its interpretation of limits are necessary for physical commenter disputed the depth or the statute considers the relevant commodities (i.e., commodities other breadth of the Commission’s experience provisions as an integrated whole, than excluded commodities), and and expertise with position limits.67 which is required in interpreting any ordered the Commission to set them Most, if not all, commenters, many of statute. Under this approach, it is according to the same types of standards them exchanges, traders, and other referenced in the 1981 rule. This market participants who have been appropriate to give consideration to the import of the tight statutory deadlines in supports, rather than undermines, the subject to a long-standing federal and Commission’s interpretation that the exchange-set limit regime, implicitly or light of the Commission’s experience that it could not possibly comply with ‘‘standards’’ in CEA section 4a(a)(1), explicitly agreed that at least spot- referred to in CEA section 4a(a)(2) as month position limits continue to be if it had to make necessity findings as it has in the past. These comments fail added by the Dodd-Frank Act, are the essential to prevent manipulation and flexibility and aggregation standards, excessive volatility and thus serve the to take these considerations into 68 account. The Commission addresses the much as they were in the 1981 public interest. One commenter rulemaking interpreting CEA section acknowledged that only the language relied upon by these commenters, infra, in its discussion of 4a(a)(1). Commission can impose and monitor Several commenters contended that limits across exchanges.69 Another the text of the statute. CME also contended that the 180- and the Commission’s reliance on the 1981 rulemaking ignores that the CFTC then 65 270-day time limits were a difficulty Id. imposed limits only after a fact- 66 A list is provided below in Section V, manufactured by the December 2013 Appendix B, of the full names, abbreviations, dates Position Limits Proposal itself. intensive inquiry into the characteristics and comment letter numbers for all comment letters According to CME, the Commission of individual contracts markets to cited in this rulemaking. The Commission notes could instead expedite the process for determine the limits most appropriate that many commenters submitted more than one for individual contract markets.75 comment letter. Additionally, all comment letters setting limits by utilizing its exchanges that pertain to the December 2013 Position Limits and others to determine whether However, the Commission has taken Proposal and the 2016 Supplemental Position position limits are necessary and those inquiries into account. The Limits Proposal, including non-substantive Commission believes these inquiries are comment letters, are contained in the rulemaking appropriate for a particular commodity comment file and are available through the and, if so, the appropriate types and significant because while the Commission’s Web site at http://comments.cftc.gov/ levels of limits and related Commission performed such PublicComments/CommentList.aspx?id=1708. A exemptions.73 While this is a plausible investigation for some markets, it did search can be done online for a particular comment not do so for all markets ultimately letters by inserting the specific comment letter approach to generating necessity number in the address in place of the hash tags in findings, the Commission views it within the scope of the rule. The 1981 the following web address: http:// unlikely that Congress had this Rule directed exchanges to impose comments.cftc.gov/PublicComments/ approach in mind. The provisions at limits on all futures contracts for which ViewComment.aspx?id=#####&SearchText. exchanges had not already imposed 67 One commenter questioned whether the issue make no mention of exchange-set Commission’s experience was even relevant. This limits or necessity findings. CME also limits. For example, citing a then-recent commenter asserted that the statute clearly and gave no reason to believe that disruption in the silver market, the unambiguously does not mandate imposition of Commission directed that position position limits, and therefore no consideration or commodity-by-commodity necessity findings could be made by the limits be imposed prophylactically for deference to the Commission’s experience is 76 appropriate. CL–ISDA/SIFMA–59611 at 7. But the exchanges within the prescribed 180/ all futures and options contracts. It district court disagreed and directed the 270 day limits. further directed the exchanges to Commission to employ its experience in resolving consider the characteristics of particular the ambiguities in the statute. 887 F. Supp. 2d at contracts and markets in determining 270, 280–82. In any event, for the reasons 70 CL–CMOC–60400 at 3; and CL-Public Citizen- discussed, the Commission’s reading is, at a 60390 at 2–3. how to set limits (the standards, limit minimum, reasonable. 71 E.g., CL–A4A–59714 at 3. 68 E.g., CL–CME–59718 at 2; see also CL–ISDA/ 72 CL–CME–59718 at 7; and CL–ISDA/SIFMA– 74 Id. at 9–10. SIFMA–59611 at 3, 27–32, App. A at 11, App. B at 59611 at 9, n. 32 (asserting that deadlines are no 75 CL–AMG–59709 at 4, n. 8; and CL–CME–59718 6 (arguing for alternatives to limits outside the spot excuse for the Commission to be ‘‘arbitrary’’ or at 15–16. month). ‘‘sloppy.’’). 76 Establishment of Speculative Position Limits, 69 CL–CME–59718 at 18. 73 CL–CME–59718 at 7. 46 FR at 50940–41 (Oct. 16, 1981).

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levels and so on) but not whether to do the 1981 rulemaking because the Act of 2000 (‘‘CFMA’’),86 Congress so.77 It specifically rejected Commission later allowed exchanges to expressly authorized the use of position commenters’ concerns that position set position accountability levels in lieu accountability as an alternative means limits would not be beneficial for all of limits for some commodities and to limit speculative positions.87 contracts, finding, after ‘‘considerable contracts.81 Those later exemptions do Following this experiment with years of Federal and contract market not, however, alter the language or position accountability, Congress regulatory experience,’’ that ‘‘the import of the 1981 rule, which directed became concerned about fluctuations in capacity of any contract market . . . is the exchanges to impose limits in commodity prices. In the late 1990s and not unlimited,’’ and there was no need accordance with ‘‘standards’’ that did 2000s, Congress conducted several to evaluate the particulars of whether not include a necessity finding. The investigations that concluded that any contract would benefit from 1981 rulemaking is the last time the excessive speculation accounted for position limits.78 The Dodd-Frank Act Commission definitively addressed and significant volatility and price increases amendments unfolded in an analogous identified the ‘‘standards’’ in CEA in physical commodity markets. For fashion. Prior to the Dodd-Frank Act, section 4a(a)(1) for imposing across-the- example, a congressional investigation Congress conducted studies of some, but board, prophylactic position limits in a determined that prices of crude oil had not all, markets in physical manner akin to the Dodd-Frank Act risen precipitously and that ‘‘[t]he commodities. This history suggests that amendments. That other approaches traditional forces of supply and demand Congress extrapolated from the intervened is not inconsistent with the cannot fully account for these conclusions reached in those studies to inference that Congress was influenced increases.’’ 88 The investigation found determine that position limits were by the 1981 rulemaking in the Dodd- evidence suggesting that speculation necessary for all physical commodities Frank Act amendments. was responsible for an increase of as other than excluded commodities. much as $20–25 per barrel of crude oil, ISDA and SIFMA asserted that the 4. Legislative History of the Dodd-Frank which was then at $70.89 Subsequently, Commission’s reliance on the 1981 Act Amendments to Position Limits Congress found similar price volatility rulemaking is unavailing because (1) it Statute stemming from excessive speculation in cannot alter the Commission’s statutory As discussed in the 2016 the natural gas market.90 burdens with respect to imposing Supplemental Position Limits Proposal, These investigations appear to have position limits; and (2) it was never the Commission has also considered the informed the drafting of the Dodd-Frank adopted by Congress.79 The first of these legislative history of the Dodd-Frank Act. During hearings prior to the comments begs the question, i.e., what Act amendments.82 That history passage of the Dodd-Frank Act, Senator is ‘‘the statutory burden’’ intended in contains further indication that Carl Levin, then-Chair of the Senate the text of CEA sections 4a(a)(1) and (2), Congress intended to mandate the Permanent Subcommittee on read as a whole and considered in imposition of limits for physical Investigations that had conducted them, context to resolve the ambiguity found commodity derivatives without urged passage to ensure ‘‘a cop on the by the district court. As to the second requiring the Commission to make beat in all commodity markets where comment, the Commission does not antecedent necessity findings, and did U.S. commodities are traded . . . that contend that Congress adopted the 1981 not intend the term ‘‘standards’’ to can enforce the law to prevent excessive rule. Rather, it is relevant because the include such a finding.83 speculation and market language the district court found The Commission’s preliminary manipulation.’’ 91 In addition, Congress ambiguous in the Dodd-Frank Act interpretation of CEA section 4a(a)(2) is viewed the nearly $600 trillion little- amendments to CEA section 4a(a) based in part on congressional concerns regulated swaps market as a ‘‘major resembles the language of the 1981 rule, that arose, and congressional actions contributor to the financial crisis’’ and some of the context is parallel. The taken, before the passage of the Dodd- because excessive risk taking, hidden 84 relevance of this rulemaking is Frank Act amendments. During the leverage, and under collateralization in supported by the fact that Congress did 1990s, the Commission began that market created a systemic risk of ratify it the following year, when it permitting exchanges to experiment harm to the entire financial system.92 As amended the CEA by granting the with an alternative to position limits— Senator Cantwell and others explained, Commission the authority to enforce the position accountability, which allowed it was imperative that the CFTC have position limits set by the exchanges, a trader to hold large positions subject the ability to regulate swaps through reinforcing that as a historical matter to reporting requirements and gave the Congress had approved an omnibus exchange the right to order the trader to 86 Commodity Futures Modernization Act of 85 2000, Public Law 106–554, 114 Stat. 2763 (Dec. 21, prophylactic approach as reasonable. hold or reduce its position. Then, in the Commodity Futures Modernization 2000). That Congress had approved of such an 87 7 U.S.C. 7(d)(3) (2009). approach before and then used language 88 The Role of Market Speculation in Rising Oil 81 in the Dodd-Frank Act that closely E.g., CL–ISDA/SIFMA–59611 at 9; and CL– and Gas Prices: A Need to Put the Cop Back on the AMG–59709 at 4, n.8. Beat, Staff Report, Permanent Subcommittee on resembles the very language the 82 Union Carbide Corp. & Subsidiaries v. Comm’r Investigations of the Senate Committee on Commission used when it mandated of Internal Revenue, 697 F.3d 104, 109 (2d Cir. Homeland Security and Governmental Affairs, U.S. that omnibus approach is another factor 2012) (explaining that when an agency must resolve Senate, S. Prt. No. 109–65 at 1 (June 27, 2006). that weighs on the side of interpreting a statutory ambiguity, to do so ‘‘with the aid of 89 Id. at 12; see also Excessive Speculation in the reliable legislative history is rational and prudent’’ Natural Gas Market, Staff Report, Permanent the statutory ambiguity to find a (quoting Robert A. Katzman, Madison Lecture: Subcommittee on Investigations of the Senate mandate to impose physical commodity Statutes, 87 N.Y.U. L. Rev. 637, 659 (2012)). Committee on Homeland Security and positon limits.80 83 December 2013 Position Limits Proposal, 78 FR Governmental Affairs, U.S. Senate at 1 (June 25, Finally, several commenters asserted at 75682, 75684–85. 2007), available at http://www.levin.senate.gov/ that the Commission cannot consider 84 Id. at 75682. imo/media/doc/supporting/2007/ 85 Federal Speculative Position Limits for PSI.Amaranth.062507.pdf (last visited Mar. 18, Referenced Energy Contracts and Associated 2013) (‘‘Gas Report’’). 77 Id. Regulations, 75 FR 4144, 4147 (Jan. 26, 2010); 90 Gas Report at 1–2. 78 Id. Revision of Federal Speculative Position Limits and 91 156 Cong. Record S. 4064 (daily ed. May 20, 79 CL–ISDA/SIFMA–59611 at 9. Associated Rules, 64 FR 24038, 24048–49 (May 5, 2010). 80 CFTC v. Schor, 478 U.S. 833, 846 (1986). 1999). 92 S. Rep. 111–176, at 29 (2010).

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‘‘position limits,’’ ‘‘exchange trading,’’ deadlines described above.97 After price swings.’’ 105 Senator Levin, who and ‘‘public transparency’’ to avoid a changing ‘‘may’’ to ‘‘shall,’’ the House presided over the investigations, recurrence of the instability that rippled further amended the bill to refer in one commented that those investigations, through the entire financial system in instance to the limits for agricultural conducted from 2002 onwards, ‘‘into 2008.93 And in the House of and exempt commodities as how our commodity markets function, Representatives, Representative Collin ‘‘required.’’ 98 And only after the focusing in particular on the role of Peterson, then-Chairman of the House language had changed from permissive excessive speculation on commodity Committee on Agriculture and author of to mandatory, the House added the prices’’ ‘‘have demonstrated that the an amendment strengthening the requirement that the Commission failure to impose and enforce effective conduct studies on the ‘‘effects (if any) position limits have led to greater position limits provision as discussed of position limits imposed’’ 99 to speculation and increased price below, reminded his colleagues that his determine if the required position limits volatility in U.S. commodity committee’s own ‘‘in-depth review of were harming U.S. markets.100 markets.’’ 106 According to Senator derivative markets began when we Underscoring its intent to amend the Levin, the investigations ‘‘provide[d] experienced significant price volatility bill to include a mandate, the House strong support for the Dodd-Frank in energy futures markets due to Report accompanying the House Bill decision to require the Commission to excessive speculation—first with stated that it ‘‘required’’ the impose position limits on all types of natural gas and then with crude oil. We Commission to impose limits.101 The commodity futures, swaps, and all remember when we had $147 oil. Conference Committee adopted the options.’’ 107 Senator Levin also stated . . . This conference report [now] House bill’s amended provisions on that the harms of excessive speculation includes the tools we authorized and position limits and then strengthened continue to be felt in the absence of the the direction to the CFTC to mitigate them even further by referring to the mandated limits. He cited recent actions outrageous price spikes we saw 2 years position limits as ‘‘required’’ an by federal regulators to stop ago.’’ 94 Congress’s focus in its additional three times, bringing the total manipulation in energy markets, and investigations on excessive speculation to four times in the final legislation the opined that the continuing problems in involving physical commodities is number of references in statutory text to the absence of the mandated limits only reflected in the scope of the Dodd-Frank position limits as ‘‘required.’’ 102 reinforce the reasonableness of the Commission’s view that Congress Act’s position limits amendment: It a. Comments applies only to physical commodities. intended to mandate position limits as A number of commenters generally a prophylactic measure.108 Senator The evolution of the position limits supported or opposed the Commission’s Levin’s point was echoed by Public provision in the bills before Congress consideration of Congressional Citizen, a consumer advocacy from permissive to mandatory supports investigations and the textual organization, and Airlines for America, a preliminary determination that strengthening of the Dodd-Frank bill. a trade association for the U.S. Congress intended to do something The Commission addresses specific scheduled airline industry.109 more than continue the long-standing comments below. Other commenters disagreed with the statutory regime giving the Commission i. Congressional Investigations: Commission’s preliminary discretionary authority to impose Several commenters agreed that the determination that the Congressional limits.95 As initially introduced, the Congressional investigations, hearings investigations indicate that Congress House bill that became the Dodd-Frank and reports support the view that intended to mandate limits. CME Act provided the Commission with Congress decided to mandate position asserted that the investigations do not in discretionary authority to issue position limits.103 They pointed out that themselves demonstrate that Congress limits, stating that the Commission Congress’s investigations followed required the CFTC to impose position ‘‘may’’ impose them.96 However, the amendments in 2000 to the CEA as part limits as recommended even if those investigations suggest that excessive House replaced the word ‘‘may’’ with of the CFMA that exempted swaps and energy derivatives from position limits speculation poses a burden on interstate the word ‘‘shall,’’ suggesting a specific and expressly authorized exchanges to commerce in certain physical judgment that the limits should be impose position accountability levels in commodity markets.110 Citadel mandatory, not discretionary. The lieu of limits.104 According to the questioned whether the cited reports House also added other language Commodity Markets Oversight Coalition could be ‘‘broadly indicative of militating in favor of interpreting CEA (‘‘CMOC’’), ‘‘witnesses confirmed [at Congressional intent,’’ or could section 4a(a)(2) as a mandate. In two those hearings] that the erosion of the ‘‘redefine statutory language that has new subsections, it set the tight position limits regime was a leading existed for nearly eight decades.’’ 111 cause in market instability and wild But the Commission is not relying 93 See, e.g., 156 Cong. Rec. S 2676–78, S 2698– solely on these reports. The question, 99, S 3606–07, S 3966, S 5919 (daily ed. April 27, 97 Levin Br. at 11 (citing H.R. 4173, 111th Cong. rather, is whether these Congressional May 12, 19, July 15, 2010 (providing statements of 3113(a)(5)(2), (7) (as passed by the House Dec. 11, Senators Cantwell, Feinstein, Lincoln)). 2009) (‘‘Engrossed Bill’’)). 105 94 156 Cong. Rec. H5245 (daily ed. June 30, 2010) CL–CMOC–59720 at 2. 98 Id. at 12. (citing Engrossed Bill at 3113(a)(5)(3)). 106 (emphasis added). CL–Sen. Levin–59637 at 3–4. 99 15 U.S.C. 8307; Engrossed Bill at 3005(a). 107 95 December 2013 Position Limits Proposal, 78 FR Id. 100 at 75684–85. See Levin Br. at 13–17; see also DVD: October 108 Id. at 2. 21, 2009 Business Meeting (House Agriculture 109 96 Initially, the House used the word ‘‘may’’ to CL–Public Citizen–59648 at 2–3, and CL– Committee 2009), ISDA v. CFTC, Dkt. 37–2 Exh. B permit the Commission to impose aggregate A4A–59686 at 1–2. (Apr. 13, 2012) at 59:55–1:02:18. positions on contracts based upon the same 110 CL–CME–59718 at 8. CME also asserted that 101 underlying commodity. See H.R. 4173, 11th Cong. Levin Br. at 23 (citing H.R. Rep. No. 111–373 the Congressional investigation into excessive 3113(a)(2) (providing the version introduced in the at 11 (2009)). speculation in natural gas futures focused more on House, Dec. 2, 2009) (‘‘Introduced Bill’’); see also 102 Levin Br. at 17–18. the fact that position accountability rules for Brief of Senator Levin et al as Amicus Curiae at 10– 103 CL–CMOC–59720 at 2; CL–Sen. Levin–59637 exchange-traded natural gas futures were not in 11, ISDA v. CFTC, no. 12–5362 (D.C. Cir. Apr. 22, at 2–5; and CL–A4A–59686 at 2–3. place for ‘‘look-alike’’ natural gas swaps traded 2013), Document No. 1432046 (hereafter ‘‘Levine 104 CL–IECA–59964 at 2; CL–A4A–59686 at 2; and ‘‘over the counter,’’ permitting regulatory arbitrage. Br.’’). CL–Public Citizen–59648 at 2–3. 111 CL–Citadel–59717 at 3.

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investigations and findings of excessive also supports the conclusion rates. Amended CEA section 4a(a) speculation and price volatility in ‘‘standards’’ does not include an repeatedly uses the word ‘‘shall’’ and energy markets, conducted and issued antecedent necessity finding. refers to the new limits as ‘‘required,’’ when the Commission was authorized differentiating it from the text that 5. The Commission Preliminarily but not required by law to impose existed before the Dodd-Frank Act.114 Interprets the Text of CEA Section 4a(a) limits, may be one indication, among as an Integrated Whole, In Light of Its Never before in the Commission’s others, that Congress sought to do Experience and Expertise. experience had Congress set deadlines something more with the Dodd-Frank on action for position limits by a date Act amendments than to maintain the In the December 2013 Position Limits certain, much less the short time statutory status quo for futures on Proposal, the Commission discussed provided in CEA section 4a(a)(2)(B).115 physical commodities. In the how its interpretation of the text of CEA Nor, in the Commission’s experience, Commission’s preliminary view, it is section 4a(a), considered as an had Congress required a report by a more plausible, based on these integrated whole, is consistent with and given date or committed itself to hold investigations, that Congress sought to supports its conclusions based on hearings on the report within 30 days do something more—to require that the experience and expertise. As discussed, thereafter.116 The Commission Commission impose limits for the the ambiguity is the meaning of CEA preliminarily concluded that, covered commodities without having to section 4a(a)(2)’s statement that the considered as a whole in light of this first find that they are necessary to Commission ‘‘shall’’ establish limits on experience, these provisions evince a prevent excessive speculation. Contrary physical commodities other than Congressional mandate that the to Citadel’s comment, the Commission excluded commodities ‘‘[i]n accordance Commission impose limits on physical is not relying on the investigations and with the standards’’ set forth in CEA commodities, that it do so quickly, that reports to redefine statutory language section 4a(a)(1). If ‘‘standards’’ includes it impose limit levels in accordance that has existed for nearly eight decades. a necessity finding, then a necessity with certain requirements, and that it Rather, the Commission believes that finding is required before limits can be study the effectiveness of the limits after the investigations favor the conclusion imposed on agricultural and exempt imposing them and then report to that Congress added CEA section commodities. If not, the Commission Congress. 4a(a)(2) to the pre-existing language in must impose limits for that subset of By the same token, the Commission order to strengthen the long-standing commodity derivatives. In the December preliminarily determined that position limits regime for a category of 2013 Position Limits Proposal, the interpreting CEA section 4a(a)(2) as it commodity derivatives—physical Commission resolved the ambiguity by proposed to do would not render commodities—that Congress’s preliminarily determining that the superfluous the necessity finding investigations revealed to be vulnerable reference in CEA section 4a(a)(2) to the requirement in CEA section 4a(a) to substantial price fluctuations. ‘‘standards’’ in pre-Dodd-Frank section because that section still applies to the ii. Evolution of the Dodd-Frank Bill: 4a(a)(1) refers to the criteria in CEA non-physical (excluded) commodity Several commenters agreed with the section 4a(a)(1) for how the required derivatives that are not subject to CEA Commission’s preliminary limits are to be set and not the section 4a(a)(2). Nor would it nullify determination that the strengthening of antecedent finding whether limits are other parts of CEA section 4a(a), as even necessary. The Commission the position limits language in the those are unaffected by this reading. Dodd-Frank bill evinces Congress’ explained that, in its preliminary view, The Commission received a number 112 intent to mandate limits. ‘‘standards’’ refers to, in CEA section of comments on its discussion of the CME and MFA disagreed; while they 4a(a)(1), only the following two interplay between the statute’s text and do not directly address this point, they provisions. First, the limits must the Commission’s experience and believed that the strengthening of the account for situations in which one expertise. The Commission has language in the Dodd-Frank bills does person controls another or two persons considered them carefully, but is not act in concert, by aggregating those not indicate that Congress intended to thus far persuaded. The Commission positions as if the trading were done by de-couple the enacted directive to preliminarily believes that it is a one person acting alone (aggregation). impose position limits from the reasonable interpretation of the text of necessity finding of CEA section The second ‘‘standard’’ in CEA section the statute considered as an integrated 4a(a)(1).113 The Commission, however, 4a(a)(1) states that the limits may be whole and viewed through the lens of preliminarily considers this the most different for different commodities, the Commission’s experience and plausible interpretation. The evolution markets, delivery months, etc. expertise, that Congress mandated that of the bill from one stating the (flexibility). the Commission establish position Commission ‘‘may’’ impose position The Commission reasoned that this limits for physical commodities. It is limits to include statements that the construction of ‘‘standards’’ seemed also reasonable to construe the reference Commission ‘‘shall’’ impose them, that most consistent with the Commission’s to ‘‘standards’’ as an instruction to the they are ‘‘required,’’ and that the experience and history administering Commission to apply the flexibility and Commission shall study their effects position limits. It also seemed most indicates intentional progressive consistent with the text of CEA section aggregation standards set forth in CEA refinement from a bill that would 4a(a)(2), the rest of CEA section 4a(a), section 4a(a)(1), just as the Commission continue the status quo for futures to and the Act as a whole. The Dodd-Frank instructed the exchanges to impose one that added special nondiscretionary Act amendments to CEA section 4a(a) 114 E.g., CEA sections 4a(a)(2)(A) (providing that requirements for a category of largely re-shape CEA section 4a(a) by the Commission ‘‘shall’’ set the limits); 4a(a)(2)(B) commodities. This legislative evolution adding a new, detailed, and (referring twice to the ‘‘limits required’’ and comprehensive section 4a(a)(2) that directing that they ‘‘shall’’ be established by a time 112 CL–Public Citizen–59648 at 2. applies only to a subset of the certain); 4a(a)(3)(referring to the limits ‘‘required’’ 113 CL–CME–59718 at 2, 5–12 (maintaining under subparagraph (A)); 4a(a)(5)(stating that the derivatives regulated by the Commission ‘‘shall’’ concurrently establish limits statutory language requires necessity finding); and Commission—physical commodities CL–MFA–59606 at 9 (citing S. Rept. 111–176 (Apr. on economically equivalent contracts). 30, 2010, which states ‘‘[t]his section authorizes the like wheat, oil, and gold—and not 115 7 U.S.C. 6a(a)(2(B). CFTC to establish aggregate position limits. . . .’’). intangible commodities like interest 116 15 U.S.C. 8307.

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omnibus limits in 1981. And it is at diminish, eliminate, or prevent [the district court found these words to be least reasonable to conclude that burden on interstate commerce]’’ in ambiguous. In the court’s view, they Congress, in directing the Commission CEA section 4a(a)(1).119 They believed could refer to the Commission’s to impose the ‘‘required’’ limits on that the Commission’s contrary obligation to impose limits (i.e., the extremely tight deadlines, did not interpretation constitutes an implied Commission shall, ‘‘as appropriate,’’ intend the Commission to repeal of the necessity finding impose limits), or to the level of the independently make an antecedent language.120 limits the Commission is to impose.122 finding that any given position limit for The Commission disagrees that this The Commission preliminarily physical commodities is ‘‘necessary’’—a constitutes an implied repeal. First, CEA believes that when these words are finding that would take many months section 4a(a)(2) applies only to physical considered in the context of CEA for each individual physical commodity commodities, not other commodities. section 4a(a)(2)–(7) as a whole, contract. Accordingly, the requirement of a including the multiple uses of the new necessity finding in section 4a(a)(1) still terms ‘‘shall’’ and ‘‘required’’ and the a. Comments applies to a broad swath of commodity historically unique stringent time limits Several commenters disputed the derivatives. Second, there is no implied for imposing the covered limits and Commission’s interpretation, based on repeal even in part, because the post-imposition study requirement, it is its experience and expertise, that CEA Commission is interpreting express more reasonable to interpret these section 4a(a)(2) is a mandate for language—the term ‘‘standards.’’ The words as referring to the level of limits, prophylactic limits based on their view Commission must bring its experience i.e., the Commission must set physical that the statute unambiguously requires to bear when interpreting the ambiguity commodity limits at an appropriate the Commission to promulgate position in the new provision, and the level, and not to require the limits only after making a necessity Commission preliminarily believes that Commission to first determine whether finding, and only ‘‘as appropriate.’’ 117 the statute, read in light of the the required limits are appropriate But in ISDA v. SIFMA, the district court Commission’s experience administering before it may even impose them.123 In held that the statute was ambiguous in position limits and making necessity other words, while Congress made the this respect, and the Commission here is findings, is more reasonably read as an threshold decision to impose position following the court’s direction to apply express limited exception, for physical limits on physical commodity futures its experience and expertise to resolve commodities futures and economically and options and economically the ambiguity. This is consistent with a equivalent swaps, to the preexisting equivalent swaps, Congress at the same commenter’s statement that ‘‘the authorization in CEA section 4a(a)(1) for time delegated to the Commission the meshing of the Dodd-Frank Act into the the Commission to impose limits when task of setting the limits at levels that CEA may have created some ambiguity it finds them necessary. would maximize Congress’ objectives. from a technical drafting/wording ii. Other Limiting Language: Some Some commenters claimed that other standpoint.’’ 118 Nevertheless, the commenters pointed to a number of parts of CEA section 4a(a)(2) undermine Commission addresses these textual terms and provisions that they say the Commission’s determination. First, arguments to show that its preliminary support the notion that the Commission CEA section 4a(2)(C) states that the interpretation is, at a minimum, a must make antecedent findings before ‘‘[g]oal . . . [i]n establishing the limits permissible one. imposing any limits under new CEA required’’ is to ‘‘strive to ensure’’ that The commenters that disagreed with section 4a(a)(2). trading on foreign boards of trade the Commission’s preliminary First, some commenters asserted that (‘‘FBOTs’’) for commodities that have conclusion argued that the Commission: the term ‘‘as appropriate’’ in CEA limits will be subject to ‘‘comparable (i) Erred in determining that the sections 4a(a)(3) (factors that the limits.’’ It goes on to state that for ‘‘any reference to ‘‘standards’’ in CEA section ‘‘Commission, ‘‘as appropriate’’ must limits to be imposed’’ the Commission 4a(a)(2) does not include the necessity consider when it ‘‘shall set limits’’) and will strive to ensure that they not shift finding in CEA section 4a(a)(1); (ii) 4a(a)(5)(A) (providing that Commission trading overseas. Commenters argue that failed to consider other provisions that ‘‘shall’’ ‘‘as appropriate’’ establish limits ‘‘any limits to be imposed’’ under CEA show Congress intended to require the on swaps that are economically section 4a(a)(2)(A) implies that limits Commission to make antecedent equivalent to physical commodity might not be imposed under that findings; and (iii) incorrectly futures and options) require the section. However, in the context determined that its interpretation is the Commission to make antecedent discussed and in view of the reference only way to give effect to CEA section findings that the limits required under in that section to position limits 4a(a)(2). CEA section 4a(a)(2) are appropriate i. Meaning of Standards: Several before it may impose them.121 The hedgers; and (iv) to ensure that the price discovery commenters asserted that the language: function of the underlying market is not disrupted.). 122 119 887 F.Supp. 2d at 278; December 2013 ‘‘[in] accordance with the standards set See, e.g., CL–CME–59718 at 12–13; CL– Position Limits Proposal, 78 FR at 75685, n. 59. Citadel–59717 at 3–4; CL–AMG–59709 at 3; CL– forth in paragraph (1)’’ in section 123 CEA section 4a(a)(2)(A) provides that the MFA–59606 at 9–10; CL–ISDA/SIFMA–59611 at 5– 4a(a)(2) must include the phrase ‘‘as the Commission ‘‘shall’’ establish limits; CEA section 7; CL–IECAssn–59679 at 3–4; and CL–FIA–59595 at 4a(a)(2)(B) refers multiple times to the ‘‘required’’ Commission finds are necessary to 6–7. limits in (A) that ‘‘shall’’ be established within 180 120 CL–CME–59718 at 2, 12 (citing Hunter v. or 270 days of enactment of Dodd-Frank; and CEA 117 CL–CME–59718 at 11; CL–MFA–59606. at 9; FERC, 711 F.3d 155 (D.C. Cir. 2013)). section 4a(a)(2)(C) provides that ‘‘[i]n establishing etc. But see, e.g., CL–A4A–59714 at 2–3 (noting that 121 See, e.g., CL–ISDA/SIFMA–59611 at 5, 7–8 the limits required’’ the Commission shall ‘‘strive notwithstanding the ‘‘meshing’’ problems, ‘‘it is (citing CEA section 4a(a)(5) as authorizing aggregate to ensure’’ that trading on foreign boards of trade clear that the Commission’s interpretation is position limits ‘‘as appropriate’’ for swaps that are for commodities that have limits will be subject to reasonable and fully supported by the context in economically equivalent to DCM futures and ‘‘comparable limits,’’ thereby assuming that limits which the Dodd-Frank Act was passed, its options and CEA section 4a(a)(3), which directs the must be established and requiring that they be set legislative history, and the many other factors Commission to set position limits as appropriate at levels in accordance with particular identified in the NPRM’’); CL–AFR–59685 at 1; CL– and to the maximum extent practicable, in its considerations. CEA section 4a(a)(3) contains Public Citizen–60390 at 2; CL–Public Citizen–59648 discretion: (i) To diminish, eliminate, or prevent ‘‘specific limitations’’ on the ‘‘required’’ limits at 2; CL–Sen. Levin–59637 at 4; and CL–CMOC– excessive speculation; (ii) to deter and prevent which are most reasonably understood to be 59720 at 2–3. market manipulation, squeezes, and corners; (iii) to considerations for the Commission for the levels of 118 CL–A4A–59714 at 2–3. ensure sufficient market liquidity for bona fide limits.

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‘‘required,’’ the reference to ‘‘any limits The second pre-Dodd Frank Act The Commission agrees with the latter to be imposed’’ refers again to the levels provision the commenters mentioned is group of commenters and finds the or other standards applied. That is, CEA section 5(d)(5); 129 it gives the former reading strained. CEA section whatever the contours the Commission exchanges discretionary authority to 4a(a)(2) makes no mention of position chooses for the required limits, they impose position limits on all accountability levels. Regardless must meet the goal set forth in that commodity derivatives ‘‘as is necessary whether pre-Dodd Frank section 5(d)(5) section. and appropriate.’’ 130 There is, however, allows exchanges to set accountability Second, CEA section 4a(a)(3)(B) states no inconsistency. Exchanges retain the levels in lieu of limits where the certain factors that the Commission discretionary authority to set position Commission has not set limits, and must consider in setting limits under limits for the many commodities not regardless whether the Commission has CEA section 4a(a)(2).124 The covered by CEA section 4a(a)(2), and in the past endorsed exchange-set Commission sees no inconsistency with they retain the discretion to impose position accountability levels in lieu of mandatory position limits—the position limits for physical limits, CEA section 4a(a)(2) does not Commission must consider these factors commodities, so long as the limits are mention that tool. If anything, reference in setting the appropriate levels and no higher than federal position limits. to accountability levels elsewhere in the other contours. Indeed, CEA section CEA shows that Congress understands Some commenters cited other that exchanges have used position 4a(a)(3)(B) applies by its own terms to language in CEA section 5(d)(5) to ‘‘establishing the limits required in accountability, but made no reference to support their assertion that, it in amended CEA section 4a(a). paragraph (2).’’ Moreover, consideration notwithstanding the Dodd-Frank Act of these factors under CEA section iii. Avoiding Surplusage or Nullity: amendments discussed above requiring Several commenters took issue with the 4a(a)(3) is not mandatory, as some the Commission to impose limits, the commenters suggest,125 but rather to be Commission’s preliminary Commission retains and should exercise determination that its interpretation is made ‘‘in [the Commission’s] its discretion to impose position 126 necessary in order to avoid rendering discretion.’’ In the Commission’s accountability levels in lieu of limits or preliminary view, there is thus nothing CEA section 4a(a)(2)(A) surplusage. delegate that authority exchanges to do These commenters suggested that in these provisions at odds with the so. CEA section 5(d)(5) authorizes Commission’s interpretation that it is reading the term ‘‘standards’’ in CEA exchanges to adopt ‘‘position limitations section 4a(a)(2)(A) to include the required by CEA section 4a(a)(2)(A) to or position accountability’’ levels in impose limits on a subset of antecedent necessity finding in CEA order to reduce the threat of section 4a(a)(1) will not render CEA commodities without making manipulation and congestion. These antecedent findings whether they section 4a(a)(2) surplusage because if commenters also pointed out that the the Commission finds a position limit is should be imposed, particularly when Commission has previously endorsed the language at issue is construed, as it ‘‘necessary’’ and ‘‘appropriate,’’ it now accountability levels for exchanges in must impose one (as opposed to pre- should be, with other terms in CEA 131 lieu of limits. Other commenters Dodd-Frank, when the Commission had section 4a(a)(2)–(7), discussed above, disagree. They asserted that, given what that use mandatory language and authority but not a mandate under CEA they interpret as a mandate in CEA section 4a(a) to impose limits).133 The impose time limits. section 4a(a)(2) for the Commission to Some commenters stated that two pre- Commission finds this reading highly impose position limits for physical unlikely. There is no history of the Dodd Frank Act provisions in CEA commodities, it would be inappropriate section 4a undermine the Commission’s Commission determining that limits are for the Commission to consider necessary and appropriate, but then interpretation. The first is CEA section imposing position accountability levels 4a(e),which states, ‘‘if the Commission declining to impose them. Nor is it instead for those commodities, or to reasonable to expect that the shall have fixed limits . . . for any allow exchanges to do so.132 contract . . . , then the limits’’ imposed Commission might do so. Indeed, by DCMs, SEFs or other trading facilities historically necessity findings were 129 7 U.S.C. 7(d)(5). made only in connection with ‘‘shall not be higher than the limits 130 CL–CME–59718 at 11 (citing 7 U.S.C. 7(d)(5)). 127 establishing limits. fixed by Commission.’’ According to 131 CL–CME–59718 at 10; CL–AMG–59709 5–6; Furthermore, if Congress had still a commenter, the ‘‘if/then’’ formulation CL–FIA–59595 at 12–13; CL–FIA–60392 at 4–6, 8 wanted to leave it to the Commission to suggests position limits should not be (asserting that under the Commission’s general rulemaking authority in CEA section 8a(5), 7 U.S.C. ultimately decide whether a limit was presupposed for any contract.128 The 12a(5), ‘‘the Commission has the power to adopt, as necessary, there is no reason for it to Commission sees the provision part of an accountability regime, a rule pursuant to have also set tight deadlines, repeat differently. CEA section 4a(a)(2) applies which it or a DCM could direct a market participant multiple times that the limits are only to a subset of futures contracts— to reduce speculative positions above an accountability limit because that authority is ‘‘required,’’ and direct the agency to contracts in physical commodities. For ‘reasonably necessary to effectuate’ a position conduct a study after the limits were other commodities, position limits accountability rule,’’ and observing that the imposed. In other words, requiring the remain subject to the Commission’s Commission previously determined in rulemakings Commission to make an antecedent determination of necessity, and the ‘‘if/ that exchange-set accountability levels represent an alternative means to limit excessive speculation); necessity finding would render many of then’’ formulation applies and remains CL–FIA–60303 at 3–4; CL–DBCS–59569 at 4; CL– the Dodd-Frank Act amendments logical. There is, accordingly, no MFA–60385 at 7–8, 10–14; and CL–Olam–59658 at superfluous. For example, if the inconsistency. 1–2 (declaring that the Commission can and should permit exchanges to administer position Commission determined limits were not accountability levels in lieu of Commission-set necessary then, contrary to CEA section 124 See, e.g., CL–CME–59718 at 11, 13–17, and limits under CEA section 4a(a)(2)). CL–FIA–59595 at 5–6. 4a(a)(2), no limits were in fact 132 CL–Public Citizen–60390 at 3–4 (noting other 125 ‘‘required,’’ no limits needed to be See, e.g., CL–AMG–59709 at 3; and CL–CME– concerns with exchange set limits or accountability 59718 at 13–17. levels); CL–IECA 60389 at 3–4 (asserting that the imposed by the deadlines, and no study 126 CEA section 4a(a)(3), 7 U.S.C. 6a(a)(3). Commission should not cede its authority to 127 CEA section 4a(e), 7 U.S.C. 6a(e). exchanges); CL–AFR–60953 at 4; CL–A4A–59686 at 133 CL–ISDA/SIFMA–59611 at 5; and CL–MFA– 128 CL–CME–59718 at 10 (citing CEA section 2–3; CL–IECA–59671 at 2; and CL–CMOC–59720 at 59606 at 9–10. The District Court expressed the 4a(e)). 2. same concern. 887 F. Supp. 2d at 274–75.

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needed to be conducted. But none of economically equivalent swaps, to make speculative position limits in this these provisions were phrased in the same point that there are still reproposed Rule are necessary to conditional terms (e.g., if the meaningful provisions in CEA section achieve their statutory purposes. Commission finds a limit necessary, 4a(a), even with a necessity finding. But As described in the Proposal, the then it shall . . . ). Had Congress CEA section 4a(a)(1) already authorizes policy basis and reasoning for the wanted the Commission to continue to the Commission to establish limits on Commission’s necessity finding is be the decisionmaker regarding the need swaps as necessary, and so the illustrated by two major incidents in for limits, it could have expressed that authority, which would be discretionary which market participants amassed view in countless ways that would not under CME’s reading, to impose limits massive futures positions in silver and strain the statutory language in this way. on economically equivalent swaps natural gas, respectively, which enabled CME contended that the would add nothing to the statute and them to cause sudden and unreasonable Commission’s position—that requiring a the amendment would be wholly fluctuations and unwarranted changes necessity finding would essentially give superfluous. in the prices of those commodities. CEA the Commission the same permissive section 4a(a)(1) calls for position limits 6. Conclusion authority it had before the Dodd-Frank for the purpose of diminishing, Act amendments—is ‘‘short-sighted’’ Having carefully considered the text, eliminating, or preventing the burden of because other provisions of CEA section purpose and legislative history of CEA excessive speculation.137 Although both 4a(a) ‘‘would still have practical section 4a(a) as a whole, along with its episodes involved manipulative intent, significance.’’ In support of this view, own experience and expertise and the the Commission believes that such CME stated that new CEA sections comments on its proposed intent is not necessary for an 4a(a)(2)(C) and 4(a)(3)(B) have interpretation, the Commission excessively large position to give rise to significance even if the Commission is preliminarily believes for the reasons sudden and unreasonable fluctuations required to make a necessity finding above that Congress—while not or unwarranted changes in the price of because they ‘‘set forth safeguards that expressing itself with ideal clarity— an underlying commodity. This is the CFTC must balance when it decided that position limits were illustrated, for example, by the fact that establishes limits’’ after ‘‘the CFTC finds necessary for a subset of commodities, when the perpetrators of the silver that such limits are necessary.’’ The physical commodities, mandated the manipulation lost the ability to control Commission preliminarily believes it Commission to impose them on those their scheme, i.e., to manipulate the unlikely that Congress would have commodities in accordance with certain market at will, they were forced to intended that. On CME’s reading, the criteria, and required that the liquidate quickly, which, given the statute would place additional Commission do so expeditiously, amount of contracts sold in a very short requirements to constrain the without first making antecedent time, caused silver prices to plummet. Commission’s preexisting authority. findings that they are necessary to Any trader who was forced by Given the background for the prevent excessive speculation. conditions in the market or their own amendments, particularly the studies Consistent with this interpretation, financial condition to liquidate a very that preceded the Dodd-Frank Act, the Congress also directed the agency to large position could predictably have Commission sees no reason why report back to Congress on their similar effects on prices, regardless of Congress would have placed additional effectiveness within one year. In the their motivation for amassing the constraints, nor any reason it would Commission’s preliminary view, this position in the first place. Moreover, have placed them with respect to interpretation, even if not the only although these two episodes unfolded in physical commodities but not excluded possible interpretation, best gives effect contract markets for silver and natural commodities or others. This comment to the text and purpose of the Dodd- gas, and unfolded at two different times also does not address the thrust of the Frank Act amendments in the context of in the past, there is nothing unique Commission’s interpretation, which is the pre-existing position limits about either market at either relevant that finding a mandate is the only way provision, while ensuring that neither time that causes the Commission to to read the entirety of the statute the amendments nor the pre-existing restrict its preliminary finding of harmoniously, including the timing language is rendered superfluous. necessity to those markets or to reach a requirements of CEA section 4a(a)(2)(B) different conclusion based on market and the reporting requirements of C. Necessity Finding conditions today. Put another way, any Section 719 of the Dodd-Frank Act, 1. Necessity account for the historical context, and, contract market has a limited ability, at the same time, avoid reading CEA The Commission reiterates its closely linked to the market’s size, to section 4a(a)(2)(A) as the functional preliminary alternative necessity absorb the establishment and 134 finding as articulated in the December liquidation of large speculative equivalent of CEA section 4a(a)(1). 138 CME also cited CEA section 4a(a)(5), 2013 Position Limits Proposal: 135 Out of positions in an orderly manner. The which requires position limits for an abundance of caution in light of the silver and natural gas examples district court decision in ISDA v. illustrate these issues, but the reasoning 134 In this vein, then-Commissioner Mark Wetjen, CFTC,136 and without prejudice to any applies beyond their specific facts. who was an aide to Senate Majority Leader Harry argument the Commission may advance Accordingly, the Commission Reid during the Dodd-Frank legislative process, in any forum, the Commission preliminarily finds it necessary to stated at the Commission’s public meeting to adopt the December 2013 proposal that to read Section reproposes, as a separate and implement position limits as a 4a(a)(2)(A) to require the same antecedent necessity independent basis for the Rule, a prophylactic measure for the 25 core finding as Section 4a(a)(1) ‘‘does not comport with preliminary finding herein that the referenced futures contracts.139 my understanding of the statute’s intent as informed by my experience working as a Senate 137 aide during consideration of these provisions.’’ 135 December 2013 Position Limits Proposal, 78 7 U.S.C. 6a(a)(1). Statement of Commissioner Mark Wetjen, Public FR at 75685. 138 Establishment of Speculative Position Limits, Meeting of the Commodity Futures Trading 136 International Swaps and Derivatives 46 FR 50938, 50940 (Oct. 16, 1981). Commission (Nov. 5, 2013), http://www.cftc.gov/ Association v. United States Commodity Futures 139 The Commission’s necessity finding is also PressRoom/SpeechesTestimony/ Trading Commission, 887 F. Supp. 2d 259 (D.D.C. supported by the consideration of costs and benefits wetjenstatement110513. 2012). below.

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The Commission received many supported by the text of CEA section ago.’’ 160 Others noted that the comments on its preliminary alternative 4a(a)(1), which states that there shall be Commission has undertaken no necessity finding; the Commission such limits as ‘‘the Commission finds’’ independent analysis of each market, summarizes and responds to significant are necessary.149 Thus, while the commodity, or contract affected by this comments below. Commission finds the studies useful, it rulemaking.161 They then claim that a. Studies’ Lack of Consensus.140 The does not cede the necessity finding to because particular markets or Commission stated in the December the authors. commodities have unique 2013 Position Limits Proposal that the b. Reliance on Silver and Natural Gas characteristics, one cannot extrapolate lack of consensus in the studies Studies.150 The Commission stated in from these two specific episodes to reviewed at that time warrants acting on the December 2013 Position Limits other commodities or other markets.162 the side of caution and implementing Proposal that it ‘‘found two studies of Several commenters describe the Hunt position limits as a prophylactic actual market events to be helpful and brothers silver crisis and the collapse of measure, ‘‘to protect against undue price persuasive in making its preliminary the natural gas speculator Amaranth as fluctuations and other burdens on alternative necessity finding,’’ 151 instances of market manipulation rather commerce that in some cases have been namely, the Interagency Silver Study 152 than excessive speculation.163 at least in part attributable to excessive and the PSI Report on Excessive 141 As discussed above, the presence of speculation.’’ Some commenters Speculation in the Natural Gas manipulative intent or activity does not suggested that a lack of consensus Market.153 Some commenters criticized preclude the existence of excessive means instead that the Commission the Commission’s reliance on these two speculation, and traders do not need should not implement position studies.154 These commenters dismissed 142 manipulative intent for the limits, that the issue merits further the two studies, variously, as limited, 143 accumulation of very large positions to study, that it would be arbitrary and outdated,155 dubious,156 unpersuasive, capricious to implement position anecdotal, and irrelevant.157 Other cause the negative consequences 144 limits, and that the desire to err on commenters characterized the episodes observed in the Hunt and Amaranth the side of caution should be irrelevant as extreme or unique.158 Some incidents. These are some reasons to an assessment of whether position commenters observed that neither study position limits are valuable as a 145 limits are necessary. In short, these recommended position limits.159 One prophylactic measure for, in the comments contend that the lack of noted that, ‘‘Each study focuses on language of CEA section 4a(a)(1), consensus means position limits cannot activities in a single market during a ‘‘preventing’’ burdens on interstate 146 be necessary. The Commission limited timeframe that occurred years commerce. The Hunt brothers, who disagrees. The lack of consensus does distorted the price of silver, and not provide ‘‘objective evidence that 149 This assumes that, contrary to the Amaranth, who distorted the price of 147 position limits are not necessary;’’ Commission’s interpretation of the statute, Congress natural gas, are examples that illustrate rather, it suggests that they remain did not make that determination itself as to physical the burdens on interstate commerce of controversial.148 In response to these commodity markets. excessive speculation that occurred in 150 comments, the Commission believes The Commission stated in the December 2013 the absence of position limits, and Position Limits Proposal that it found two studies that Congress could not have intended of actual market events to be helpful and persuasive position limits would have restricted by using the word ‘‘necessary’’ to in making its preliminary alternative necessity those traders’ ability to cause restrict the Commission from finding, namely, the interagency report on the silver unwarranted price movement and determining to implement position crisis, U.S. Commodity Futures Trading Commission, ‘‘Part Two, A Study of the Silver market volatility, and this would be so limits unless experts unanimously agree Market, May 29, 1981, Report to The Congress in even had their motivations been or form a consensus they would be Response to Section 21 of the Commodity Exchange innocent. Both episodes involved beneficial. Otherwise a necessity finding Act, and the PSI Report on, U.S. Senate, ‘‘Excessive extraordinarily large speculative would be virtually impossible and, in Speculation in the Natural Gas Market,’’ June 25, positions, which the Commission has fact, the Commission could plausibly be 2007. 151 December 2013 Position Limits Proposal, 78 historically associated with excessive stymied by interested persons FR at 75695. speculation.164 We are also given no publishing self-interested studies. The 152 Commodity Futures Trading Commission, persuasive reason to change our Commission’s view in this respect is Report to The Congress in Response to Section 21 conclusion that extraordinarily large of the Commodity Exchange Act, May 29, 1981, Part speculative positions could result in 140 The Commission observed in the December Two, A Study of the Silver Market. 2013 Position Limits Proposal that the studies 153 Excessive Speculation in the Natural Gas sudden or unreasonable fluctuations or discussed therein ‘‘overall show a lack of consensus Market, Staff Report with Additional Minority Staff unwarranted price changes in other regarding the impact of speculation on commodity Views, Permanent Subcommittee on Investigations, physical commodity markets, just as markets and the effectiveness of position limits.’’ 78 United States Senate, Released in Conjunction with they did in silver and natural case in the FR at 75695. the Permanent Subcommittee on Investigations June 141 December 2013 Position Limits Proposal, 78 25 & July 9, 2007 Hearings. Hunt Brothers and Amaranth episodes. FR at 75695. 154 One commenter called the Commission’s Although commenters describe changes 142 E.g., CL–CCMR–59623 at 4–5; CL–EEI–EPSA– choice ‘cherry-picking.’ CL–Citadel–59717 at 4. in these markets over time, the 59602 at 3; CL–FIA–59595 at 7; and CL–IECAssn– 155 The Commission disagrees; that an exemplary characteristics that we find salient have 59679 at 3. event occurred in the past does not make it 143 E.g., CL–BG Group–59656 at 3; CL–EEI–EPSA– irrelevant. 59602 at 3; and CL–WGC–59558 at 2. 156 Contra CL–Sen. Levin–59637 at 6 (pointing to 160 CL–CME–59718 at 18. 144 CL–Chamber–59684 at 4. ‘‘concrete examples’’). 161 E.g., CL–EEI–EPSA–59602 at 2; CL–WGC– 145 CL–CCMR–59623 at 4–5. 157 E.g., CL–Chamber–59684 at 3; CL–CME–59718 59558 at 2. 146 Contra CL–AFR–59711 at 1; CL–AFR–59685 at at 3, 18; CL–IECAssn–59679 at 2; CL–ISDA/SIFMA– 162 E.g., CL–Citadel–59717 at 4; CL–ISDA/ 1; CL–Public Citizen–59648 at 3; CL–WEED–59628. 59611 at 12; and CL–USCF–59644 at 3. SIFMA–59611 at 12–14; CL–MFA–59606 at 10; and 147 CL–EEI–EPSA–59602 at 3. 158 E.g., CL–IECAssn–59679 at 2; and CL–BG CL–WGC–59558 at 2. 148 A discussion of the cumulative studies Group–59656 at 3. Certainly the Commission seeks 163 E.g., CL–Better Markets–59716 at 12; CL–BG reviewed by the Commission follows below. See to prevent extreme events such as Amaranth and Group-59656 at 3; CL–COPE–59622 at 4–5; CL– below, Section I.C.2. (discussing studies and reports the Hunt brothers, however infrequently they may CCMR–59623 at 4; CL–ISDA/SIFMA–59611 at 13; received or reviwed in connection with the occur. and CL–AMG–59709 at 5. December 2013 Position Limits Proposal), and 159 E.g., CL–CME–59718 at 18; and CL–CCMR– 164 December 2013 Position Limits Proposal, 78 accompanying text. 59623 at 3. FR at 75685, n. 60.

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not changed materially.165 Thus, these economic analysis to determine, if in The Commission disagrees that it has two examples remain relevant and fact, the position limits as proposed failed to conduct proper economic compelling. were likely to have any positive impact analysis to determine the likely benefits CME makes a textual argument in in promoting fair and orderly of position limits. CEA section 15(a) support of the position that CEA section commodity markets.’’ 170 While requires that before promulgating a 4a(a)(2) requires a commodity-by- acknowledging the Commission’s regulation under the Act, the commodity determination that position resource constraints, this commenter Commission consider the costs and limits are necessary. It cites several remarked on ‘‘the paucity of the benefits of the action according to five places in CEA section 4a(a)(1) that refer published record by the CFTC’s s own statutory factors. The Commission does to limits as necessary to eliminate ‘‘such staff’’ 171 and suggests that outside so below in robust fashion with respect burden’’ on ‘‘such commodity’’ or ‘‘any authors be given ‘‘controlled access to to the Reproposal in its entirety, commodity.’’ 166 However, the all of the CFTC’s data regarding investor including the alternative necessity prophylactic measures described herein and hedger trading records.’’ 172 This finding. Neither section 15(a) of the CEA address vulnerabilities characteristic of commenter then proceeds to accuse the nor the Administrative Procedure Act each market.167 Accordingly, the Commission of failing to ‘‘conduct such requires the Commission to conduct a Commission believes the statute’s use of research because they felt the data study in any particular form so long as the singular is immaterial.168 would not in fact support the proposed it considers the costs and benefits and The Commission’s analysis applies to position limit regulations.’’ 173 the entire administrative record. Section all physical commodities, and it would 719(a) of the Dodd-Frank Act, on the account for differences among markets 170 CL–USCF–59644 at 2. other hand, provides that the by setting the limits at levels based on 171 CL–USCF–59644 at 2. This commenter Commission ‘‘shall conduct a study of updated data regarding estimated exaggerates. The last arguably relevant report of the effects (if any) of the position limits deliverable supply in each of the given Commission staff is ‘‘Commodity Swap Dealers & Index Traders with Commission imposed pursuant to the . . . [CEA] on underlying commodities in the case of Recommendations’’ (Sept. 2008), available at http:// excessive speculation’’ and report to spot-month limits or based on exchange www.cftc.gov/idc/groups/public/@newsroom/ Congress on such matters after the recommendation, if an exchange documents/file/cftcstaffreportonswapdealers09.pdf. 174 However, several authors or co-authors of academic imposition of position limits. The recommended a spot-month limit level Commission will do so as required by of less than 25 percent of estimated papers reviewed by the Commission are or have been affiliated with the Commission in various Section 719(a), thereby fully discharging deliverable supply, and open interest in capacities and have added to the current literature its duty. At all stages, the Commission the case of single-month and all- relating to position limits. Each of Harris, see note240, Kirilenko, see note 2400, and Overdahl, has relied on and will continue to rely months-combined limits, for each on the input of staff economists in the separate commodity. The Commission’s see notes 240 and 241, are former Chief Economists of the Commission. Other authors, e.g., Aulerich, Division of Market Oversight (‘‘DMO’’) Reproposal regarding whether to adopt Boyd, Brunetti, Bu¨ yu¨ ks¸ahin, Einloth, Haigh, and the Office of the Chief Economist conditional spot-month limits is also Hranaiova, Kyle, Robe, and Rothenberg, are now or (‘‘OCE’’). based on updated data.169 The have been staff and/or consultants to the Commission also does not find it Commission, have spent sabbaticals at the d. Excessive Speculation Commission, or have been detailed to the relevant that the Interagency Silver Commission from other federal agencies. Graduate One commenter opined that, ‘‘in Study and the PSI Report, each of which students studying with some study authors, was published before the Dodd-Frank including some working on dissertations, have also discussing only the Hunt Brothers and Act became law, do not recommend the cycled through the Commission as interns. Cf. note Amaranth case studies the Commission imposition of position limits. Based on 180 (disclaimer on paper by Harris and has not given adequate weight to the Bu¨ yu¨ ks¸ahin). benefits that speculators provide to the the facts described in those reports, 172 CL–USCF–59644 at 3. Data regarding investor 175 along with the Commission’s and hedger trading records may be protected by market.’’ To the contrary, the understanding of the policies section 8 of the CEA, 7 U.S.C. 12. In general, ‘‘the Commission recognizes that speculation underlying CEA section 4a(a)(1) in light Commission may not publish data and information is part of a well-functioning market, that would separately disclose the business particularly insofar as speculators of the Commission’s own experience transactions or market positions of any person and with legacy limits, the Commission trade secrets or names of customers . . . .’’ 7 U.S.C. contribute valuable liquidity. The focus preliminarily finds that position limits 12(a)(1). The Commission must therefore be very of this reproposed rulemaking is not are necessary within the meaning of that careful about granting outside economists access to speculation per se; Congress identified such data. Commission registrants have in the past excessive speculation as an undue section. ‘‘questioned why the CFTC was permitting outside c. Commission research. One economists to access CFTC data, why the CFTC was commenter asserted that the permitting the publication of academic articles Pertaining to the Office of the Chief Economist, Jan. Commission failed ‘‘to conduct proper using that data, and . . . the administrative process 13, 2016 (‘‘Follow Up Report’’), available at http:// by which the CFTC was employing these outside www.cftc.gov/idc/groups/public/@aboutcftc/ economists.’’ Review of the Commodity Futures documents/file/oig_oce011316.pdf. The Follow Up 165 See infra Section I.C.1.f., and accompanying Trading Commission’s Response to Allegations Report emphasizes ‘‘that there has been no text. Pertaining to the Office of the Chief Economist, allegation that the Chairman or Commissioners 166 CL–CME–59718 at 13–14. Prepared by the Office of the Inspector General, have attempted to prevent certain topics from being 167 See, e.g., Establishment of Speculative Commodity Futures Trading Commission, Feb. 21. researched or to alter conclusions,’’ Follow Up Position Limits, 46 FR at 50940 (Oct. 16, 1981) (‘‘[I]t 2014, at ii, available at http://www.cftc.gov/idc/ Report at 11, but nevertheless recommended ‘‘that appears that the capacity of any contract market to groups/public/@freedomofinformationact/ OCE not prohibit research topics relevant to the absorb the establishment and liquidation of large documents/file/oigreportredacted.pdf. The CFTC mission.’’ Follow Up Report at 10. The speculative positions in an orderly manner is Commission is sensitive to these concerns, and Follow Up Report observed that recently ‘‘OCE has related to the relative size of such positions, i.e., the strives to ensure that reports and publications that focused almost exclusively on short-term research capacity of the market is not unlimited.’’). rely on Commission data do not reveal sensitive and economic analysis in support of other Divisions 168 See also 1 U.S.C. 1 (‘‘In determining the information. To do so requires an expenditure of and the Commission.’’ Follow Up Report at 10. meaning of any Act of Congress, unless the context effort by Commission staff. 174 15 U.S.C. 8307(a). See December 2013 Position indicates otherwise—words importing the singular 173 CL–USCF–59644 at 3. The Commission rejects Limits Proposal, 78 FR at 75684 (discussing section include and apply to several persons, parties, or the commenter’s aspersion. The Commission’s 719(a) of the Dodd-Frank Act in the context of the things[.]’’) Office of the Inspector General addressed the Commission’s construal of CEA section 4a(a) to 169 See the Commission’s discussion of its perception of institutional censorship in its ‘‘Follow mandate that the Commission impose position verification of estimates of deliverable supply and Up Report: Review of the Commodity Futures limits). work with open interest data, below. Trading Commission’s Response to Allegations 175 CL–MFA–59606 at 11–12.

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burden on interstate commerce in CEA 2013 Position Limits Proposal, the necessarily indicative of future events in section 4a(a)(1).176 Commission referenced its prior that commodity. Further, it would One commenter asserted that the determination in 1981 ‘‘that, with require the Commission to determine Commission must provide a definition respect to any particular market, the what may happen in a forecasted future of excessive speculation before making ‘existence of historical trading data’ state of the market in a particular any necessity finding.177 The showing excessive speculation or other commodity. As the Commission has Commission disagrees that the rule must burdens on that market is not ‘an often repeated, position limits are a include such a definition. The statute essential prerequisite to the prophylactic measure. Inherently, then, contains no such requirement, and did establishment of a speculative position limits are designed to address not contain such a requirement prior to limit.’ ’’ 182 The Commission reiterates the burdens of excessive speculation the Dodd-Frank Act. The Commission this statement and underscores that well before they occur, not when the has never based necessity findings on a these risks are characteristic of contract Commission somehow determines that rigid definition. The Commission’s markets generally. Differences among such speculation is imminent, which position on this issue has been clear markets can be addressed, as the the Commission (or any market actor for over time: ‘‘The CEA does not define Commission reproposes to do here, by that matter) cannot reliably do. excessive speculation. But the setting the limit levels to account for e. Volatility Commission historically has associated individual market characteristics. it with extraordinarily large speculative Attempting to demonstrate and Commenters assert, variously, that positions ....’’178 CEA section determine that excessive speculation is ‘‘the volatility of commodity markets 4a(a)(1) states that position limits reasonably likely to occur with respect has decreased steadily over the past should diminish, eliminate, or prevent to particular commodities before decade,’’ 183 that ‘‘research found that burdens on interstate commerce implementing position limits is there was a negative correlation between associated with sudden or unreasonable impractical because historical trading speculative positions and market fluctuations or unwarranted changes in data in a particular commodity is not volatility,’’ 184 research shows that the price of commodities.179 It stands to factors other than excessive speculation reason that excessive speculation ‘‘Congress’ determination, codified in CEA section were primarily responsible for specific involves positions large enough to risk 4a(a)(1), that position limits are an effective tool to instances of price volatility,185 that such unreasonable fluctuations or address excessive speculation as a cause of sudden futures markets are associated with or unreasonable fluctuations or unwarranted 186 unwarranted changes. This commenter changes in the price of . . . [agricultural and lower price volatility, that particular also urges the Commission to exempt] commodities. December 2013 Position types of speculators provide liquidity ‘‘demonstrate and determine that . . . Limits Proposal, 78 FR at 75695 (footnote omitted). rather than causing price volatility,187 harmful excessive speculation exists or Another commenter mischaracterizes the finding of that position limits will increase the Congressional Budget Report, ‘‘Evaluating 188 is reasonably likely to occur with Limits on Participation and Transactions in Markets volatility, etc. It would follow, then, respect to particular commodities’’ 180 for Emissions Allowances’’ (2010), available at according to these commenters, that before implementing any position http://www.cbo.gov/publication/21967 (‘‘CBO because they believe there is little or no limits.181 As stated in the December Report’’); the CBO Report does not conclude ‘‘that volatility (no sudden or unreasonable position limits are harmful to markets.’’ CL– fluctuations or unwarranted price IECAssn–59679 at 3. Rather, in the context of 176 7 U.S.C. 6a(a)(1). One commenter suggests that creating markets for emissions allowance trading, changes), or no volatility caused by the Commission base speculative position limits on the CBO Report discusses both the uses and benefits excessive speculation, position limits ‘‘a determination of an acceptable total level of and the challenges and drawbacks of not only cannot be necessary. speculation that approximates the historic ratio of position limits but also circuit breakers, in addition As stated above, the Commission hedging to investor/speculative trading.’’ CL–A4A– to banning certain types of traders and banning 59714 at 4. The Commission declines at this time allowance derivatives. Among other things, the recognizes that speculation is part of a to adopt such a ratio as basis for speculative CBO Report states, ‘‘Position Limits would probably position limits. Among other things, the lessen the possibility of systemic risk and 183 CL–CCMR–59623 at 4 (claim supported only Commission does not now collect reliable data manipulation in allowance markets . . . .’’ CBO by a reference to a comment letter that pre-dates the distinguishing hedgers from speculators. Also, there Report at viii. Another commenter states that a December 2013 Position Limits Proposal). may be levels above a historic hedging ratio that ‘‘CFTC study’’ found that the 2008 crude oil crisis 184 CL–MFA–59606 at 12 (citing one academic still provide liquidity rather than denoting was primarily due to fundamental factors in the paper, Irwin and Sanders, The Impact of Index and excessive speculation. While the Commission has supply and demand of oil. CL–CCMR–59623 at 4. Swap Funds on Commodity Futures Markets: authority under section 4a(a)(1) of the Act to The referenced study is Harris and Bu¨ yu¨ ks¸ahin, The Preliminary Results (working paper 2010)). See impose position limits on a group or class of Role of Speculators in the Crude Oil Futures Market generally note 240 (studies that employ the Granger traders, the only way that the Commission knows (working paper 2009). See generally note 240 method of statistical analysis). how to implement limit levels based on such a (listing studies that employ the Granger method of 185 E.g., CL–MFA–59606 at 11–12, n. 26. Contra historic ratio would be to impose rationing, which statistical analysis). While Harris is a former Chief CL–AFR–59685 at 1 (stating ‘‘We understand that the Commission declines to do at this time. Economist, and Bu¨ yu¨ ks¸ahin is a former staff other factors contribute to highly volatile 177 CL–ISDA/SIFMA–59611 at 3, 14–15; see also economist in OCE, as noted above, the cover page commodity prices, but excessive speculation plays CL–FIA–59595 at 6–7. of the referenced paper contains the standard a significant part, according to studies by Princeton, 178 December 2013 Position Limits Proposal, 78 disclaimer, ‘‘This paper reflects the opinions of its MIT, the Petersen Institute, the University of FR at 75685, n. 60 (citation omitted). authors only, and not those of the U.S. Commodity London, and the U.S. Senate, among other highly 179 7 U.S.C. 6a(a)(1). Futures Trading Commission, the Commissioners, credible sources.’’). 180 CL–ISDA/SIFMA–59611 at 3; see also CL– or other staff of the Commission.’’ That is, it is not 186 CL–MFA–59606 at 13, n. 30. CCMR–59623 at 4; CL-Chamber-59684 at 4. Contra a ‘‘CFTC study.’’ In addition, other studies of that 187 E.g., CL–MFA–59606 at 12–13 (hedge funds). CL-Sen. Levin-59637 at 6 (stating ‘‘[c]ontrary to the market at that time reached different conclusions. Cf. CL–SIFMA AMG–59709 at 15 (asserting ‘‘neither complaints of some critics, it would be a waste of Cf. note 252 (citing study that concludes price Amaranth nor the Hunt brothers were in any way time and resources for the Commission to expand changes precede the position change). The involved in commodity index swaps’’), 16 the proposed rules beyond the existing justification Commission reviewed several studies of the crude (registered investment companies and ERISA to repeat the same analysis, reach the same oil market around 2008 and discusses them herein. accounts). conclusions, and issue the same findings for each See discussion of persuasive academic studies, 188 CL–MFA- 59606 at 13. Contra CL–CMOC– of the 28 commodities.’’). below. The Commission cautions that, given the 59702 at 2 (maintaining that witness testimony 181 See also CL–CCMR–59623 at 4–5. Another continuing controversy surrounding position limits, before policymakers ‘‘confirmed that the erosion of commenter ‘‘contends that the best available it is unlikely that one study will ever be completely the position limits regime was a leading cause in evidence discounts the theory that there is dispositive of these complicated and difficult market instability and wild price swings seen in excessive speculation distorting the prices in the issues. recent years and that it had led to diminished commodity markets.’’ CL–MFA–59606 at 13 (citing 182 December 2013 Position Limits Proposal, 78 confidence in the commodity derivative markets as Pirrong). Such a contention is inconsistent with FR at 75683. a hedging and price discovery tool’’).

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well-functioning market particularly, as Another commenter states that the the size of the current market as noted in comments, as a source of December 2013 Position Limits Proposal described elsewhere in this release. liquidity. Position limits address ‘‘does not provide any quantitative With respect to Amaranth, the excessive speculation, not speculation analysis of how the outcome of these Commission stated, ‘‘Based on certain per se. Position limits neither exclude [two historical] events might have assumptions ..., the Commission particular types of speculators nor differed if the proposed position limits believes that if Federal speculative prohibit speculative transactions; they had been in place.’’ 194 The Commission position limits had been in effect that constrain only speculators with disagrees. The Commission stated in the correspond to the limits that the excessively large positions in order to December 2013 Position Limits Proposal Commission . . . [proposed in the diminish, eliminate, or prevent an that, ‘‘The Commission believes that if December 2013 Position Limits undue and unnecessary burden on Federal speculative position limits had Proposal], across markets now subject to interstate commerce in a commodity.189 been in effect that correspond to the Commission jurisdiction, such limits The Commission agrees that futures .... [proposed] limits ..., across would have prevented Amaranth from markets are associated with, and may markets now subject to Commission accumulating such large futures indeed contribute to, lower volatility in jurisdiction, such limits would have positions and thereby restrict its ability underlying commodity prices. However, prevented the Hunt brothers and their to cause unwarranted price effects.’’ 199 as Congress observed, in CEA section cohorts from accumulating such large This statement of belief about Amaranth 4a(a)(1), excessive speculation in a futures positions.’’ 195 This statement was also based on calculations using the commodity contract that causes sudden was based on calculations using a methodology applied to quantitative or unreasonable fluctuations or methodology similar to 196 that data as described and included in the unwarranted changes in the price of proposed in the December 2013 Position December 2013 Position Limits Proposal such commodity, is an undue and Limits Proposal applied to quantitative preamble.200 The historical size of unnecessary burden on interstate data included and as described Amaranth positions would no longer commerce in such commodity.190 In therein.197 The Commission’s stated breach the higher single-month and all- promulgating CEA section 4a(a)(1), belief is unchanged at the higher single- months-combined limit levels of Congress adopted position limits as a month and all-months-combined limit 200,900 contracts that the Commission 201 useful tool to diminish, eliminate, or levels of 7,600 contracts that the adopts today for natural gas. prevent those problems. The Commission adopts today for silver.198 However, the Commission is Commission believes that position Nevertheless, historical data regarding reproposing setting a level using a limits are a necessary prophylactic absolute position size from the period of methodology that adapts to changes in measure to guard against disruptions the late-1970’s to 1980 may not be the market for natural gas, i.e., the fact arising from excessive speculation, and readily comparable to the numerical that it has grown larger and more liquid the Commission has endeavored to limits adopted in the current market since the collapse of Amaranth. Thus, it repropose limit levels that are not so environment. Accordingly, the stands to reason that a speculator might low as to hamper healthy speculation as Commission is reproposing establishing now have to accumulate a larger a source of liquidity.191 levels using the methodology based on position than Amaranth’s historical position to present a similar risk of f. Basis for Determination disruption to the natural gas market. In reports that more recent market events have been One commenter states, ‘‘The necessity perceived as involving excessively large positions fact, the Commission has long finding . . . proffered by the that have caused or threatened to cause market recognized ‘‘that the capacity of any Commission—which consists of a disruptions. See, e.g., Ed Ballard, Speculators sit on contract market to absorb the Sugar Pile, Raising Fears of Selloff, The Wall Street establishment and liquidation of large discussion of two historical events and Journal (Nov. 21, 2016) (‘‘Speculative investors a cursory review of existing studies and have built a record position in sugar this year, speculative positions in an orderly reports on position limits related sparking fears of a swift pullback in its price.’’); Of manner is related to the relative size of issues—falls short of a comprehensive mice and markets, A surge in speculation is making such positions, i.e., the capacity of the commodity markets more volatile, The Economist market is not unlimited.’’ 202 A larger analysis and justification for the (Sept. 10, 2016) (discussing ‘‘scramble by funds to 192 market should have larger capacity, proposed position limits. We disagree unwind their short positions in’’ West Texas 203 with the commenter’s opinion that the Intermediate that appears to have ‘‘fanned a rally other things being equal; hence, the Commission’s analysis is not in spot oil prices’’). As discussed elsewhere, Commission is adopting higher levels of willingness to participate in the futures and swaps limits. Moreover, costly disruptions like comprehensive or falls short of markets may be reduced by perceptions that a 193 those associated with Amaranth remain justifying the reproposed rule. participant with an unusually large speculative position could exert unreasonable market power. entirely possible. Because the costs of 189 That a particular type of speculator trades a 194 CL–WGC–59558 at 2; see also CL–BG Group- these disruptions can be great, and different type of instrument, employs a different 59656 at 3. borne by members of the public trading strategy, or is unlevered, diversified, subject 195 December 2013 Position Limits Proposal, 78 to other regulatory regimes, etc., so as to distinguish FR at 75690. 199 December 2013 Position Limits Proposal, 78 it in some way from Amaranth or the Hunt brothers 196 The Commission’s methodology is a fair FR at 75692. does not overcome the size of the position held by approximation of how the limits would have been 200 December 2013 Position Limits Proposal, 78 the speculator, and the risks inherent in amassing applied during the time of the silver crisis. See FR at 75692–3. extraordinarily large speculative positions. December 2013 Position Limits Proposal, 78 FR at 201 190 See level of initial limits under App. D to part CEA section 4a(a)(1); 7 U.S.C. 6a(a)(1). 75690. 150. 191 See the discussion of the impact analysis, 197 December 2013 Position Limits Proposal, 78 202 Establishment of Speculative Position Limits, below under § 150.2. FR at 75690–1. 46 FR 50938, 50940. 192 CL–Citadel–59717 at 3–4 (footnote omitted). 198 For example, using historical month-end open 203 A gross comparison such as this may not Contra CL-Sen. Levin-59637 at 6 (declaring that interest data, the Commission calculated a single- meaningful. For example, the Commission could ‘‘[t]he Commission’s analysis and findings, paired and all-months-combined limit level of 6,700 have increased the size of Amaranth’s historical with concrete examples, provide a comprehensive contracts, which would have been exceeded by a position proportionately to the increased size of the explanation of the principles and reasoning behind total Hunt position of over 12,000 contracts for market and compared it to the limit level for natural establishing position limits.’’). March delivery. December 2013 Position Limits gas that the Commission adopts today. But such an 193 Although the events described in the proposal Proposal, 78 FR at 75690. Baldly, a position of approach would be less rigorous than the analysis are sufficient to support the necessity finding for 12,000 contracts would still exceed a 7,600 contract on which the Commission bases its determination the reasons given, the Commission also notes limit. today.

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unconnected with trading markets, the existing position accountability levels as instances of greater price volatility by Commission preliminarily finds it an alternative means to limit the exercising emergency authority as they necessary to impose speculative burdens of excessive speculative did during the silver crisis.212 In position limits as a preventative positions. Nevertheless, the CFMA did addition, the Commission has striven to measure. As markets differ in size, the not weaken the Commission’s authority take current market developments into limit levels differ accordingly, each in CEA section 4a to establish position account by considering the market data designed to prevent the accumulation of limits as an alternative means to prevent to which the Commission has access as positions that are extraordinary in size such undue burdens on interstate described herein and by considering the in the context of each market. commerce. More recently, in the CFTC description of current market Several commenters opined that the Reauthorization Act of 2008, Congress developments to the extent included in Commission, in reaching its preliminary gave the Commission expanded the comments the Commission has alternative necessity finding, ignores authority to set position limits for received in connection with the current market developments and does significant price discovery contracts on December 2013 Position Limits not employ the ‘‘new tools’’ other than exempt commercial markets,’’ 207 and it Proposal. Some commenters suggest that position limits available to it to prevent expanded the Commission’s authority the Commission, in reaching its excessive speculation or manipulative again in the Dodd-Frank Act.208 While preliminary alternative necessity or potentially manipulative behavior.204 position accountability is useful in finding, has not undertaken any Specifically, some commenters providing exchanges with information empirical analysis of available data.213 suggested that position limits are not about specific trading activity so that As discussed above, the Commission necessary because position exchanges can act if prudent to require carefully reviewed the Interagency accountability rules and exchange-set a trader to reduce a position after the Silver Study and the PSI Report on limits are adequate.205 The Commission position has already been amassed, Excessive Speculation in the Natural agrees that the Dodd-Frank Act gave the position limits operate prophylactically Gas Market.214 The Commission also Commission new tools with which to without requiring case-by-case, ex post carefully considered the studies protect and oversee the commodity determinations about large positions. As submitted during the various comment markets, and agrees that these along to exchange-set accountability levels or periods regarding the December 2013 with older tools may be useful in position limits set at levels below those Position Limits Proposal and the 2016 addressing market volatility. However, of federal position limits, those remain Supplemental Position Limits Proposal. the Commission disagrees that the useful as well and should be used, at the Other commenters suggest that the availability of other tools means that exchanges’ discretion, in conjunction Commission relies on incomplete, position limits are not necessary.206 with federal position limits. They may unreliable, or out of date data, and that Rather the statute, at a minimum, be most useful, for example, with the Commission should collect more reflects Congress’ judgment that respect to contracts that are not core- and/or better data before determining position limits may be found by the referenced futures contracts or if an that position limits are necessary or Commission to be necessary. The exchange determines that federal limits implementing position limits.215 The Commission notes that although CEA are too high to address adequately the Commission disagrees. The Commission section 4a(a) position limits provisions conditions in the markets it administers. has considered the recent data have existed for many years, the Dodd- In the regulations that the Commission presented by the exchanges in support Frank Act not only retained CEA section reproposes today, the Commission of their estimates of deliverable supply. 4a(a), but added, rather than deleted, would update (rather than eliminate) The Commission is expending several sections. This leads to the the acceptable practices for exchange-set significant, agency-wide efforts to conclusion that Congress appears to speculative position limits and position improve data collection and to analyze share the Commission’s view that the accountability rules to conform to the the data it receives. The quality of the other tools provided by Congress were Dodd-Frank Act changes [as described data on which the Commission relies not sufficient. in the December 2013 Position Limits has improved since the December 2013 Position accountability, for example, Proposal].209 Generally, for contracts Position Limits Proposal. The is an older tool, from the era of the subject to speculative limits, exchanges Commission is satisfied with the quality CFMA. As the Commission explained in may set limits no higher than the federal of the data on which it bases its the December 2013 Position Limits limits,210 and may impose ‘‘restrictions Reproposal. Proposal, the CFMA ‘‘provided a . . . to reduce the threat of market One commenter opines that, ‘‘The statutory basis for exchanges to use pre- manipulation or congestion, to maintain Proposal’s ‘necessary’ finding offers no orderly execution of transactions, or for reasoned basis for adopting its 204 E.g., CL–CCMR–59623 at 3 (supporting such other purposes consistent with its framework and the shift in regulatory additional transparency and reporting); CL-Citadel– responsibilities.’’ 211 And § 150.5(b)(3) policy it embodies.’’ 216 To the contrary, 59717 at 4 (pointing to available tools, including sets forth the requirements for position ‘‘enhanced market surveillance, broadened reporting requirements, broadened special call accountability in lieu of exchange-set 212 See generally 7 U.S.C. 7(d)(6) (DCM Core authorities, and exchange limits’’); CL–ISDA/ limits in the case of contracts not Principles: Emergency Authority); 7 U.S.C. 7b– SIFMA–59611 at 13 (noting that tools that the subject to federal limits. The exchanges 3(f)(8) (Core Principles for Swap Execution Commission has incorporated include ‘‘enhanced are also still authorized to react to Facilities—Emergency Authority); 17 CFR 37.800 market surveillance, broadened reporting (Swap Execution Facility Core Principle 8— requirements, broadened special call authorities, Emergency authority), 17 CFR 38.350 (Designated and exchange limits’’); CL–MFA–59606 at 10; and 207 78 FR at 75681 (footnotes omitted). Contract Markets –Emergency Authority—Core CL–SIFMA AMG–59709 at 5–6 (providing examples 208 See generally December 2013 Position Limits Principle 6). of new tools). Proposal, 78 FR at 75681. 213 E.g., CL–FIA–59595 at 3; CL–EEI–EPSA–59602 205 E.g., CL–CME–59718 at 18; CL–ICE–59645 at 209 See generally December 2013 Position Limits at 2, 8–9. 2–4; CL–FIA–59595 at 6, n. 13, 12–13; and CL– Proposal, 78 FR at 75747–8. 214 See supra Section I.C.2 (discussing the AMG–59709 at 8. 210 See discussion of requirements for exchange- Interagency Silver Study and the PSI Report on 206 The Commission observes that logically there set position limits under § 150.5, below, and Excessive Speculation in the Natural Gas Market). is no reason why the availability of some regulatory exchange core principles regarding position limits, 215 E.g., CL-Citadel-59717 at 4–5; CL–EEI–EPSA– tools under the CEA should preclude the use of below. 59602 at 8–9. another tool explicitly authorized by Congress. 211 See reproposed § 150.5(a)(6)(iii). 216 CL–CME–59718 at 3.

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the necessity finding, including the states that ‘‘improperly calibrated non- commenter points out that the limit Commission’s responses to comments, spot month limits would also deter levels as proposed would not have is the Commission’s explanation of why speculative activity that triggers no risk prevented the misconduct alleged by the position limits are necessary.217 of manipulation or ‘causing sudden or Commission in a particular enforcement unreasonable fluctuations or action filed in 2011.229 As repeated g. Non-Spot-Month Limits unwarranted changes in the price of elsewhere in this Notice 230 and in the Some commenters opine that ‘‘the such commodity,’ the hallmarks of December 2013 Position Limits Commission’s proposed non-spot-month ‘excessive speculation.’ ’’ 226 The Proposal,231 in establishing limits, the position limits do not increase the Commission sees little merit in this Commission must, ‘‘to the maximum likelihood of preventing the excessive objection because the Reproposal would extent practicable, in its discretion . . . speculation or manipulative trading calibrate the levels of the non-spot ensure sufficient market liquidity for exemplified by Amaranth or the Hunt month limits to accommodate bona fide hedgers.232 The Commission brothers relative to the status quo.’’ 218 speculative activity that provides realizes that the reproposed initial limit The Commission disagrees; as repeated liquidity for hedgers. levels may prevent or deter some, but above, ‘‘the capacity of the market is not fail to eliminate all, excessive h. Meaning of Necessity unlimited.’’ 219 This includes markets in speculation in the markets for the 25 non-spot month contracts. Thus, as with One commenter suggests that position commodities covered by this first phase spot-month contracts, extraordinarily limits could only be necessary if they of implementation. But the Commission large positions in non-spot month were the only means of preventing the is concerned that initial limit levels set contracts may still be capable of Hunt brothers and Amaranth crises.227 lower than those reproposed today, and distorting prices.220 If prices are First, while the Commission relies on in particular low enough to prevent distorted, the utility of hedging may these incidents to explain its reasoning, market manipulation or excessive decline.221 One commenter argues for the risks they illustrate apply to all speculation in specific, less egregious non-spot month position accountability markets in physical commodities, and cases than the Hunt brothers or rules; 222 the Commission discusses so the efficacy of the limits the Amaranth, could impair liquidity for position accountability above.223 Commission adopts today, and the hedges.233 Another argues that Amaranth was extent to which other tools are The Commission requests comment really just ‘‘another case of spot-month sufficient, cannot be judged solely by on all aspects of this section. whether they might have prevented misconduct.’’ 224 The Commission 2. Studies and Reports disagrees that this limits the relevance those specific incidents. Second, in any of Amaranth; a speculator like event, the Commission rejects such an The Commission has reviewed and Amaranth may attempt to distort the overly restrictive reading, which lacks a evaluated studies and reports received as comments on the December 2013 perception of supply and demand in basis in both common usage and Position Limits Proposal, in addition to order to benefit, for instance, calendar statutory construction. The Commission the studies and reports reviewed in spread positions by, for instance, preliminarily finds that limits are connection with the December 2013 creating the perception of a nearby necessary as a prophylactic tool to Position Limits Proposal 234 (such shortage of the commodity which a strengthen the regulatory framework to speculator could do by accumulating prevent excessive speculation ex ante to 229 CL–Better Markets–59716 at 22, n. 38 (Parnon extraordinarily large long positions in diminish the risk of the economic harm it may cause further than it would Energy). the nearby month.225 One commenter 230 See the discussion in levels of limits, under reliably be from the other tools alone. § 150.2, below. 217 See CL–Sen. Levin–59637 at 6 (stating that the Other commenters question why the 231 E.g., December 2013 Position Limits Proposal, Commission’s necessity finding ‘‘appropriately Commission proposed limits at levels 78 FR at 75681. reflects Congressional action in enacting the Dodd- they contend are too high to be effective, 232 CEA section 4a(a)(3)(B)(iii), 7 U.S.C. Frank Act which requires the Commission to undercutting the Commission’s 6a(a)(3)(B)(iii). Some commenters expressed impose appropriate position limits on speculators alternative necessity finding.228 One concern that position limits could trading physical commodities.’’). disproportionately affect commercial entities. E.g., 218 CL–AMG–59709 at 9. See the Commission’s CL–CME–59718 at 43; CL–APGA–59722 at 3. Some response to the comment regarding the purported discussed at 78 FR 75692. The Commission repeats commenters expressed concern about the lack of ‘‘quantitative analysis of how the outcome that the findings of the Permanent Subcommittee in application of position limits to trade options. E.g., of these [two historical] events might of differed if the PSI Report support the imposition of CL–APGA–59722 at 3; CL–EEI–EPSA–59602 at 3. the proposed position limits had been in place’’ at speculative position limits outside the spot month. The Commission reminds commenters that the text accompanying notes 192–200 above. See A trader, who does not liquidate an extraordinarily speculative position limits do not apply to bona also CL–CME–59718 at 41–3; CL–ISDA/SIFMA– large long futures position in the nearby physical- fide hedging transactions or positions. CEA section 59611 at 28. delivery futures contract, contrary to typical 4a(c), 7 U.S.C. 6a(c). 233 219 See note 202 supra and accompanying text. declining open interest patterns in a physical- The Commission will revisit the specific 220 delivery contract approaching expiration, may limitations set forth in CEA section 4a(a)(3) when, See December 2013 Position Limits Proposal, cause the nearby futures price to increase as short 78 FR at 75691 (citing the PSI Report, ‘‘Amaranth under reproposed § 150.2(e), it considers resetting position holders, who do not wish to make physical limit levels. accumulated such large positions and traded such delivery, bid up the futures price in an attempt to 234 large volumes of natural gas futures that it distorted A list of studies and reports that the offset their short positions. Potential liquidity Commission reviewed in connection with the market prices, widened price spread, and increased providers who do not currently hold a deliverable price volatility.’’). December 2013 Position Limits Proposal was commodity may be hesitant to establish short included in its Appendix A to the preamble. 221 See December 2013 Position Limits Proposal, positions as a physical-delivery futures contract December 2013 Position Limits Proposal, 78 FR at 78 FR at 75692 (citing the PSI Report, ‘‘Commercial approaches expiration, because exchange rules and 75784–7. One commenter observed that the studies participants in the 2006 natural gas markets were contract terms require such short position holder to reviewed in connection with the December 2013 reluctant or unable to hedge.’’). prepare to make delivery by obtaining the cash Position Limits Proposal are not all ‘‘necessarily 222 CL–CME–59718 at 41–42. commodity. germane to specific position limits proposed.’’ CL– 223 See notes 207–212 supra and accompanying 226 CL–CME–59718 at 43; cf. CL–APGA–59722 at Citadel–59717 at 4. See also CL–CCMR–59623 at 5 text. 3 (asserting that ‘‘the non-spot month limits being (stating that it had reviewed the studies, and found 224 CL–ISDA/SIFMA–59611 at 28. proposed by the Commission are too high to be that ‘‘only 27 address position limits’’). The 225 The Commission discussed the trading activity effective’’). Commission acknowledges that some studies are of Amaranth at length in the December 2013 227 CL–CCMR–59623 at 4. more relevant than others. The Commission in the Position Limits Proposal, 78 FR at 75691–3; in 228 CL–ISDA/SIFMA–59611 at 28; CL–Better December 2013 Position Limits Proposal was particular, Amaranth’s calendar spread trading is Markets–59716 at 24; CL–APGA–59722 at 6–7. disclosing the studies that it had reviewed and

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studies and reports, collectively, Commission to reverse course 237 or to reasons why there are not many ‘‘studies’’). Appendix A to this preamble change its necessity finding.238 compelling, peer-reviewed economic is a summary of the various studies The Commission’s deliberations are studies engaging in quantitative, reviewed and evaluated by the informed by its consideration of the empirical analysis of the impact of Commission. studies. The Commission recognizes position limits on prices or price that speculation and volatility are not volatility: Limitations on publicly The Commission observed in the per se unusual or exceptional available data, including detailed December 2013 Position Limits occurrences in commodity markets. information on specific trades and Proposal, ‘‘There is a demonstrable lack Some economic studies attempt to traders; pre-existing position limits in 235 of consensus in the studies.’’ Neither distinguish normal, helpful speculative some commodity markets, making it the passage of time nor the additional activity in commodity markets from difficult to determine how those studies have changed the Commission’s excessive speculation, and normal markets would operate in the absence of view: As a group, these studies do not volatility from unreasonable price position limits; and the difficulties show a consensus in favor of or against fluctuations. It has proven difficult in inherent in modelling complex position limits.236 In addition to some studies to discriminate between economic phenomena. arriving at disparate conclusions, the the proper workings of a well- The studies that the Commission quality of the studies varies. functioning market and unwanted considered can be grouped into seven Nevertheless, the Commission believes phenomena. That some studies have as categories.239 that some well-executed studies suggest yet failed to do so with precision or that excessive speculation cannot be certainty does not, in light of the full Granger Causality Analyses 240 excluded as a possible cause of undue record, persuade the Commission to price fluctuations and other burdens on reverse course or to change its necessity commerce in certain circumstances. All finding. In general, many studies focused on 239 These categories are not exclusive; some of these factors persuade the studies employ or examine more than one type of subsidiary questions and did not Commission to act on the side of methodology. That researchers in the different directly address the desirability or categories employed different methodologies caution in preliminarily finding limits utility of position limits. Their proffered complicates the task of comparing the studies necessary, consistent with their interpretations may not be the only across the seven categories. In addition, some prophylactic purpose. For these reasons, studies were not susceptible to meaningful plausible explanation for statistical economic analysis for various reasons, such as explained in more detail below, the results. There is no broad academic being written in a foreign language, being founded Commission preliminarily concludes consensus on the formal, testable on suspect methodologies, being press releases, etc. that the studies, individually or taken as economic definition of ‘‘excessive These studies include: Basak and Pavlova, A Model Financialization of Commodities (working paper a whole, do not persuade the speculation’’ in commodity futures 2013); Bass, Finanazma¨rkte als Hungerverursacher? markets or other relevant terms such as (working paper 2011); Bass, Finanzspekulation und evaluated. The Commission requested comment on ‘‘price bubble.’’ There is also no broad Nahrungsmittelpreise. Anmerkungenzum Stand der its discussion of the studies, and invited Forschung (working paper 2013); Bukold, academic consensus on the best O¨ lpreisspekulation und Benzinpreise in commenters to advise the Commission of other statistical model to test for the existence Deutschland, (2011); Chevalier, (Ministe`re de studies to consider, in the hope that commenters of excessive speculation. There are not l’Economie, de l’Industrie e t de l’emploi): Rappor would indicate which studies they believe are more many papers that quantify the impact t du groupe de travai l sur la volatilite` des prix du germane or persuasive and suggest other studies for pe`trole, (2010); Dicker, Oil’s Endless Bid, (2011); Commission review. and effectiveness of position limits in Ederington and Lee, Who Trades Futures and How: 235 December 2013 Position Limits Proposal, 78 commodity futures markets. The Evidence from the Heating Oil Market?, Journal of FR at 75694. Commission has identified some Business 2002; Evans, The Official Demise of the Oil Bubble, Wall Street Journal 2008; Gheit and 236 See 162 Cong. Rec. E1005–03, E1006 (June 28, Katzenberg, Surviving Lower Oil Prices, 237 2016) (Statement of Rep. Conaway, Chairman of the See discussion of mandate, above. We Oppenheimer & Co. (2008); Ghosh, Commodity House Committee on Agriculture) (‘‘Comment emphasize that this discussion relates only to the Speculation and the Food Crisis, (working paper letters on either side declaring that the matter is Commission’s alternative necessity finding. To the 2010); Halova, The Intraday Volatility-Volume settled in their favor among respectable economists extent there is a Congressional mandate that the Relationship in Oil and Gas Futures, (working are simply incorrect.’’). Contra CL–CCMR–59623 at Commission establish position limits, these studies paper 2012); Jouyet, Rappor t d’ e´tape-Pre´venir e t 5, which says, ‘‘The Committee staff also reviewed could be no basis to disregard it. As noted in the ge´rer l’instabilite´ des marche´s agricoles, (2010); December 2013 Position Limits Proposal, ‘‘Studies these studies and found that of them, only 27 Korzenik, Fundamental Misconceptions in the that militate against imposing any speculative Speculation Debate, (2009); Lake Hill Capital address position limits, with the majority opposing position limits appear to conflict with the such limits.’’ The commenter describes how it Management, Investable Indices are Distorting Congressional mandate . . . that the Commission Commodity Markets?, (2013); Lee, Cheng, and Koh, arrives at this conclusion as follows: ‘‘The impose limits on futures contracts, options, and Would Position Limits Have Made any Difference Committee staff reviewed the abstract and body of certain swaps for agricultural and exempt to the ‘Flash Crash’ on May 6, 2010?, Review of each study to determine if the author assessed: (1) commodities.’’ 78 FR at 75695 (footnote omitted). Futures Markets (2010); Markham, Manipulation of Whether position limits are effective at reducing Separately, ‘‘such studies also appear to conflict Commodity Futures Prices: The Unprosecutable speculation; or (2) whether excessive speculation is with Congress’ determination, codified in CEA Crime, Yale Journal of Regulation (1991); Mayer, distorting prices in commodities markets. If the section 4a(a)(1), that position limits are an effective The Growing Financializsation of Commodity author presented a critical analysis of the issue, tool to address excessive speculation as a cause of Markets: Divergences between Index Investors and rather than just mentioning position limits or sudden or unreasonable fluctuations or Money Managers, Journal of Development Studies excessive speculation in passing, then the unwarranted changes in the price of such (2012); Morse, Oil dotcom, Research Notes, (2008); commodities,’’ irrespective of whether they are Committee staff included the study in its tally.’’ Naylor, Food Security in an Era of Economic mandated. Id. The Commission acknowledges that Such a method is relatively unsophisticated, and Volatility (working paper 2010); Newell, some of the studies, when considered as comments Commodity Speculation’s ‘‘Smoking Gun’’ (2008); the Commission cannot evaluate it without on the December 2013 Position Limits Proposal, can Peri, Vandone, and Baldi, Internet, Noise Trading knowing to which studies the commenter refers. be understood to suggest that, contrary to the and Commodity Prices (working paper 2012); Soros, The commenter continues, ‘‘Of the total, 105 Congressional determination, there is no empirical Interview with Stern Stern Magazine (2008); studies address whether excessive speculation is evidence that excessive speculation exists, that Tanaka, IEA Says Speculation Amplifying Oil Price distorting prices in today’s commodity markets, excessive speculation causes sudden or Moves, (2006); Von Braun and Tadesse, Global with 66 of these studies finding that excessive unreasonable fluctuations or unwarranted changes Food Price Volatility and Spikes: An Overview of speculation is not a problem.’’ This statement did in the price of a commodity, or is an undue and Costs, Cause and Solutions (2012). not identify the 66 studies or 105 studies on which unnecessary burden on interstate commerce in a 240 Studies that employ the Granger method of it based its belief. Accordingly, the Commission is commodity. statistical analysis include: Algieri, Price Volatility, unable to evaluate the basis of its belief. 238 See discussion of necessity finding, above. Continued

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Some economic studies considered by The comovement method looks for Speculation and Excessive Speculation in the Commission employ the Granger whether there is correlation that is Commodity Markets: Sheep or Shepherd method of statistical analysis. The contemporaneous and not lagged. A Behaviour? (working paper 2012); Antoshin, Canetti, and Miyajima, IMF Global Financial Granger method seeks to assess whether subset of these comovement studies use Stability Report: Financial Stress and Deleveraging: there is a strong linear correlation a technique called cointegration for Macrofinancial Implications and Policy, Annex 1.2, between two sets of data that are testing correlation between two sets of Financial Investment in Commodities Markets arranged chronologically forming a data. (October 2008); Aulerich, Irwin, and Garcia, Bubbles, Food Prices, and Speculation: Evidence ‘‘time series.’’ While the Granger test is Models of Fundamental Supply and from the CFTC’s Daily Large Trader Data Files referred to as the ‘‘Granger causality Demand 242 (NBER Conference 2012); Borin and Di Nino, The test,’’ it is important to understand that, Role of Financial Investments in Agricultural notwithstanding this shorthand, Commodity Derivatives Markets (working paper 2012); Brunetti and Bu¨ yu¨ ks¸ahin, Is Speculation ‘‘Granger causality’’ does not necessarily establish an actual cause and effect Commodity Markets’ Volatility, Energy Economics Destabilizing? (working paper 2009); Cooke and (2010); Dorfman and Karali, Have Commodity Index Robles, Recent Food Prices Movements: A Time relationship. The result of the Granger Funds Increased Price Linkages between Series Analysis (working paper 2009); Frenk, method is evidence, or the lack of Commodities? (working paper 2012); Filimonov, Review of Irwin and Sanders 2010 OECD Report Bicchetti, Maystre, and Sornette, Quantification of (Better Markets June 10, 2010); Gilbert, Commodity evidence, of the existence of a linear correlation between the two time series. the High Level of Endogeneity and of Structural Speculation and Commodity Investment (2010); Regime Shifts in Commodity Markets, (working Gilbert, How to Understand High Food Prices, The absence of Granger causality does paper 2013); Haigh, Harris, and Overdahl, Market Journal of Agricultural Economics (2008); Gilbert, not necessarily imply the absence of Growth, Trader Participation and Pricing in Energy Speculative Influences on Commodity Futures actual causation. Futures Markets (working paper 2007); Hoff, Prices, 2006–2008, UN Conference on Trade and Herding Behavior in Asset Markets, Journal of Development (2010); Goyal and Tripathi, Comovement or Cointegration Financial Stability (2009); Kawamoto, Kimura, et Regulation and Price Discovery: Oil Spot and Analyses 241 al., What Has Caused the Surge in Global Futures Markets (working paper 2012); Grosche, Commodity Prices and Strengthened Cross-market Limitations of Granger Causality Analysis to Assess Linkage?, Bank of Japan Working Papers Series the Price Effects From the Financialization of No.11–E–3 (May 2011); Korniotis, Does Speculation Agricultural Commodity Markets Under Bounded Affect Spot Price Levels? The Case of Metals With paper 2010); Timmer, Did Speculation Affect World Rationality, Agricultural and Resource Economics and Without Futures Markets (working paper, FRB Rice Prices?, UN Food and Agricultural (2012); Harris and Bu¨ yu¨ ks¸ahin, The Role of Finance and Economic Discussion Series 2009); Le Organization (working paper 2009); Tse and Speculators in the Crude Oil Futures Market Pen and Se´vi, Futures Trading and the Excess Williams, Does Index Speculation Impact (working paper 2009); Irwin and Sanders, Energy Comovement of Commodity Prices (working paper Commodity Prices?, Financial Review, Vol. 48, Futures Prices and Commodity Index Investment: 2012); Pollin and Heintz, How Wall Street Issue 3 (2013); Tse, The Relationship Among New Evidence from Firm-Level Position Data Speculation is Driving Up Gasoline Prices Today Agricultural Futures, ETFs, and the US Stock (AFR working paper 2011); Tang and Xiong, Index (working paper 2014); Irwin and Sanders, The Market, Review of Futures Markets (2012); Varadi, Impact of Index and Swap Funds on Commodity Investment and Financialization of Commodities, An Evidence of Speculation in Indian Commodity Financial Analysts Journal (2012); and Windawi, Futures Markets: A Systems Approach, Journal of Markets (working paper 2012); Williams, Dodging Alternative Investments (working paper 2010); Speculation, Embedding, and Food Prices: A Dodd-Frank: Excessive Speculation, Commodities Cointegration Analysis (working paper 2012). Irwin and Sanders, The Impact of Index and Swap Markets, and the Burden of Proof, Law & Policy 242 Studies that employ models of fundamental Funds on Commodity Futures Markets: Preliminary Journal of the University of Denver (2015). Results (working paper 2010); Irwin and Sanders, supply and demand include: Acharya, Ramadorai, 241 Studies that employ the comovement or The ‘‘Necessity’’ of New Position Limits in and Lochstoer, Limits to Arbitrage and Hedging: cointegration methods include: Ada¨mmer, Bohl and Agricultural Futures Markets: The Verdict from Evidence from Commodity Markets, Journal of Stephan, Speculative Bubbles in Agricultural Prices Daily Firm-Level Position Data (working paper Financial Economics (2013); Allen, Litov, and Mei, (working paper 2011); Algieri, A Roller Coaster Large Investors, Price Manipulation, and Limits to 2014); Irwin and Sanders, The Performance of Ride: an Empirical Investigation of the Main Drivers CBOT Corn, Soybean, and Wheat Futures Contracts Arbitrage: An Anatomy of Market Corners, Review of Wheat Price (working paper 2013); Babula and of Finance (2006); Bos and van der Molen, A Bitter after Recent Changes in Speculative Limits Rothenberg, A Dynamic Monthly Model of U.S. (working paper 2007); Irwin, Sanders, and Merrin, Brew? How Index Fund Speculation Can Drive Up Pork Product Markets: Testing for and Discerning Commodity Prices, Journal of Agricultural and Devil or Angel: The Role of Speculation in the the Role of Hedging on Pork-Related Food Costs, Recent Commodity Price Boom, Journal of Applied Economics (2010); Breitenfellner, Crespo, Journal of Int’l Agricultural Trade and Development and Keppel, Determinants of Crude Oil Prices: Agricultural and Applied Economics (2009); (2013); Baffes and Haniotos, Placing the 2006/08 Kaufman, The role of market fundamentals and Supply, Demand, Cartel, or Speculation?, Monetary Commodity Boom into Perspective, World Bank Policy and the Economy (2009); Brennan and speculation in recent price changes for crude oil, Policy Research Working Paper 5371 (2010); Basu Schwartz, Arbitrage in Stock Index Futures, Journal Energy Policy, Vol. 39, Issue 1 (January 2011); and Miffre, Capturing the Risk Premium of of Business (1990); Byun and Sungje, Speculation Kaufmann and Ullman, Oil Prices, Speculation, and Commodity Futures: The Role of Hedging Pressure, in Commodity Futures Market, Inventories and the Fundamentals: Interpreting Causal Relations Journal of Banking and Risk (2013); Belke, Bordon, Price of Crude Oil (working paper 2013); Chan, Among Spot and Futures Prices, Energy Economics, and Volz, Effects of Global Liquidity on Commodity Trade Size, Order Imbalance, and Volatility-Volume Vol. 31, Issue 4 (July 2009); Mayer, The Growing and Food Prices, German Institute for Economic Relation, Journal of Financial Economics (2000); Interdependence Between Financial and Research (2013); Bicchetti and Maystre, The Chordia, Subrahmanyam and Roll, Order Commodity Markets, UN Conference on Trade and Synchronized and Long-lasting Structural Change imbalance, Liquidity, and Market Returns, Journal Development (discussion paper 2009); Mobert, Do on Commodity Markets: Evidence from High of Financial Economics (2002); Cifarelli and Speculators Drive Crude Oil Prices? (2009 working Frequency Data (working paper 2012); Boyd, Paladino, Oil Price Dynamics and Speculation: a paper); Robles, Torero, and von Braun, When Bu¨ yu¨ ks¸ahin, and Haigh, The Prevalence, Sources, Multivariate Financial Approach, Energy Speculation Matters (working paper 2009); Sanders, and Effects of Herding (working paper 2013); Bunn, Economics (2010); Doroudian and Vercammen, Boris, and Manfredo, Hedgers, Funds, and Small Chevalier, and Le Pen, Fundamental and Financial First and Second Order Impacts of Speculation and Speculators in the Energy Futures Markets: An Influences on the Co-movement of Oil and Gas Commodity Price Volatility (working paper 2012); Analysis of the CFTC’s Commitment of Traders Prices (working paper 2012); Bu¨ yu¨ ks¸ahin, Harris, Ederington, Dewally, and Fernando, Determinants Reports, Energy Economics (2004); Sanders, Irwin, and Haigh, Fundamentals, Trader Activity, and of Trader Profits in Futures Markets (working paper and Merrin, The Adequacy of Speculation in Derivatives Pricing (working paper 2008); 2013); Einloth, Speculation and Recent Volatility in Agricultural Futures Markets: Too Much of a Good Bu¨ yu¨ ks¸ahin and Robe, Does it Matter Who Trades the Price of Oil (working paper 2009); Frankel and Thing?, Applied Economic Perspectives and Policy Energy Derivatives?, Review of Env’t, Energy, and Rose, Determinants of Agricultural and Mineral (2010); Sanders, Irwin, and Merrin, Smart Money? Economics (2013); Bu¨ yu¨ ks¸ahin and Robe, Does Commodity Prices (working paper 2010); Girardi, The Forecasting Ability of CFTC Large Traders, ‘‘Paper Oil’’ Matter? (working paper 2011); Do Financial Investors Affect Commodity Prices? Journal of Agricultural and Resource Economics Bu¨ yu¨ ks¸ahin and Robe, Speculators, Commodities, (working paper 2011); Gorton, Hayashi, (2009); Sanders, Irwin, and Merrin, A Speculative and Cross-Market Linkages (working paper 2012); Rouwenhorst, The Fundamentals of Commodity Bubble in Commodity Futures? Cross-Sectional Cheng, Kirilenko, and Xiong, Convective Risk Futures Returns, Review of Finance (2013); Evidence, Agricultural Economics (2010); Flows in Commodity Futures Markets (working Guilleminot and Ohana, The Interaction of Hedge Singleton, The 2008 Boom/Bust in Oil Prices paper 2012); Coleman and Dark, Economic Funds and Index Investors in Agricultural (working paper 2010); Singleton, Investor Flows Significance of Non-Hedger Investment in Derivatives Markets (working paper 2013); Gupta and the 2008 Boom/Bust in Oil Prices (working Commodity Markets (working paper 2012); Creti, and Kamzemi, Factor Exposures and Hedge Fund paper 2011); Stoll and Whaley, Commodity Index Joets, and Mignon, On the Links Between Stock and Operational Risk: The Case of Amaranth (working Investing and Commodity Futures Prices (working

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Some economists have developed capacity and use affect supply and Eigenvalue Stability Analysis 245 economic models for the supply and demand, which may influence the price demand of a commodity. These models of a physical commodity over time. An Some economists have run regression often include theories of how storage economist looks at where the model is analyses 246 on price and time-lagged in equilibrium with respect to quantities values of price. They estimate an paper 2009); Haigh, Hranaiova, and Overdahl, of a commodity supplied and demanded Hedge Funds, Volatility, and Liquidity Provisions equation that relates current to past time in the Energy Futures Markets, Journal of to arrive at a ‘‘fundamental’’ price or values over short time intervals and Alternative Investments (2007); Haigh, Hranaiova, price return. The economist then looks solve for the roots of that equation, and Overdahl, Price Dynamics, Price Discovery, and for deviations between the fundamental called the eigenvalues (latent values), in Large Futures Trader Interactions in the Energy Complex, (working paper 2005); Hamilton, Causes price (based on the model) and the order to detect unusual price changes. If and Consequences of the Oil Shock of 2007–2008, actual price of a commodity. When they find an eigenvalue 247 with an Brookings Paper on Economic Activity (2009); there is a statistically significant absolute value of greater than one, they Hamilton and Wu, Effects of Index-Fund Investing on Commodity Futures Prices, International deviation between the fundamental infer that the price of the commodity is Economic Review, Vol. 56, No. 1 (2015); Hamilton price and the actual price, the in a ‘‘bubble.’’ and Wu, Risk Premia in Crude Oil Futures Prices, economist generally infers that the price 248 Journal of International Money and Finance (2013); Theoretical Models Harrison and Kreps, Speculative Investor Behavior is not driven by market fundamentals of in a Stock Market with Heterogeneous Expectations, supply and demand. Quarterly Journal of Economics (1978); Henderson, Pearson and Wang, New Evidence on the Switching Regressions or Similar 245 Studies that employ eigenvalue stability Financialization of Commodity Markets (working Analyses 243 analysis include: Czudaj and Beckman, Spot and paper 2012); Hirshleifer, Residual Risk, Trading Futures Commodity Markets and the Unbiasedness Costs, and Commodity Futures Risk Premia, Review Hypothesis—Evidence from a Novel Panel Unit of Financial Studies, Vol. 1, No. 2, Oxford Root Test, Economic Bulletin (2013); Du, Yu, and University Press (1988); Hong and Yogo, Digging In the context of studies relating to Hayes, Speculation and Volatility Spillover in the into Commodities (working paper 2009); Crude Oil and Agricultural Commodity Markets: A Interagency Task Force on Commodity Markets, position limits, economists employing Bayesian Analysis, (working paper 2012); Gilbert, Interim Report on Crude Oil, multiple federal switching regression analysis generally Speculative Influences on Commodity Futures agencies including the CFTC (2008); Juvenal and posit a model with two states: A normal Prices, 2006–2008, UN Conference on Trade and Petrella, Speculation in the Oil Market (working state, where prices reflect market Development (working paper 2010); Gutierrez, paper 2012); Juvenal and Petrella, Speculation in Speculative Bubbles in Agricultural Commodity Commodities, and Cross-Market Linkages (working fundamentals, and a second state, often Markets, European Review of Agricultural paper 2011); Kilian, Not All Oil Price Shocks Are interpreted as a ‘‘bubble.’’ 244 Using Economics (2012); Phillips and Yu, Dating the Alike: Disentangling Demand and Supply Shocks in price data, authors of these studies Timeline of Financial Bubbles During the Subprime the Crude Oil Market, American Economic Review Crisis, Quantitative Economics (2011). (2007); Kilian and Lee, Quantifying the Speculative calculate the probability of a transition 246 In statistical modeling, regression analysis is Component in the Real Price of Oil: The Role of between the two states. The point of a process for estimating the relationships among Global Oil Inventories (working paper 2013); Kilian transition is called a structural certain types of variables (values that change over and Murphy, The Role of Inventories and ‘‘breakpoint.’’ Examination of these time or in different circumstances). Speculative Trading in the Global Market for Crude 247 In this context, an eigenvalue is a Oil, Journal of Applied Econometrics (2010); Knittel breakpoints permits the researcher to mathematical calculation that summarizes the and Pindyck, The Simple Economics of Commodity identify the duration of a particular dynamic properties of the data generated by the Price Speculation, (working paper 2013); Kyle and ‘‘bubble.’’ model. Generally, an eigenvalue is a concept from Wang, Speculation Duopoly with Agreement to linear algebra. Disagree: Can Overconfidence Survive the Market 248 Studies that present theoretical models Test?, Journal of Finance (1997); Manera, Nicolini 243 Studies that include switching regressions or include: Avriel and Reisman, Optimal Option and Vignati, Futures Price Volatility in similar analyses include: Brooks, Prokopczuk, and Commodities Markets: The Role of Short-Term vs Portfolios in Markets with Position Limits and Wu, Boom and Bust in Commodity Markets: Margin Requirements, Journal of Risk (2000); Dai, Long-Term Speculation (working paper 2013); Mei, Bubbles or Fundamentals? (working paper 2014); Acheinkman, and Xiong, Speculative Trading and Jin and Liu, Illiquidity, Position Limits, and Baldi and Peri, Price Discovery in Agricultural Optimal Investment (working paper 2009); Stock Prices: An Analysis of Chinese A–B Share Commodities: the Shifting Relationship Between Premia, Annals of Economics and Finance (2009); Dicembrino and Scandizzo, The Fundamental and Spot and Futures Prices (working paper 2011); Speculative Components of the Oil Spot Price: A Morana, Oil Price Dynamics, Macro-finance Chevallier, Price Relationships in Crude oil Futures: Interactions and the Role of Financial Speculation, Real Options Value Approach (working paper New Evidence from CFTC Disaggregated Data, Journal of Banking & Finance, Vol. 37, Issue 1 (Jan. 2012); Dutt and Harris, Position Limits for Cash- Environmental Economics and Policy Studies 2012); Mou, Limits to Arbitrage and Commodity Settled Derivative Contracts, Journal of Futures (2012); Cifarelli and Paladino, Commodity Futures Index Investment: Front-Running the Goldman roll Markets (2005); Ebrahim and ap Gwilym, Can Returns: A non-linear Markov Regime Switching (working paper 2011); Plato and Hoffman, Position Limits Restrain Rogue Traders?, at p.832 Model of Hedging and Speculative Pressures Measuring the Influence of Commodity Fund Journal of Banking & Finance (2013); Edirsinghe, Trading on Soybean Price Discovery (working paper (working paper 2010); Fan and Xu, What Has Naik, and Uppal, Optimal Replication of Options 2007); Sornette, Woodard and Zhou, The 2006– Driven Oil Prices Since 2000? A Structural Change with Transaction Costs and Trading Restrictions, 2008 Oil Bubble and Beyond: Evidence of Perspective, Energy Economics (2011); Hache and Journal of Financial and Quantitative Analysis Speculation, and Prediction, Physica A. (2009); Lantz, Speculative Trading & Oil Price Dynamic: A (1993); Froot, Scharfstein, and Stein, Herd on the Stevans and Sessions, Speculation, Futures Prices, Study of the WTI Market, Energy Economics, Vol. Street: Informational Inefficiencies in a Market with and the U.S. Real Price of Crude Oil, American 36, p.340 (March 2013); Lammerding, Stephan, Short Term Speculation, (Working Paper 1990); Journal of Social and Management Science (2010); Trede, and Wifling, Speculative Bubbles in Recent Kumar and Seppi, Futures Manipulation with Trostle, Global Agricultural Supply and Demand: Oil Price Dynamics: Evidence from a Bayesian ‘‘Cash Settlement’’, Journal of Finance (1992); Kyle Factors Contributing to the Recent Increase in Food Markov Switching State-Space Approach, Energy and Viswanathan, How to Define Illegal Price Commodity Prices, USDA Economic Research Economics Vol. 36 (2013); Sigl-Gru¨ b and Schiereck, Manipulation, American Economic Review (2008); Service (2008);Van der Molen, Speculators Invading Speculation and Nonlinear Price Dynamics in Kyle and Wang, Speculation Duopoly with the Commodity Markets (working paper 2009); Commodity Futures Markets, Investment Agreement to Disagree: Can Overconfidence Weiner, Do Birds of A Feather Flock Together? Management and Financial Innovations, Vol. 77 Survive the Market Test?, Journal of Finance (1997); Speculation in the Oil Markets, (Working Paper (2010); Silvernnoinen and Thorp, Financialization, Lee, Cheng and Koh, An Analysis of Extreme Price 2006); Weiner, Speculation in International Crises: Crisis and Commodity Correlation Dynamics, Shocks and Illiquidity Among Systematic Trend Report from the Gulf, Journal of Int’l Business Journal of Int’l Financial Markets, Institutions, and Followers (working paper 2010); Leitner, Inducing Studies (2005); Westcott and Hoffman, Price Money (2013). Agents to Report Hidden Trades: A Theory of an Determination for Corn and Wheat: The Role of 244 While there is no broad academic consensus Intermediary, Review of Finance (2012); Liu, Market Factors and Government Programs (working on the formal, testable economic definition of the Financial-Demand Based Commodity Pricing: A paper 1999); Wright, International Grain Reserves term ‘‘price bubble,’’ price bubbles are colloquially Theoretical Model for Financialization of and Other Instruments to Address Volatility in thought to be unsustainable surges in asset prices Commodities (working paper 2011); Lombardi and Grain Markets, World Bank Research Observer fueled by speculation and followed by ‘‘crashes’’ or van Robays, Do Financial Investors Destabilize the (2012). precipitous price drops. Continued

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Some studies perform little or no The Commission considered more empirical analysis and instead present a Making of a Dealer Market: From Entry to than seventy studies that are survey or general theoretical model that may bear, Equilibrium in the Trading of Nasdaq Stocks, opinion pieces. Some of these studies Journal of Finance (2002); European Commission, directly or indirectly, on the effect of Review of the Markets in Financial Instruments provide useful background material but, excessive speculation in the Directive (working paper 2010); European on the whole, they offer mere opinion commodities markets. Because these Commission, Tackling the Challenges in unsupported by rigorous empirical papers do not include empirical Commodity Markets, Communication from the analysis. While they may be useful for European Commission to the European Parliament analysis, they contain many untested (2011); Frenk and Turbeville, Commodity Index developing hypotheses or informing assumptions and conclusory statements, Traders and the Boom/Bust Cycle in Commodities policymakers, these secondary sources limiting their usefulness to the Prices, Better Markets Copyright (2011); Goldman often exhibit policy bias and are not Commission. Sachs, Global Energy Weekly March 2011 (2011); neutral, reliable bases for scientific Government Accountability Office, Issues Involving inquiry the way that primary economic Surveys of Economic Literature and the Use of the Futures Markets to Invest in studies are.250 Opinion Pieces 249 Commodity Indexes, (Report 2009); Greenberger, The Relationship of Unregulated Excessive Speculation to Oil Market Price Volatility (working More Persuasive Academic Studies paper 2010); Harris, Circuit Breaker and Program While the economic literature is Oil Price? (working paper, European Central Bank, Trading Limits: What Have We Learned, Brooking inconclusive, the Commission can 2011); Morris, Speculative Investor Behavior and Institutions Press (1997); Henn, CL–WEED–59628; Learning, Quarterly Journal of Economics (1996); Her Majesty’s Treasury, Global Commodities: A Suggest Otherwise, Federal Reserve Bank of Dallas Parsons, Black Gold & Fool’s Gold: Speculation in Long Term Vision for Stable, Secure, and (2011); Plante and Yucel, Did Speculation Drive Oil the Oil Futures Market, Economia (2009); Pierru Sustainable Global Markets, (2008); House of Prices? Futures Market Points to Fundamentals, and Babusiaux, Speculation without Oil Stockpiling Commons Select Committee on Science & Federal Reserve Bank of Dallas (2011); Ray and as a Signature: A Dynamic Perspective (working Technology of the United Kingdom, Strategically Schaffer, Index Funds and the 2006–2008 Run-up paper 2010); Pirrong, Manipulation of the Important Metals, (2011); Hunt, Thought for the in Agricultural Commodity Prices (working paper Commodity Futures Market Delivery Process, Day: Unreported Copper Stocks, Simon Hunt 2010); Rossi, Analysis of CFTC Proposed Position Journal of Business (1993); Pirrong, The Self- Strategic Services (2011); Inamura Kimata, and Limits on Commodity Index Fund Trading (working Regulation of Commodity Exchanges: The Case of Takeshi, Recent Surge in Global commodity paper 2011); Smith, World Oil: Market or Mayhem?, Market Manipulation, Journal of Law and Prices—Impact of Financialization of Commodities Journal of Economic Perspectives (2009); Technical Economics (1995); Pliska and Shalen, The Effects of and Globally Accommodative Monetary Conditions, Committee of the International Organization of Regulation on Trading Activity and Return Bank of Japan Review March 2011; International Securities Commissions, Task Force on Commodity Volatility in Futures Markets, Journal of Futures Monetary Fund, Is Inflation Back? Commodity Futures Market Final Report, (2009); Tokic, Rational Markets (2006); Routledge, Seppi, and Spatt, Prices and Inflation, Chapter 3 of IMF’s World Destabilizing Speculation, Positive Feedback Equilibrium Forward Curves for Commodities, Economic Outlook ‘‘Financial Stress, Downturns, Trading, and the Oil Bubble of 2008, Energy Journal of Finance (2000); Schulmeister, Technical and Recoveries’’ (2008); Irwin and Sanders, Index Economics (2011); U.S. Commodity Futures Trading Trading and Commodity Price Fluctuations Funds, Financialization, and Commodity Futures Commission, Part Two, A Study of the Silver (working paper 2012); Schulmeister, Torero, and Markets, Applied Economic Perspective and Policy Market, May 29, 1981, Report to the Congress in von Braun, Trading Practices and Price Dynamics (2010); Jack, Populists vs Theorists: Futures Markets in Commodity Markets (working paper 2009); Response to Section 21 Of The Commodity and the Volatility of Prices, Exploration in Exchange Act., (1981); U.S. Commodity Futures Shleifer and Vishney, The Limits of Arbitrage, Economic History (2006); Jickling and Austin, Journal of Finance (1997); Sockin and Xiong, Trading Commission, Staff Report on Commodity Hedge Fund Speculation and Oil Prices (working Swap Dealers and Index Traders with Commission Feedback Effects of Commodity Futures Prices paper 2011); Kemp, Crisis Remarks the Commodity (working paper 2012); Vansteenkiste, What is Recommendations, (2008); U.S. Senate Permanent Business, Reuters Columnist (2008); Khan, The Subcommittee, Excessive Speculation in the Driving Oil Price Futures? Fundamentals Versus 2008 Oil Price ‘‘Bubble (working paper 2009); Koski Speculation (working paper, European Central Natural Gas Market, (2007); U.S. Senate Permanent and Pontiff, How Are Derivatives Used? Evidence Subcommittee, Excessive Speculation in the Wheat Bank, 2011); Westerhoff, Speculative Markets and from the Mutual Fund Industry, Journal of Finance the Effectiveness of Price Limits, Journal of Market, (2009); U.S. Senate Permanent (1996); Lagi, Bar-Yam, and Bertrand, The Food Subcommittee, The Role of Market Speculation in Economic Dynamics and Control (2003). Crisis: A Quantitative Model Of Food Prices 249 Rising Oil and Gas Prices: A Need to Put the cop Studies that are survey or opinion pieces Including Speculators and Ethanol Conversion include: Anderson, Outlaw, and Bryant, The Effects Back on the Beat, (2006); United Nations (working paper 2012); Lagi, Bar-Yam, and Bertrand, Commission of Experts on Reforms of the of Ethanol on Texas Food and Feed, Agricultural The Food Crisis: A Quantitative Model Of Food and Food Policy Center Research Report (2008); International and Monetary System, Report of the Prices Including Speculators and Ethanol Commission of Experts, (2009); United Nations Baffes, The Long-term Implications of the 2007– Conversion (working paper 2011); Lines, 2008 Commodity-Price Boom, Development in Conference on Trade and Development, The Global Speculation in Food Commodity Markets, World Practice (2011); Basu and Gavin, What Explains the Economic Crisis: Systemic Failures and Multilateral Development Movement (2010); Luciani, From Growth in Commodity Derivatives? (working paper Remedies, (2009); United Nations Conference on Price Taker to Price Maker? Saudi Arabia and the 2011); Berg, The Rise of Commodity Speculation: Trade and Development, The Financialization of World Oil Market (working paper 2009); Masters from Villainous to Venerable, (2011); Bessenbinder, Commodity Markets, (2009); United Nations and White, The Accidental Hunt Brother: How Lilan, and Mahadeva, The Role of Speculation in Conference on Trade and Development, Trade and Oil Markets: What Have We Learned So Far? Institutional Investors are Driving UP Food and Development Report: Price Formation in (working paper 2012); Cagan, Financial Futures Energy Prices (working paper 2008); Medlock and Financialized Commodity Markets: The Role of Markets: Is More Regulation Needed?, Journal of Myers, Who is in the Oil Futures Market and How Information, (2011); United Nations Food and Futures Markets (1981); Chincarini, The Amaranth Has It Changed?, (working paper 2009); Newman, Agricultural Organization, Final Report of the Debacle: Failure of Risk Measures or Failure of Risk Financialiation and Changes in the Social Relations Committee on Commodity Problems: Extraordinary Management (working paper 2007); Chincarini, along commodity Chains: The Case of Coffee, Joint Intersessional Meeting of the Natural Gas Futures and Spread Position Risk: Review of Radical Political Economics (2009); Intergovernmental Group (IGG), (2010); United Lessons from the Collapse of Amaranth Advisors Nissanke, Commodity Markets and Excess Nations Food and Agricultural Organization, Price L.L.C., Journal of Applied Finance (2008); CME Volatility: An Evolution of Price Dynamics Under Volatility in Agricultural Markets, Economic and Group, Inc., Excessive Speculation and Position Financialization (working paper 2011); Nissanke, Social Perspectives Policy Brief (2010); United Limits in Energy Derivatives Markets (working Commodity Market Linkage in the Global Financial Nations Food and Agricultural Organization, Price paper); Cooper, Excessive Speculation and Oil Price Crisis: Excess Volatility and Development Impact, Volatility in Food and Agricultural Markets: Policy Shock Recessions: A Case of Wall Street ‘‘De´ja` vu Journal of Development Studies (2012); Parsons, Response, (2011); Urbanchuk, Speculation and the All Over Again,’’ Consumer Federation of America Black Gold & Fool’s Gold: Speculation in the Oil Commodity Markets (2011); Verleger, Annex A to (2011); Dahl, Future Markets: The Interaction of Futures Market, (Economia 2009); Jones, Price CL–ISDA/SIFMA–59611; Woolley, Why are Economic Analyses and Regulation: Discussion, Limits: A Return to Patience and Rationality in U.S. Financial Markets so Inefficient and Exploitative— American Journal of Agricultural Economics (1980); Markets, Speech to the CME Global Financial and a Suggested Remedy, (2010); Wray, The De Schutter, Food Commodities Speculation and Leadership (2010); Petzel, Testimony before the Commodities Market Bubble: Money Manager Food Price Crises, United Nations Special Report on CFTC, (July 28, 2009); Pfuderer and Gilbert, Index Capitalism and the Financialization of Commodities the Right to Food (2010); Easterbrook, Monopoly, Funds Do Impact Agricultural Prices? (working (working paper 2008). Manipulation, and the Regulation of Futures paper 2012); Pirrong, Squeezes, Corners, and the 250 For example, these surveys may posit ‘‘facts’’ Markets, Journal of Business (1986); Eckaus, The Anti-Manipulation Provisions of the Commodity that are unsupported by testing, may not test their Oil Price Really is a Speculative Bubble (working Exchange Act, Regulation (1994); Pirrong, Annex B hypotheses, or may claim results that are subject to paper 2008); Ellis, Michaely, and O’Hara, The to CL–ISDA/SIFMA–59611; Plante and Yucel, Did multiple interpretations. Speculation Drive Oil Prices? Market Fundamentals

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identify a few of the well-executed positions and risk premiums.255 statistical or theoretical models to reach studies that do not militate against and, Chevallier, in Price Relationships in economically rigorous conclusions. to some degree, support the Crude Oil Futures: New Evidence from Some of the evidence cited in these Commission’s reproposal to follow, out CFTC Disaggregated Data, studies is anecdotal. Still, these two of due caution, a prophylactic Environmental Economics and Policy studies are in-depth examinations of approach.251 Hamilton and Wu, in Risk Studies (2012), applies switching actual market events and the Premia in Crude Oil Futures Prices, regression analysis to position data and Commission continues to find them to Journal of International Money and concludes that one cannot eliminate the be helpful and persuasive in making its Finance (2013), using models of possibility of speculation as one of the preliminary alternative necessity fundamental supply and demand, find main factors contributing to oil price finding. The Commission reiterates that evidence that changes in non- volatility in 2008. This study also the PSI Report (because it closely commercial positions can affect the risk suggests that when supply and demand preceded Congress’ amendments to CEA are highly inelastic, i.e., relatively section 4a(a) in the Dodd-Frank Act) premium in crude oil futures prices; unresponsive to price changes, financial indicates how Congress views limits as that is, Hamilton and Wu found that, for investors may have contributed to oil necessary as a prophylactic measure to a limited period around the time of the price volatility by taking large positions prevent the adverse effects of 2008 financial crisis that gave rise to the in energy sector commodity index excessively large speculative positions. Dodd-Frank Act, increases in funds.256 As one may infer from this The studies, individually or taken as a speculative positions reduced the risk small sample, some of the more whole, do not dissuade the Commission 252 premiums in crude oil futures compelling studies that support the from its consistent view that large 253 prices. This is important because, all proposition that large positions may speculative positions and outsized else being equal, one would expect the move prices involve empirical studies of market power pose risks to well- risk premium to be the component of the oil market. The Commission functioning commodities markets, nor price that would be affected by traders acknowledges that not all commodity from its preliminary finding that accumulating large positions.254 markets exhibit the same price behavior speculative position limits are necessary Hamilton, in Causes of the Oil Shock of at the same times. Even so, that the to achieve their statutory purposes. 2007–2008, Brookings Paper on findings of a particular study of the The Commission requests comment Economic Activity (2009), also market experience of a particular on its discussion of studies and reports. concludes that the oil price run-up was commodity over a particular time period It also invites commenters to advise the caused by strong demand confronting may not be extensible to other Commission of any additional studies stagnating world production, but that commodity markets or over other time that the Commission should consider, something other than fundamental periods does not mean that the and why. factors of supply and demand (as Commission should disregard that study. This is because, as explained II. Compliance Date for the Reproposed modeled) may have aggravated the Rules speed and magnitude of the ensuing oil elsewhere, these markets are over time price collapse. Singleton, in Investor all susceptible to similar risks from Commenters requested that the Flows and the 2008 Boom/Bust in Oil excessive speculation. Again, this Commission delay the compliance date, Prices (working paper 2011), employs a supports a prophylactic approach to generally for at least nine months, to technique that is similar to Granger limits and a determination that limits provide adequate time for market causality and finds a negative are necessary to effectuate their participants to come into compliance 261 correlation between speculative statutory purposes. with a final rule. In addition, a The Commission in the December commenter requested the Commission 2013 Position Limits Proposal identified delay the compliance date until no 251 Generally, studies that the Commission considers to be well-executed, for example, employ two studies of actual market events to be earlier than January 3, 2018, to well-accepted, defensible, scientific methodology, helpful and persuasive in making its coordinate with the expected document and present facts and results that can be alternative necessity finding: 257 The implementation date for position limits replicated, are on point regarding issues relevant to inter-agency report on the silver in Europe.262 position limits, and may eventually appear in crisis 258 and the PSI Report on respected, peer-reviewed academic journals. In response to commenters, in this 252 A risk premium is the amount of return on a Excessive Speculation in the Natural reproposal, the Commission proposes to 259 particular asset or investment that is in excess of Gas Market. These two studies and delay the compliance date of any final the expected rate of return on a theoretically risk some of the other reports included in rule until, at earliest, January 3, 2018, as free asset or investment, i.e., one with a virtually the survey category 260 do not use provided under reproposed § 150.2(e). certain or guaranteed return. 253 The Commission is of the opinion that The economic rationale behind this is that 255 speculative traders would be taking long positions That is, when long speculative positions are a delay would provide market to earn the risk premium, among other things. If larger, the risk premiums are smaller. 256 participants with sufficient time to more speculative traders are going long, i.e., See also Hamilton and Wu, Risk Premia in come into compliance with a final rule, bidding to earn the risk premium, the risk premium Crude Oil Futures Prices, Journal of International would be reduced. In this way, speculators make it Money and Finance (2013); Hamilton, Causes of the particularly in light of grandfathering cheaper for short hedgers to lock in their price risk. Oil Shock of 2007–2008, Brookings Paper on provisions, discussed below. Contra Harris and Bu¨ yu¨ ks¸ahin, The Role of Economic Activity (2009). The Commission believes that a delay Speculators in the Crude Oil Futures Market 257 December 2013 Position Limits Proposal, 78 until January 3, 2018, would provide FR at 75695–6. (working paper 2009) (concluding that price time for market participants to gain changes precede the position change). In this way, 258 U.S. Commodity Futures Trading Commission, speculators make it cheaper for short hedgers to ‘‘Part Two, A Study of the Silver Market,’’ May 29, lock in their price risk. 1981, Report to Congress in Response to Section 21 Recommendations (2008); U.S. Senate Permanent 254 Long speculators would tend to be of The Commodity Exchange Act. Subcommittee, Excessive Speculation in the Wheat compensated for assuming the price risk that is 259 U.S. Senate Permanent Subcommittee on Market (2009); U.S. Senate Permanent inherent with going long in the crude oil futures Investigations, ‘‘Excessive Speculation in the Subcommittee, The Role of Market Speculation in contract. If more speculators are bidding to earn the Natural Gas Market,’’ June 25, 2007. Rising Oil and Gas Prices: A Need to Put the Cop risk premium by taking long position in crude oil 260 E.g., U.S. Commodity Futures Trading Back on the Beat (2006). futures contracts, it should lower the risk premium, Commission, Staff Report on Commodity Swap 261 See, e.g., CL–FIA–60937 at 5. all else being equal. Dealers and Index Traders with Commission 262 CL–FIA–61036 at 2.

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access to adequate systems to compute III. Reproposed Rules commodity derivative contracts as non- futures-equivalent positions. The The Commission is not addressing enumerated bona fide hedges or Commission bases this opinion on its comments that are beyond the scope of enumerated anticipatory bona fide experience, including with swap dealers this reproposed rulemaking. hedges, and to exempt from federal and clearing members of derivative position limits certain spread positions, clearing organizations, who, as reporting A. § 150.1—Definitions the Commission proposed to further entities under part 20 (swaps large 1. Various Definitions Found in § 150.1 amend certain relevant definitions, trader reporting), have been required to including changes to the definitions of prepare reports of swaps on a futures- Among other elements, the December ‘‘futures-equivalent,’’ ‘‘intermarket equivalent basis for years. As discussed 2013 Position Limits Proposal included spread position,’’ and ‘‘intramarket above, futures-equivalent reporting of amendments to the definitions of spread position.’’ ‘‘futures-equivalent,’’ ‘‘long position,’’ swaps under part 20 generally has Separately, as noted in the December ‘‘short position,’’ and ‘‘spot-month’’ improved. This means many reporting 2013 Position Limits Proposal, found in § 150.1 of the Commission’s entities already have implemented amendments to two definitions were regulations, to conform them to the acceptable systems to compute futures- proposed in the November 2013 concepts and terminology of the CEA, as equivalent positions. The systems Aggregation Proposal,265 which was amended by the Dodd-Frank Act. The developed for that purpose also should approved by the Commission on the Commission also proposed to add to be acceptable for monitoring same date as the December 2013 § 150.1, definitions for ‘‘basis contract,’’ compliance with position limits. The Position Limits Proposal. The November ‘‘calendar spread contract,’’ Commission believes it is reasonable to 2013 Aggregation Proposal, a ‘‘commodity derivative contract,’’ expect some reporting entities to offer companion to the December 2013 ‘‘commodity index contract,’’ ‘‘core futures-equivalent computation services Position Limits Proposal, included referenced futures contract,’’ ‘‘eligible to market participants. In this regard, amendments to the definitions of affiliate,’’ ‘‘entity,’’ ‘‘excluded such reporting entities already compute ‘‘eligible entity’’ and ‘‘independent commodity,’’ ‘‘intercommodity spread and report, under part 20, futures- account controller.’’ 266 The contract,’’ ‘‘intermarket spread equivalent positions for swap Commission notes that since the positions,’’ ‘‘intramarket spread counterparties with reportable amendments were part of the separate positions,’’ ‘‘physical commodity,’’ positions, including spot-month Aggregation proposal, the proposed ‘‘pre-enactment swap,’’ ‘‘pre-existing positions and non-spot-month positions. amendments to those definitions, and position,’’ ‘‘referenced contract,’’ The Commission notes that market comments thereon, are addressed in the ‘‘spread contract,’’ ‘‘speculative position participants who expect to be over the final Aggregation rulemaking (the ‘‘2016 limit,’’ ‘‘swap,’’ ‘‘swap dealer’’ and limits would need to assess whether Final Aggregation Rule’’); 267 therefore, ‘‘transition period swap.’’ In addition, exemptions are available (including the Commission is not addressing the the Commission proposed to move the requesting non-enumerated bona fide definitions of ‘‘eligible entity’’ and definition of bona fide hedging from hedging positon exemptions or spread ‘‘independent account controller’’ § 1.3(z) into part 150, and to amend and exemptions from exchanges, as herein. discussed below under reproposed update it. Moreover, the Commission proposed to delete the definition for The Commission is reproposing the §§ 150.9 and 150.10). In the absence of amendments to the definitions in exemptions, such market participants ‘‘the first delivery month of the ‘crop year.’ ’’ 263 Separately, the Commission § 150.1, as set forth in the December would need to develop plans for coming 2013 Position Limits Proposal and as into compliance. proposed making a non-substantive change to list the definitions in amended in the 2016 Supplemental The Commission notes the request for alphabetical order rather than by use of Position Limits Proposal, with a further delay in a compliance date assigned letters.264 According to the modifications made in response to may be mitigated by the grandfathering December 2013 Position Limits public comments. The Reproposal also provisions in the Reproposal. First, the Proposal, this last change would be includes non-substantive changes to reproposed rules would exclude from helpful when looking for a particular certain definitions to enhance position limits ‘‘pre-enactment swaps’’ definition, both in the near future, in readability and clarity for market and ‘‘transition period swaps,’’ as light of the additional definitions participants and the public, including discussed below. Second, the rules proposed to be adopted, and in the the extraction of definitions that were would exempt certain pre-existing expectation that future rulemakings may contained in the definition of positions from position limits under adopt additional definitions. ‘‘referenced contract’’ to stand on their reproposed § 150.2(f). Essentially, this Finally, in connection with the 2016 own. The amendments and the public means only futures contracts initially Supplemental Position Limits Proposal, would be subject to non-spot-month which provided new alternative 265 See Aggregation of Positions, 78 FR 68946 position limits, as well as swaps entered processes for DCMs and SEFs to (Nov. 15, 2013) at 68965, 68974 (proposing changes to the definitions of ‘‘eligible entity’’ and after the compliance date. The recognize certain positions in Commission notes that a pre-existing ‘‘independent account controller’’) (‘‘November 2013 Aggregation Proposal’’). The Commission position in a futures contract also would 263 At that time, the Commission noted that issued a supplement to this proposal in September not be a violation of a non-spot-month several terms that are not currently in part 150 were 2015, but the supplement did not propose any limit, but, rather, would be not included in the December 2013 Position Limits changes to the definitions. See 80 FR 58365 (Sept. grandfathered, as discussed under Proposal even though definitions for those terms 29, 2015). were adopted in vacated part 151. The Commission 266 The December 2013 Position Limits Proposal reproposed § 150.2(f)(2), below. stated its view that the definition of those terms was mirrored the amendments to the definitions of Nevertheless, the Commission intends not necessary for clarity in light of other revisions ‘‘eligible entity’’ and ‘‘independent account to provide a substantial implementation proposed in that rulemaking. The terms not controller,’’ proposed in the November 2013 period to ease the compliance burden. proposed at that time include ‘‘swaption’’ and Aggregation Proposal, and also included some non- ‘‘trader.’’ substantive change to the definition of The Commission requests comment 264 The December 2013 Position Limits Proposal ‘‘independent account controller.’’ on its discussion of the proposed also made several non-substantive edits to the 267 See 2016 Final Aggregation Rule, adopted by compliance date. definitions to make them easier to read. the Commission separately from this Reproposal.

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comments relevant to each amendment futures contract.270 In the absence of Futures should be listed as basis are discussed below. this provision, the speculator could then contracts for Light Louisiana Sweet increase further the large position in the (LLS) Crude Oil.274 a. Basis Contract referenced contracts. By way of Noting that basis contracts are Proposed Rule: In the December 2013 comparison, the Commission noted in excluded from the definition of Position Limits Proposal, the the December 2013 Position Limits referenced contract and thus not subject Commission proposed to exclude ‘‘basis Proposal that there is greater concern (i) to speculative position limits, two contracts’’ from the definition of that someone may manipulate the commenters requested CFTC expand the ‘‘referenced contracts.’’ 268 While the markets by disguise of a directional list in Appendix B to part 150 of term ‘‘basis contract’’ is not defined in exposure through netting down the commodities considered substantially current § 150.1, the Commission directional exposure using one of the the same as a core referenced futures proposed a definition for basis contract legs of a quality differential (if that contract, and the corresponding list of in the December 2013 Position Limits quality differential contract were not basis contracts, to reflect the exempted), than (ii) that someone may commercial practices of market Proposal. Proposed § 150.1 defined basis 275 contract to mean ‘‘a commodity use certain quality differential contracts participants. One of these derivative contract that is cash-settled that were exempted from position limits commenters recommended that the based on the difference in: (1) The price, to manipulate the outright price of a Commission adopt a flexible process for 271 directly or indirectly, of: (a) A particular referenced contract. identifying any additional commodities core referenced futures contract; or (b) a Comments Received: The Commission that are substantially the same as a commodity deliverable on a particular received a number of comment letters commodity underlying a core referenced core referenced futures contract, regarding the proposed definition of futures contract for inclusion in whether at par, a fixed discount to par, basis contract. One commenter Appendix B, and allow market or a premium to par; and (2) the price, supported the proposed definition of participants to request a timely at a different delivery location or pricing basis contract and stated that it interpretation regarding whether a point than that of the same particular appreciates the Commission’s inclusion particular commodity is substantially core referenced futures contract, directly of Appendix B listing the commodities the same as a core referenced futures it believes are substantially the same as contract or that a particular contract or indirectly, of: (a) A commodity 276 deliverable on the same particular core a core referenced futures contract for qualifies as a basis contract. Commission Reproposal: The referenced futures contract, whether at purposes of identifying contracts that 272 Commission has determined to par, a fixed discount to par, or a meet the basis contract definition. repropose the definition of basis premium to par; or (b) a commodity that Other comment letters requested that contract as originally proposed, but to is listed in appendix B to this part as the Commission broaden the definition change the defined term from ‘‘basis substantially the same as a commodity to include contracts that settle to other contract’’ to ‘‘location basis contract.’’ underlying the same core referenced types of differentials, such as processing The Commission intended the ‘‘basis futures contract.’’ differentials (e.g., crack or crush spreads) or quality differentials (e.g., contract’’ definition to encompass The Commission also proposed sweet vs. sour crude oil). One contracts that settle to the difference Appendix B to part 150, Commodities commenter recommended a definition between prices in separate delivery Listed as Substantially the Same for of basis contract that includes crack locations of the same (or substantially Purposes of the Definition of Basis spreads, by-products priced at a the same) commodity, while the Contract. As proposed, the definition of differential to other by-products (e.g., jet industry seems to use the term ‘‘basis’’ basis contract would include contracts fuel vs. heating oil, both of which are more broadly to include other price cash-settled on the difference in prices crude oil by-products), and a differentials, including, among other of two different, but economically commodity that includes similar things, processing differentials and closely related commodities, for commodities such as a contract based quality differentials. Thus, under the example, certain quality differentials on the difference in prices between light Reproposal, the term is changing from (e.g., RBOB gasoline vs. 87 unleaded).269 sweet crude and a sour crude that is not ‘‘basis contract’’ to ‘‘location basis As explained when it was proposed, the deliverable against the NYMEX Light contract’’ in order to reduce any intent of the proposed definition was to Sweet Crude Oil core referenced futures confusion stemming from the more reduce the potential for excessive contract. This commenter suggested that encompassing use of the word ‘‘basis’’ speculation in referenced contracts if these types of contracts are included in industry parlance.277 where, for example, a speculator as basis contracts, market participants establishes a large outright directional should be able to net certain contracts 274 CL–FIA–59595 at 19; CL–ISDA/SIFMA–59611 position in referenced contracts and where a commodity is priced at a at 35. 275 nets down that directional position with differential to a product or by-product, CL–FIA–59595 at 4 and 18–19; CL–ISDA/ a contract based on the difference in SIFMA–59611 at 34–35. subject to prior approval according to a 276 CL–FIA–59595 at 19. 273 price of the commodity underlying the process created by the Commission. 277 Consequently, the Commission realizes that its referenced contracts and a close Two commenters specifically determination to retain its traditional definition economic substitute that was not requested that the list in Appendix B while clarifying its meaning by adopting the deliverable on the core referenced include Jet fuel (54 grade) as amended term of ‘‘locational basis contract’’ does not provide for the expanded definition of basis substantially the same as heating oil (67 contract requested by some of the commenters. A 268 The Commission also notes that the proposed grade). They also requested that WTI broader definition of basis contract would result in definition of ‘‘commodity index contract’’ excluded Midland (Argus) vs. WTI Financial the exclusion of more derivative contracts from the intercommodity spread contracts, calendar spread definition of referenced contract than previously contracts, and basis contracts. proposed. A contract excluded from the definition 270 269 The proposed basis contract definition was not December 2013 Position Limits Proposal at of referenced contract is not subject to position intended to include significant time differentials in 75696. limit under this Reproposal. The Commission prices of the two commodities (e.g., the proposed 271 Id. declines to exclude more than the locational basis basis contract definition did not include calendar 272 CL–Working Group–59693 at 68. contracts that it previously proposed from the spreads for nearby vs. deferred contracts). 273 CLWorking Group–59959 at 16. definition of referenced contract.

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The Commission is reproposing defined in CEA section 1a(45)). The the difference between the settlement Appendix B as originally proposed. The proposed use of such a generic term price in one or a series of contract Commission is not persuaded by would be a convenient way to months of an agreement, contract or commenters’ suggestions for expanding streamline and simplify references in transaction and the settlement price of the current list of commodities part 150 to the various kinds of another contract month or another series considered ‘‘substantially the same’’ in contracts to which the position limits of contract months’ settlement prices for Appendix B. While a commenter regime applies. As such, this new the same agreement, contract or requested the Commission expand the definition can be found frequently transaction.’’ An intercommodity spread list to address all ‘‘commercial throughout the Commission’s proposed contract would mean ‘‘a cash-settled practices’’ used by market participants, amendments to part 150.280 agreement, contract or transaction that the Commission believes this request is Comments Received: The Commission represents the difference between the too vague and too broad to be workable. received no comments on the proposed settlement price of a referenced contract In addition, although a commenter definition. and the settlement price of another recommended that the Commission Commission Reproposal: The contract, agreement, or transaction that adopt a flexible process for identifying Commission has determined to is based on a different commodity.’’ 282 any additional commodities that are repropose the definition as proposed for The December 2013 Position Limits substantially the same as a commodity the reasons given above. Proposal further noted that part 20 of underlying a core referenced futures c. Commodity Index Contract, Spread the Commission’s regulations requires contract for inclusion in Appendix B,278 Contract, Calendar Spread Contract, and reporting entities to report commodity the Commission observes that market Intercommodity Spread Contract reference price data sufficient to participants are already provided the distinguish between commodity index Proposed Rule: The December 2013 flexibility of two processes: (i) To contract and non-commodity index Position Limits Proposal excluded request an exemptive, no-action or contract positions in covered commodity index contracts from the 283 interpretative letter under § 140.99; and/ contracts. Therefore, for commodity definition of referenced contracts; thus, or (ii) to petition for changes to index contracts, the Commission stated commodity index contracts would not its intention to rely on the data elements Appendix B under § 13.2. Under either be subject to position limits. The process, the Commission would need to in § 20.4(b) to distinguish data records Commission also proposed to define the subject to § 150.2 position limits from carefully consider whether it would be term commodity index contract, which beneficial and consistent with the those contracts that are excluded from is not in current § 150.1, to mean ‘‘an § 150.2. The Commission explained that policies underlying CEA section 4a to agreement, contract, or transaction that list additional commodities as this would enable the Commission to set is not a basis contract or any type of position limits using the narrower data substantially the same as a commodity spread contract, based on an index underlying a core referenced futures set (i.e., referenced contracts subject to comprised of prices of commodities that § 150.2 position limits) as well as contract, especially since various market are not the same or substantially the participants might have conflicting conduct surveillance using the broader same.’’ 284 views on such a determination in data set. Further, the Commission proposed to Comments Received: The Commission certain cases. add a definition of basis contract, as Finally, the Commission notes that received no comments on the proposed discussed above, and spread contract to definitions for commodity index comments regarding other types of clarify which types of contracts would differentials were addressed in the contract, spread contract, calendar not be considered a commodity index spread contract, and intercommodity Commission’s 2016 Supplemental contract and thus would be subject to spread contract.285 Position Limits Proposal, which would position limits. Under the proposal, a allow exchanges to grant spread spread contract was defined as ‘‘a 282 In the December 2013 Position Limits exemptions, including calendar spreads, calendar spread contract or an Proposal, the Commission also clarified that if a quality differential spreads, processing intercommodity spread contract.’’ 281 swap was based on the difference between two prices of two different commodities, with one spreads, and product or by-product Finally, the Commission proposed the differential spreads.279 Comments linked to a core referenced futures contract price addition of definitions for a calendar (and the other either not linked to the price of a responding to that 2016 Supplemental spread contract, and an intercommodity core referenced futures contract or linked to the Position Limits Proposal and the price of a different core referenced futures contract), spread contract to clarify the meanings then the swap was an ‘‘intercommodity spread Commission’s Reproposal are discussed of those terms. In particular, under the below. contract,’’ was not a commodity index contract, and proposal, a calendar spread contract was a referenced contract subject to the position b. Commodity Derivative Contract would mean ‘‘a cash-settled agreement, limits specified in § 150.2. The Commission further clarified that a contract based on the prices of a Proposed Rule: The December 2013 contract, or transaction that represents referenced contract and the same or substantially Position Limits Proposal would define the same commodity (and not based on the 280 See, e.g., amendments to § 150.1 (the difference between such prices) was not a in § 150.1 the term ‘‘commodity definitions of: ‘‘location basis contract,’’ the commodity index contract and was a referenced derivative contract’’ for position limits definition of ‘‘bona fide hedging position,’’ ‘‘inter- contract subject to position limits specified in purposes as shorthand for any futures, market spread position,’’ ‘‘intra-market spread § 150.2. See December 2013 Position Limits option, or swap contract in a commodity position,’’ ‘‘pre-existing position,’’ ‘‘speculative Proposal, 78 FR at 75697, n. 163. 283 (other than a security futures product as position limits,’’ and ‘‘spot month’’), §§ 150.2(f)(2), Id. at 75697, n. 163. 150.3(d), 150.3(h), 150.5(a), 150.5(b), 150.5(e), 284 Id. at 75697. 150.7(d), 150.7(f), Appendix A to part 150, and 285 The Commission notes that although it did not 278 As noted above, according to the commenter, Appendix C to part 150. receive comments on the proposed definitions for a flexible process would allow market participants 281 In the December 2013 Position Limits commodity index contract, spread contract, to request a timely interpretation regarding whether Proposal, the Commission noted that while the calendar spread contract, and intercommodity a particular commodity is substantially the same as proposed definition of ‘‘referenced contract’’ spread contract, it did receive a number of a core referenced futures contract or that a specifically excluded guarantees of a swap, basis comments regarding the interplay of those defined particular contract qualifies as a ‘‘basis contract. See contracts and commodity index contracts, spread terms and the definition of ‘‘referenced contract.’’ CL–FIA–59595 at 19 contracts were not excluded from the proposed Discussion of those comments are included in the 279 See 2016 Supplemental Position Limits definition of ‘‘referenced contract.’’ The December discussion of the proposed definition of ‘‘referenced Proposal, 81 FR at 38476–80. 2013 Position Limits Proposal at 75702. contract’’ below.

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Commission Reproposal: The such consolidated financial statements Comments Received: The Commission Commission has determined to include the financial results of such received few comments on the proposed repropose the definitions as originally entity; and (3) is required to aggregate definition of ‘‘eligible affiliate.’’ proposed for the reasons provided the positions of such entity under Commenters requested that the above, with the exception that, under § 150.4 and does not claim an Commission harmonize the definition of the Reproposal, the term ‘‘basis exemption from aggregation for such ‘‘eligible affiliate’’ with the definition of contract’’ will be replaced with the term entity.288 ‘‘eligible affiliate counterparty’’ under ‘‘location basis contract,’’ in the The definition of ‘‘eligible affiliate’’ § 50.52 in order to include ‘‘sister reproposed definition of commodity proposed in the December 2013 Position affiliates’’ within the definition.292 index contract, to conform to the name Limits Proposal qualified persons as Commission Reproposal: The change discussed above. In addition, the eligible affiliates based on requirements Commission notes that under § 150.4, Commission notes that while it had similar to those adopted by the aggregation is required by a person that proposed to subsume the definitions of Commission in a separate holds an ownership or equity interest of commodity index contract, spread rulemaking.289 On April 1, 2013, the 10 percent or greater in another person, contract, calendar spread contract, and Commission provided relief from the unless an exemption applies. Under intercommodity spread contract under mandatory clearing requirement of CEA reproposed § 150.2(c)(2), sister affiliates the definition of referenced contract, in section 2(h)(1)(A) of the Act for certain would not be required to comply the Reproposal it is enumerating each as affiliated persons if the affiliated separately with position limits, a separate definition for ease of persons (‘‘eligible affiliate provided such entities are eligible reference. counterparties’’) meet requirements affiliates.293 contained in § 50.52.290 Under both As such, the Commission does not d. Core referenced Futures Contract § 50.52 and the definition proposed in believe a there is a need to conform the Proposed Rule: The December 2013 the December 2013 Position Limits ‘‘eligible affiliate’’ definition in Position Limits Proposal provided a list Proposal, a person is an eligible affiliate reproposed § 150.1 to the definition of of futures contracts in § 150.2(d) to if another person (e.g. a parent ‘‘eligible affiliate counterparty’’ in which proposed position limit rules company), directly or indirectly, holds a § 50.52 in order to accommodate sister would apply. The Commission majority ownership interest in such affiliates. The Commission notes that a proposed the term ‘‘core referenced affiliates, reports its financial statements third person that holds an ownership or futures contract’’ as a short-hand phrase on a consolidated basis under Generally equity interest in each of the sister to denote such contracts.286 Accepted Accounting Principles or affiliates—e.g., the parent company— Accordingly, the Commission proposed International Financial Reporting would be required to aggregate positions to include in § 150.1 a definition of core Standards, and such consolidated of such eligible affiliates. Thus, the referenced futures contract to mean ‘‘a financial statements include the Commission is reproposing the futures contract that is listed in financial results of such affiliates. In definition without changes. § 150.2(d).’’ In its proposal, the addition, for purposes of the position f. Entity Commission also clarified that core limits regime, that other person (e.g., a referenced futures contracts include parent company) must be required to Proposed Rule: The December 2013 options that expire into outright aggregate the positions of such affiliates Position Limits Proposal defined positions in such contracts.287 under § 150.4 and not claim an ‘‘entity’’ to mean ‘‘a ‘person’ as defined Comments Received: The Commission exemption from aggregation for such in section 1a of the Act.’’ 294 The term, received no comments on the proposed affiliates.291 not defined in current § 150.1, is used definition. in a number of contexts, and in various Commission Reproposal: The 288 See proposed § 150.1. definitions in the proposed amendments Commission has determined to 289 See December 2013 Position Limits Proposal, to part 150. Thus, the definition repropose the definition as originally 78 FR at 75698. originally proposed would provide a proposed. 290 See Clearing Exemption for Swaps Between clear and unambiguous meaning for the Certain Affiliated Entities, 78 FR 21749, 21783, Apr. term, and prevent confusion. e. Eligible Affiliate 11, 2013. Section 50.52(a) addresses eligible affiliate counterparty status, allowing a person not to clear Comments Received: The Commission Proposed Rule: The term ‘‘eligible a swap subject to the clearing requirement of received no comments on the proposed affiliate,’’ used in proposed section 2(h)(1)(A) of the Act and part 50 if the definition. person meets the requirements of the conditions Commission Reproposal: The § 150.2(c)(2), is not defined in current contained in paragraphs (a) and (b) of § 50.52. The § 150.1. The Commission proposed to conditions in paragraph (a) of § 50.52 specify either Commission has determined to amend § 150.1 to define an ‘‘eligible one counterparty holds a majority ownership repropose the definition as originally affiliate’’ as an entity with respect to interest in, and reports its financial statements on proposed, for the reasons provided a consolidated basis with, the other counterparty, above. which another person: (1) Directly or or both counterparties are majority owned by a indirectly holds either: (i) A majority of third party who reports its financial statements on g. Excluded Commodity the equity securities of such entity, or a consolidated basis with the counterparties. (ii) the right to receive upon dissolution The conditions in paragraph (b) of § 50.52 address Proposed Rule: The phrase ‘‘excluded of, or the contribution of, a majority of factors such as the decision of the parties not to commodity’’ was added into the CEA in clear, the associated documentation, audit, and the CFMA, and is defined in CEA the capital of such entity; (2) reports its recordkeeping requirements, the policies and financial statements on a consolidated procedures that must be established, maintained, basis under Generally Accepted and followed by a dealer and major swap 292 See, e.g., CL–ISDA/SIFMA–59611 at 3 and 33, Accounting Principles or International participant, and the requirement to have an CL–Working Group–59693 at 66–7. appropriate centralized risk management program, 293 Of course, sister affiliates would be required Financial Reporting Standards, and rather than the nature of the affiliation. As such, to aggregate, as would any other market those conditions are less pertinent to the definition participants, if they were trading together pursuant 286 The selection of the core referenced futures of eligible affiliate. to an express or implied agreement. contracts is explained in the discussion of § 150.2. 291 See December 2013 Position Limits Proposal, 294 CEA section 1a(38); 7 U.S.C. 1a(38). See also See discussion below. 78 FR at 75698; see also definition of ‘‘eligible December 2013 Position Limits Proposal, 78 FR at 287 See 78 FR at 75697 n. 166. affiliate’’ in § 150.1, as proposed therein. 75698.

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section 1a(19), but is not defined or would be deleted from § 150.1. The CEA section 4a,301 in part, direct the used in current part 150.295 CEA section proposed elimination of the definition Commission to apply aggregate federal 4a(a)(2)(A), as amended by the Dodd- conformed with level of individual position limits to physical commodity Frank Act, utilizes the phrase ‘‘excluded month limits set at the level of the all- futures contracts and to swaps contracts commodity’’ when it provides a months limits, thus negating the that are economically equivalent to such timeline under which the Commission purpose of the existing spread physical commodity futures contracts is charged with setting limits for futures exemption in current § 150.3(a)(3), on which the Commission has and option contracts other than on which the December 2013 Position established limits. In order to aggregate excluded commodities.296 Limits Proposal also eliminated. positions in futures, options and swaps The December 2013 Position Limits The Commission notes that in its 2016 contracts, it is necessary to adjust the Proposal included in § 150.1, a Supplemental Position Limits Proposal, position sizes, since such contracts may definition of excluded commodity that the Commission proposed to retain a have varying units of trading (e.g., the simply incorporates the statutory spread exemption in § 150.3 and not, as amount of a commodity underlying a meaning, as a useful term for purposes proposed in the December 2013 Position particular swap contract could be larger of a number of the proposed changes to Limits Proposal, to eliminate it than the amount of a commodity part 150. For example, the phrase was underlying a core referenced futures altogether.298 used in the proposed amendments to contract). The Commission proposed to § 150.5, in its provision of requirements Comments Received: The Commission adjust position sizes to an equivalent and acceptable practices for DCMs and received no comments on the proposed position based on the size of the unit of SEFs in their adoption of rules and deletion of the crop year definition. trading of the core referenced futures procedures for monitoring and enforcing Commission Reproposal: The contract. Under the December 2013 position limits and accountability Commission has determined to Position Limits Proposal, the definition provisions; the phrase was also used in repropose the deletion of the definition of ‘‘futures equivalent’’ in current the definition of bona fide hedging of the term ‘‘first delivery month of the § 150.1(f), which is applicable only to an position. crop year’’ as originally proposed. The option contract, would be extended to Comments Received: The Commission Commission notes that, although in its both options and swaps. received no comments on the proposed 2016 Supplemental Position Limits In the 2016 Supplemental Position definition. Proposal, the Commission proposed to Limits Proposal, the Commission Commission Reproposal: The retain a spread exemption in § 150.3 proposed two further clarifications to Commission has determined to and, in fact, provides for the approval the definition of the term ‘‘futures- repropose the definition as previously by exchanges of exemptions to spread equivalent.’’ First, the Commission proposed, for the reasons provided positions beyond the limited exemption proposed to address circumstances in above. for spread positions in current which a referenced contract for which h. First Delivery Month of the Crop Year § 150.3(a)(3), the crop year definition futures equivalents must be calculated remains unnecessary since the level of is itself a futures contract. The Proposed Rule: The term ‘‘first Commission noted that this may occur, delivery month of the crop year’’ is individual month limits has been set at the level of the all-months limits. for example, when the referenced currently defined in § 150.1(c), with a contract is a futures contract that is a table of the first delivery month of the i. Futures Equivalent mini-sized version of the core crop year for the commodities for which referenced futures contract (e.g., the position limits are currently provided in Proposed Rule: In the December 2013 mini-corn and the corn futures § 150.2. The crop year definition had Position Limits Proposal, the contracts).302 The Commission proposed been pertinent for purposes of the Commission proposed to broaden the to clarify in proposed § 150.1 that the spread exemption to the individual definition of the term ‘‘futures- term ‘‘futures-equivalent’’ includes a month limit in current § 150.3(a)(3), equivalent’’ found in current § 150.1(f) futures contract which has been 299 which limits spreads to those between of the Commission’s regulations, and converted to an economically equivalent individual months in the same crop year to expand upon clarifications included amount of an open position in a core and to a level no more than that of the in the current definition relating to 297 300 all-months limit. Under the adjustments and computation times. 301 Amendments to CEA section 4a(1) authorize December 2013 Position Limits The Dodd-Frank Act amendments to the Commission to extend position limits beyond Proposal, the definition of ‘‘crop year’’ futures and option contracts to swaps traded on an 298 exchange and swaps not traded on an exchange that Moreover, the 2016 Supplemental Position perform or affect a significant price discovery 295 CEA section 1a(19); 7 U.S.C. 1a(19). Limits Proposal did not limit the exemption to function with respect to regulated entities. 7 U.S.C. 296 CEA section 4a(2)(A); 7 U.S.C. 6a(2)(A). spread positions held between individual months of 6a(a)(1). In addition, under new CEA sections 297 Prior to the adoption of Part 151, a single- a futures contract in the same crop year, nor limit 4a(a)(2) and 4a(a)(5), speculative position limits month limit was set at a level that was lower than the size of an individual month position to the all- apply to agricultural and exempt commodity swaps the all-months-combined limit. Operating in months limit. that are ‘‘economically equivalent’’ to DCM futures conjunction with the lower single-month limit 299 17 CFR 150.1(f) currently defines ‘‘futures- and option contracts. 7 U.S.C. 6a(a)(2) and (5). level, as noted below, § 150.3(a)(3) provides a equivalent’’ only for an option contract, adjusting 302 Under current § 150.2, for purposes of limited exemption for calendar spread positions to the open position in options by the previous day’s compliance with federal position limits, positions exceed that single-month limit, as long as the single risk factor, as calculated at the close of trading by in regular sized and mini-sized contracts are month position (including calendar spread the exchange. aggregated. The Commission’s practice of positions) is no greater than the level of the all- 300 The December 2013 Position Limits Proposal aggregating futures contracts when a DCM lists for months-combined limit. In part 151, the defined ‘‘futures-equivalent’’ for: (1) An option trading two or more futures contracts with Commission determined to set the single-month contact, adjusting the position size by an substantially identical terms, is to scale down a position limit levels in § 150.2 at the same level as economically reasonable and analytically supported position in the mini-sized contract, by multiplying the all-months-combined limits; in vacating part risk factor, computed as of the previous day’s close the position in the mini-sized contract by the ratio 151, the court retained the amendments to § 150.2, or the current day’s close or contemporaneously of the unit of trading in the mini-sized contract to leaving the single-month limit at the same level as during the trading day; and (2) a swap, converting that of the regular sized contract. See paragraph those of the all-months-combined limit levels. The the position size to an economically equivalent (b)(2)(D) of app. C to part 38 of the Commission’s December 2013 Position Limits Proposal retained amount of an open position in a core referenced regulations for guidance regarding the contract size parity of the single-month limit and all-months- futures contract. See December 2013 Position Limits or trading unit for a futures or futures option combined limits levels. Proposal, 78 FR at 75698–9. contract.

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referenced futures contract. This recommended that the Commission request that staff review that model for clarification would mirror the expanded consider the exchanges’ approach to reasonableness.312 definition of ‘‘futures-equivalent’’ in the option valuation where appropriate Regarding the time period for a December 2013 Position Limits because these approaches are already in participant to come into compliance Proposal, as it would pertain to swaps. use and familiar to market because of option assignment, the Second, the Commission proposed in participants.308 Commission agrees that a participant in the 2016 Supplemental Position Limits compliance only because of a previous Proposal to clarify the definition of the Both MFA and FIA supported the day’s delta, and no longer, after option term ‘‘futures-equivalent’’ to provide optional use of the prior day’s delta to assignment, in compliance on a that, for purposes of calculating futures calculate a futures-equivalent position subsequent day, should have one equivalents, an option contract must for purposes of speculative position business day to liquidate the excess 309 also be converted to an economically limit compliance. In addition, each position resulting from option equivalent amount of an open position requested that the Commission confirm assignment without being considered in in a core referenced futures contract. or adopt a provision similar to CME violation of the limits.313 Exchanges This clarification would address Rule 562. That exchange rule provides, currently provide the same amount of situations, for example, where the unit among other things, that if a time to come into compliance. of trading underlying an option contract participant’s position exceeds position j. Intermarket Spread Position and (that is, the notional quantity limits as a result of an option Intramarket Spread Position underlying an option contract) may assignment, that participant is allowed differ from the unit of trading one business day to liquidate the excess Proposed Rule: In the December 2013 underlying a core referenced futures position without being considered in Position Limits Proposal, the contract.303 violation of the limits. FIA urged the Commission proposed to add to current The Commission expressed the view Commission to provide market § 150.1 new definitions of the terms in the 2016 Supplemental Position participants with a reasonable period of ‘‘intermarket spread position’’ and Limits Proposal that these clarifications time to reduce its position below the ‘‘intramarket spread position.’’ 314 These would be consistent with the speculative position limit.310 terms were defined in the December methodology the Commission used to Commission Reproposal: The 2013 Position Limits Proposal within provide its analysis of unique persons Commission has determined to the definition of ‘‘referenced contract.’’ In connection with its 2016 over percentages of the proposed repropose the definition of ‘‘futures- Supplemental Position Limits Proposal position limit levels in the December equivalent’’ as proposed in the 2016 304 to permit exchanges to process 2013 Position Limits Proposal. Supplemental Position Limits proposal, Comments Received: The Commission applications for exemptions from with the exception that it now proposes received two comments on the proposed federal position limits for certain spread adopting the current exchange practice definition of ‘‘futures-equivalent’’ in the positions, the Commission proposed to with regard to option assignments, as December 2013 Position Limits expand the definitions of these terms as Proposal.305 Each comment was discussed below. proposed in the December 2013 Position generally supportive of the proposed Regarding risk (delta) models, the Limits Proposal. definition. Although one commenter Reproposal does not provide a ‘‘safe In particular, in the 2016 commended the flexibility granted to harbor’’ as requested since risk models, Supplemental Position Limits Proposal, market participants to use different generally, should produce similar option valuation models, it results. The Commission believes a 312 Deltas are computed using an option pricing recommended that the Commission difference of 10 percent above or below model. Different option pricing models incorporate different assumptions. For a discussion of provide guidance on when it would the delta resulting from an exchange’s circumstances where assumptions in an option consider an option valuation model model generally would be too great to be pricing model may not hold, see, for example, Paul unsatisfactory and what the factors the economically reasonable. However, the Wilmott, Derivatives: The Theory and Practice of Commission would consider in arriving Commission notes that, under the Financial Engineering chapter 29 (1998) (describing 306 circumstances where delta hedging an option at such an opinion. According to the Reproposal, should a market participant position (i.e., replication trading) can move the commenter, the Commission should believe its model produces an price of the underlying asset, violating an utilize a ‘‘reasonableness approach’’ by economically reasonable and assumption of certain option pricing models that explicitly providing a ‘‘safe harbor’’ for replication trading has no influence on the price of analytically supported risk factor for a the underlying asset). models that produce results within 10 particular trading session that differs 313 The Commission believes that, in the percent of an exchange or Commission significantly from a result published by circumstance of option assignment, one business model, and should permit market an exchange for that same time,311 it day is a reasonable amount of time to come into participants to demonstrate the compliance because the markets for commodities may describe the circumstances that subject to federal limits under § 150.2 are generally reasonableness under prevailing market result in a significant difference and liquid. conditions of any model that falls 314 In the December 2013 Position Limits 307 outside this safe harbor. It was also compliance with the position limits regime. Id at Proposal, the Commission proposed to define an 17. ‘‘intermarket spread position’’ as ‘‘a long position in a commodity derivative contract in a particular 303 For an example of a futures-equivalent 308 Id at 17. commodity at a particular designated contract conversion of a swaption, see example 6, WTI 309 CL–MFA–59606 at 17; CL–FIA–59595 at 15. market or swap execution facility and a short swaptions, Appendix A to part 20 of the 310 CL–FIA–59595 at 15. position in another commodity derivative contract Commission’s regulations. 311 Under § 16.01(a)(2), a reporting market is in that same commodity away from that particular 304 2016 Supplemental Position Limits Proposal, required to record for each trading session the designated contract market or swap execution 81 FR at 38483. See also Table 11 in the December option delta, when a delta system is used, while facility.’’ The Commission also proposed to define 2013 Position Limits Proposal, 78 FR at 75731–3. § 16.01(e) requires a reporting market to make that an ‘‘intramarket spread position’’ as ‘‘a long 305 CL–MFA–59606; CL–FIA–59595 at 15. option delta readily available to the public. A position in a commodity derivative contract in a 306 CL–MFA–59606 at 16–17. reporting market for this purpose is defined in particular commodity and a short position in 307 MFA also stated that the Commission should § 15.00(q) as a DCM or a registered entity under another commodity contract in the same not second guess the results of reasonable models CEA section 1a(40) (under CEA section 1a(40), commodity on the same designated contract market and impose findings of violations after-the-fact as registered entities include, among others, DCMs, or swap execution facility.’’ See December 2013 that would introduce tremendous uncertainty into DCOs, SEFs, SDRs). Position Limits Proposal, 78 FR at 75699–700.

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the Commission proposed to define an k. Long Position Commission Reproposal: The ‘‘intermarket spread position’’ to mean Proposed Rule: The term ‘‘long Commission has determined to ‘‘a long (short) position in one or more position’’ is currently defined in repropose the definition as originally commodity derivative contracts in a § 150.1(g) to mean ‘‘a long call option, proposed. particular commodity, or its products or a short put option or a long underlying m. Pre-enactment Swap and Pre- its by-products, at a particular futures contract.’’ The Commission Existing Position designated contract market, and a short proposed to update the definition to (long) position in one or more make it also applicable to swaps such Proposed Rule: The December 2013 commodity derivative contracts in that that a long position would include a Position Limits Proposal would amend same, or similar, commodity, or its long futures-equivalent swap. § 150.1 by adding in new definitions of products or its by-products, away from Commission Reproposal: Though no the terms ‘‘pre-enactment swap’’ and that particular designated contract commenters suggested changes to the ‘‘pre-existing position’’ for position market.’’ Similarly, the Commission definition of ‘‘long position,’’ the limit purposes. Under the definitions proposed in the 2016 Supplemental Commission is concerned that the proposed in the December 2013 Position Position Limits Proposal to define an proposed definition does not clearly Limits Proposal, ‘‘pre-enactment swap’’ ‘‘intramarket spread position’’ to mean articulate that futures and options means any swap entered into prior to ‘‘a long position in one or more contracts are subject to position limits enactment of the Dodd-Frank Act of commodity derivative contracts in a on a futures-equivalent basis in terms of 2010 (July 21, 2010), the terms of which particular commodity, or its products or the core referenced futures contract. have not expired as of the date of its by-products, and a short position in Longstanding market practice has enactment of that Act, while ‘‘pre- one or more commodity derivative applied position limits on futures and existing position’’ means any position in contracts in the same, or similar, options on a futures-equivalent basis, a commodity derivative contract commodity, or its products or its by- and the Commission believes that acquired in good faith prior to the products, on the same designated practice ought to be made explicit in the effective date of any bylaw, rule, contract market.’’ definition in order to prevent confusion. regulation or resolution that specifies an initial speculative position limit level or The Commission expressed the view Thus, the Commission is reproposing an amended definition to clarify that a long a subsequent change to that level. that the expanded definitions proposed Comments Received: The Commission in the 2016 Supplemental Position position is ‘‘on a futures-equivalent basis, a long call option, a short put received no comments on the proposed Limits Proposal would take into account definitions either of the terms ‘‘pre- that a market participant may take option, a long underlying futures contract, or a swap position that is enactment swap’’ or ‘‘pre-existing positions in multiple commodity position.’’ derivative contracts to establish an equivalent to a long futures contract.’’ This clarification is consistent with the Commission Reproposal: The intermarket spread position or an Commission has determined to intramarket spread position. The clarification to the definition of futures- equivalent basis proposed in the 2016 repropose both definitions as previously expanded definitions would also take proposed. into account that such spread positions Supplemental Position Limits Proposal. may be established by taking positions Though the substance of the definition n. Referenced Contract is fundamentally unchanged, the in derivative contracts in the same Proposed Rule: Part 150 currently revised language should prevent commodity, in similar commodities, or does not include a definition of the unnecessary confusion over the in the products or by-products of the phrase ‘‘referenced contract,’’ which application of futures-equivalency to same or similar commodities. By way of was introduced and adopted in vacated different kinds of commodity derivative example, the Commission noted that the part 151.317 As was noted when part 151 contracts. expanded definitions would include a was adopted, the Commission identified short position in a crude oil derivative l. Physical Commodity 28 core referenced futures contracts and contract and long positions in a gasoline Proposed Rule: The December 2013 proposed to apply aggregate limits on a derivative contract and a diesel fuel Position Limits Proposal would amend futures equivalent basis across all derivative contract (collectively, a § 150.1 by adding in a definition of the derivatives that met the definition of 318 reverse crack spread). term ‘‘physical commodity’’ for position referenced contracts. The definition Comments Received: The Commission limit purposes. Congress used the term of referenced contract proposed in the did not receive any comments in ‘‘physical commodity’’ in CEA sections December 2013 Position Limits Proposal response to the definitions of 4a(a)(2)(A) and 4a(a)(2)(B) to mean was similar to that of vacated part 151, ‘‘intermarket spread position’’ and commodities ‘‘other than excluded 317 Vacated § 151.1 defined ‘‘Referenced ‘‘intramarket spread position’’ proposed commodities as defined by the Contract’’ to mean ‘‘on a futures-equivalent basis in the December 2013 Position Limits Commission.’’ Therefore, the with respect to a particular Core Referenced Futures Proposal 315 or in response to the 2016 Commission interprets ‘‘physical Contract, a Core Referenced Futures Contract listed Supplemental Position Limits Proposal. commodities’’ to include both exempt in § 151.2, or a futures contract, options contract, and agricultural commodities, but not swap or swaption, other than a basis contract or Commission Reproposal: The contract on a commodity index that is: (1) Directly Commission has determined to excluded commodities, and proposes to or indirectly linked, including being partially or 316 repropose the definitions of the terms define the term as such. fully settled on, or priced at a fixed differential to, Comments Received: The Commission the price of that particular Core Referenced Futures ‘‘intermarket spread position’’ and received no comments on the proposed Contract; or (2) directly or indirectly linked, ‘‘intramarket spread position’’ as including being partially or fully settled on, or definition. proposed in the 2016 Supplemental priced at a fixed differential to, the price of the Position Limits Proposal. same commodity underlying that particular Core 316 For position limits purposes, proposed § 150.1 Referenced Futures Contract for delivery at the would define ‘‘physical commodity’’ to mean any same location or locations as specified in that 315 As noted above, the definitions of agricultural commodity as that term is defined in particular Core Referenced Futures Contract.’’ ‘‘intermarket spread position’’ and ‘‘intramarket § 1.3 of this chapter or any exempt commodity as 318 Position Limits for Futures and Swaps, 76 FR spread position’’ were included. that term is defined in section 1a(20) of the Act. at 71629.

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but there were certain differences, speculative limits on futures, options, context of the any final rulemaking on including an exclusion of guarantees of and swaps because each financial position limits.324 Therefore, the swaps and the incorporation of other instrument ‘‘can be used to develop Commission is reproposing the terms into the definition of referenced market power and increase definition of ‘‘referenced contract’’ to contract. volatility.’’ 320 Another commenter expressly exclude trade options that In the December 2013 Position Limits expressed its support for the exclusion meet the requirements of § 32.3 of this Proposal, the term ‘‘referenced contract’’ of guarantees of swaps from the chapter. was proposed to be defined in § 150.1 to definition of referenced contract.321 Comments Received: Commenters mean, on a futures-equivalent basis with These comments and the Commission’s asserted that certain aspects of the respect to a particular core referenced response are detailed below. definition of referenced contract are futures contract, a core referenced Commission Reproposal: The unclear and/or unworkable. For futures contract listed in § 150.2(d) of Commission is reproposing the example, commenters suggested that the this part, or a futures contract, options definition of referenced contract with concept of ‘‘indirectly linked’’ is unclear contract, or swap, other than a guarantee two substantive modifications from the and so market participants may not of a swap, a basis contract, or a original proposal, both of which are know whether a particular contract is commodity index contract: (1) That is: discussed further below. First, the subject to limits.325 Some commenters (a) Directly or indirectly linked, Commission is now proposing to amend believe that the definition is overbroad including being partially or fully settled the definition of ‘‘referenced contract’’ and captures products that they state do on, or priced at a fixed differential to, to expressly exclude trade options. not affect price discovery or impair the price of that particular core Second, the Reproposal would clarify hedging and are not truly economically- referenced futures contract; or (b) the meaning of ‘‘indirectly linked.’’ The equivalent.326 Commenters request that directly or indirectly linked, including Reproposal also moves four definitions the Commission support its being partially or fully settled on, or that were embedded in the proposed determination regarding which priced at a fixed differential to, the price definition of referenced contract, contracts are economically equivalent of the same commodity underlying that specifically ‘‘calendar spread contract,’’ by providing a description of the particular core referenced futures ‘‘commodity index contract,’’ ‘‘spread methodology used to determine the contract for delivery at the same contract,’’ and ‘‘intercommodity spread contracts considered to be location or locations as specified in that contract,’’ to their own definitions in economically-equivalent, including particular core referenced futures § 150.1, while otherwise retaining those examples of over-the-counter (‘‘OTC’’) contract; and (2) where: (a) Calendar definitions as proposed. In addition, the and FBOT contracts.327 One commenter spread contract means a cash-settled Reproposal makes non-substantive stated that support is necessary because agreement, contract, or transaction that modifications to the definition of ‘‘mechanically assign[ing]’’ the label of represents the difference between the referenced contract to make it easier to economically-equivalent to any contract settlement price in one or a series of read. that references a core referenced futures contract months of an agreement, Comments Received: In response to a contract does not make it equivalent.328 contract or transaction and the specific request for comment in the Commission Reproposal: The settlement price of another contract December 2013 Position Limits Commission agrees with commenters month or another series of contract Proposal, many commenters that there is a need to clarify the months’ settlement prices for the same recommended excluding trade options meaning of ‘‘indirectly linked.’’ The agreement, contract or transaction; (b) from the definition of referenced Commission notes that including 322 commodity index contract means an contract. contracts that are ‘‘indirectly linked’’ to Commission Reproposal: In response agreement, contract, or transaction that the core referenced futures contract to numerous comments, the reproposed is not a basis or any type of spread under the definition of referenced definition of ‘‘referenced contract’’ contract, based on an index comprised contract is intended to prevent the expressly excludes trade options that of prices of commodities that are not the evasion of position limits through the meet the requirements of § 32.3. The same or substantially the same; (c) creation of an economically equivalent Commission notes that in its trade spread contract means either a calendar contract that does not directly reference options final rule,323 the cross-reference spread contract or an intercommodity the core referenced futures contract to vacated part 151 position limits was spread contract; and (d) intercommodity price. Under the reproposed definition, deleted from § 32.3(c). At that time, the spread contract means a cash-settled ‘‘indirectly linked’’ means a contract agreement, contract or transaction that Commission stated its belief that federal speculative position limits should not that settles to a price based on another represents the difference between the derivative contract that, either directly settlement price of a referenced contract apply to trade options, as well as its intention to address trade options in the or through linkage to another derivative and the settlement price of another contract, has a settlement price based on contract, agreement, or transaction that 320 CL–IECA–59713 at 4. is based on a different commodity. 324 321 CL–IECAssn–59679 at 31. Id. at 14971. Comments Received: The Commission 325 See, e.g., CL–CMC–59634 at 14, and CL– received numerous comments 319 322 See, e.g., CL–FIA–59595 at 4 and 19, CL–EEI– EPSA–59602 at 3, CL–ISDA/SIFMA–59611 at 3 and COPE–59662 at 7, n. 20 (stating ‘‘[i]t is one thing regarding various aspects of the 34, CL–NEM–59620 at 2, CL–DEU–59627 at 7, CL– if the Commission means a reference to a contract definition of ‘‘referenced contract.’’ AGA–59632 at 4–5, CL–AGA–60382 at 10, CL– that itself directly references a core referenced Some were generally supportive of the Olam–59658 at 3, CL–BG Group–59656 at 4, CL–BG futures contract. It is more troubling and likely unworkable if the Commission means a more proposed definition while others Group–60383 at 4, CL–COPE–59662 at 5 and 8, CL– Calpine–59663 at 5, CL–PAAP–59664 at 4, CL– subjective economic link to a delivery location that suggested changes. One commenter NGSA–59673 at 27–33, CL–ICE–59669 at 13, CL– is used in a core referenced futures contract. At a expressly stated its support for EPSA–60381 at 4–5, CL–A4A–59714 at 5, CL–NFP– minimum, the Commission should provide 59690 at 7–8, CL–Working Group–59693 at 55–58, examples of indirect linkage that triggers referenced contract status’’). 319 The commenters included AGA, APGA, CL–API–59694 at 7, CL–IECAssn–59679 at 22, CL– 326 Atmos, API, Better Markets, BG Group, Calpine, IECAssn–59957 at 6–9, CL–Atmos–59705 at 4, CL– See, e.g., CL–COPE–59662 at 7, and CL–BG Citadel, CME, CMOC, COPE, DEU, EEI, EPSA, FIA, APGA–59722 at 9, CL–EEI–59945 at 5–6, CL– Group–59656 at 4. ICE, IECA, ISDA/SIFMA, GFMA, IATP, MFA, NEM, EPSA–55953 at 6–7, and CL–SCS–60399 at 3. 327 See, e.g., CL–MFA–59606 at 4 and 15–16. NFP, NGSA, OLAM, PAAP, SCS, and Vectra. 323 Trade Options, 81 FR 14966 (Mar. 21, 2016). 328 CL–COPE–59950 at 7.

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the price of a core referenced futures unpublished methodology used to physically delivered and cash-settled contract or based on the price of the determine which contracts are referenced contracts would have, in the same commodity underlying that referenced contracts. Instead, the absence of position limits, increased particular core referenced futures Commission proposed, and, following ability to manipulate one contract to contract for delivery at the same notice and comment, is now benefit positions in the other. location specified in that particular core reproposing a definition for referenced Moreover, if speculators were referenced futures contract. Therefore, contracts, and contracts that fit under incentivized to abandon physical contracts that settle to the price of a that definition will be subject to federal delivery contracts for cash-settled referenced contract, for example, would speculative position limits. contracts so as to avoid position limits, be indirectly linked to the core Comments Received: Several it could result in degradation of the referenced futures contract (e.g., a swap commenters suggested that cash-settled physical delivery contract markets that that prices to the ICE Futures US Henry contracts should not be subject to position limits are intended and LD1 Fixed Price Futures (H) contract, position limits.330 One commenter designed to protect. which is a referenced contract that asserted that non-deliverable cash- Comments Received: One commenter settles directly to the price of the settled contracts are ‘‘fundamentally asked the Commission to confirm that a NYMEX Henry Hub Natural Gas (NG) different’’ from deliverable commodity non-transferable repurchase right core referenced futures contract). contracts and should not be subject to granted in connection with a hedged On the other hand, an outright position limits.331 The commenter also commodity transaction does not count derivative contract whose settlement asserted that subjecting penultimate-day towards position limits, citing CME price is based on an index published by contracts such as options to a limit Group and ICE Futures rules to that a price reporting agency (‘‘PRA’’) that structure would make managing an effect. The commenter is concerned that surveys cash market transaction prices option portfolio ‘‘virtually impossible’’ such a transaction could be deemed a (even if the cash market practice is to and would result in confusion and commodity option and therefore legally 332 price at a differential to a futures uncertainty. a swap, but that it believed the contract) would not be directly or Commission Reproposal: The transaction satisfies the criteria for indirectly linked to the core referenced Commission has determined not to exemption from definition as a swap.336 329 futures contract. Similarly, a make any changes in the Reproposal Commission Reproposal: As the derivative contract whose settlement that would broadly exempt cash-settled commenter notes, whether the contract price was based on the same underlying contracts from position limits. Cash- is subject to position limits depends on commodity at a different delivery settled contracts are economically whether it is a swap. The Commission location (e.g., ultra-low sulfur diesel equivalent to deliverable contracts, and points out that the release adopting the delivered at L.A. Harbor) would not be Congress has required that the definition of swap noted the Commission impose limits on linked, directly or indirectly, to the core Commission’s belief that its forward economically equivalent swaps. The referenced futures contract. The contract interpretation ‘‘provides Commission notes that Congress took Commission is publishing an updated sufficient clarity with respect to the action twice to address this issue. In CFTC Staff Workbook of Commodity forward contract exclusion from the CEA section 4a(a)(5)(A), Congress Derivative Contracts Under the swap and future delivery required the Commission to adopt Regulations Regarding Position Limits definitions.’’ 337 Also in that release, the position limits for swaps that are for Derivatives along with this release, Commission noted that commodity which provides a non-exhaustive list of economically equivalent to futures or options are swaps.338 Separately, the referenced contracts and may be helpful options on futures or commodities Commission adopted Commission to market participants in determining traded on a futures exchange, for which § 32.3, providing an exemption from the categories of contracts that fit within the the Commission has adopted position commodity option definition for trade definition. Under the Reproposal, as limits. Previously, in the CFTC options; the exemption was recently always, market participants may request Reauthorization Act of 2008,333 further amended.339 The commenter clarification from the Commission when Congress imposed a core principle for should apply these rules to determine necessary. position limitations on swaps that are Regarding comments that the significant price discovery contracts.334 whether a given contract is a swap. In definition is overbroad and captures In addition, because cash-settled addition, the Commission notes that products that commenters state do not referenced contracts are economically under Commission § 140.99, the affect price discovery or are not truly equivalent to the physical delivery commenter may request clarification or economically-equivalent, the contract in the same commodity, a exemptive relief regarding whether a Commission notes that commenters trader has an incentive to manipulate non-transferable repurchase right falls seem to be confusing the statutory one contract in order to benefit the under the definition of a ‘‘swap.’’ To the definitions of ‘‘significant price other.335 The Commission notes that a extent the commenter seeks a discovery function’’ (in CEA section trader with positions in both the clarification or change to the definition 4a(a)(4)) and ‘‘economically equivalent’’ of a swap, the current rulemaking has (in CEA section 4a(a)(5)). As a matter of 330 See, e.g., CL–Vectra–60369 at 3, and CL– not been expanded to revisit that course, contracts can be economically Citadel–59717 at 9. definition. 331 equivalent without serving a significant CL–Vectra–60369 at 3. 332 Id. 336 CL–Olam–59658 at 8–9. price discovery function. The 333 Incorporated as Title XIII of the Food, 337 See, Further Definition of ‘‘Swap,’’ ‘‘Security- Commission notes that there is no Conservation and Energy Act of 2008, Pub. L. 110– Based Swap,’’ and ‘‘Security-Based Swap 246, 122 Stat. 1624 (June 18, 2008), Agreement’’; Mixed Swaps; Security-Based Swap 329 The Commission notes that while the outright 334 CEA section 2(h)(7) (2009). Agreement Recordkeeping; Final Rule (‘‘Swap derivative contract would not be indirectly linked 335 Under the reproposed definition, a cash- Definition Rulemaking’’), 77 FR 48208, 48231 (Aug. to the core referenced contract, a derivative contract settled contract must be linked, directly or 13, 2012). that settles to the difference between the core indirectly, to the core referenced futures contract or 338 Id. at 48237. referenced futures contract and the PRA index the same underlying commodity in the same 339 See Commodity Options, 77 FR 25320, 75326 would be directly linked because it settles in part delivery location in order to be considered a (Apr. 27, 2012); see also Trade Options, 81 FR to the core referenced futures contract price. ‘‘referenced contract.’’ 14966 (Mar. 21, 2016).

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Comments Received: One action letter or other guidance from compliance for all transactions that commenter 340 requested clarification swap regulation, each such action meet the Order’s conditions. that a bid, offer, or indication of interest would need to be considered in the Comments Received: Commenters for an OTC swap that does not context of the goals of the Commission’s were divided with respect to the constitute a binding transaction will not position limits regime. Rather than exclusion of ‘‘commodity index count towards position limits, noting issuing a blanket exemption from the contracts’’ from the definition of that current CME Rule 562 provides that definition of referenced contract for any referenced contract. As a result of the such bids or offers would be in violation agreement, contract, and transaction exclusion, the position of a market of the limit. exempted from swap regulations, participant who enters into a Commission Reproposal: The therefore, the Commission believes it commodity index contract with a dealer Reproposal does not change the will not be subject to position limits. definition originally proposed in would be better to consider each such action on its own merits prior to issuing One commenter supported the response to the comment requesting exclusion of commodity index contracts an exemption from position limits. clarification that a bid, offer, or from the definition of referenced Under the Reproposal, if a market indication of interest for an OTC swap contracts.344 The commenter was that does not constitute a binding participant desires to extend a concerned, however, that a dealer who transaction will not count towards previously taken exemptive action by offsets his or her exposure in such position limits. Nevertheless, the exempting certain agreements, contracts by purchasing futures Commission clarifies that under the contracts, and transactions from the contracts on the constituent components Reproposal, such bids, offers, or definition of referenced contract, the of the commodity index will be subject indications of interest do not count market participant can request that the to position limits in the referenced toward position limits.341 particular exemption order, contracts. The commenter urged the Comments Received: One commenter interpretation, no-action letter, or other Commission to recognize as a bona fide requested that the Commission exclude guidance be so extended. This would hedge ‘‘the offsetting nature of the from the definition of referenced allow the Commission to consider the dealer’s position by exempting the contract any agreement, contract, and particular action taken and the merits of futures contracts that a dealer acquires transaction exempted from swap that particular exemption in the context to hedge its commitments under regulations by virtue of an exemption of the position limits regime. commodity index contracts.’’ 345 order, interpretation, no-action letter, or The Commission notes that in the Alternatively, the Commission should other guidance; the commenter stated ‘‘modify the definition of ‘referenced that it believes the Commission can use particular exemptive order cited by the commenter,343 certain delineated non- contract’ and the definition of its surveillance capacity and anti- ‘commodity derivative contract’ by manipulation authority, along with its financial energy transactions between excluding core referenced futures MOU with FERC, to monitor these certain specifically defined entities were contracts and related futures contracts, nonfinancial commodity transactions as exempted, pursuant to CEA sections options contracts or swaps that are well as the market participants relying 4(c)(1) and 4(c)(6), from all requirements offset on an economically equivalent on the exemptive relief.342 of the CEA and Commission regulations basis by the constituent portions of Commission Reproposal: The issued thereunder, subject to certain commodity index contracts.’’ 346 Reproposal does not change the anti-fraud, anti-manipulation, and Another commenter supported the proposed definition in response to the record inspection conditions. All comment requesting that the Commission’s proposal to exclude entities that meet the requirements for swaps that reference indices such as the Commission exclude from the definition the exemption provided by the Federal of referenced contract any agreement, Goldman Sachs Commodity Index Power Act 201(f) Order are, therefore, (GSCI) from the definition of a contract, and transaction exempted from already exempt from position limits 347 swap regulations by virtue of an referenced contract. exemption order, interpretation, no- One commenter asked that the 343 See the Between NFP Electrics Exemptive Commission reconsider excluding action letter, or other guidance. The Order (Order Exempting, Pursuant to Authority of the Commodity Exchange Act, Certain Transactions commodity index contracts from the Commission notes that any contract that 348 is not a commodity derivative contract, Between Entities Described in the Federal Power definition of referenced contract. Act, and Other Electric Cooperatives, 78 FR 19670 Another commenter urged that including one that has been excluded (Apr. 2, 2013) (‘‘Federal Power Act 201(f) Order’’). from the definition of swap, is not commodity index contracts should be See also CL–NFP–59690 at 14–15. The Federal included in the definition of referenced subject to position limits. The Power Act 201(f) Order exempted all ‘‘Exempt Non- commenter is requesting a broad Financial Energy Transactions’’ (as defined in the contract in conjunction with (1) a class Federal Power Act 201(f) Order) that are entered limit (as was proposed for vacated part exclusion from the definition of into solely between ‘‘Exempt Entities’’ (also as referenced contract, based on other 151, but not included in final part 151); defined in the Federal Power Act 201(f) Order, and (2) a lower position limit set at a regulatory relief which may have been namely any electric facility or utility that is wholly adopted for a variety of policy reasons owned by a government entity as described in the level ‘‘aimed to maintain no more than’’ unrelated to position limits. Federal Power Act (‘FPA’) section 201(f); (ii) any 30 percent speculation in each electric facility or utility that is wholly owned by commodity (based on COT report Consequently, in light of the many and an Indian tribe recognized by the U.S. government pursuant to section 104 of the Act of November 2, classifications) that is reset every 6 varied policy reasons for issuing an 349 exemption order, interpretation, no- 1994; (iii) any electric facility or utility that is months. The same commenter noted wholly owned by a cooperative, regardless of such that trading by passive, long only cooperative’s status pursuant to FPA section 201(f), 340 See, e.g., CL–MFA–59606 at 5 and 23. so long as the cooperative is treated as such under 344 CL–GFMA–60314 at 4. 341 The Commission notes that it is discussing Internal Revenue Code section 501(c)(12) or 345 Id. bids, offers, and indications of interest in the 1381(a)(2)(C), and exists for the primary purpose of 346 context of whether these would violate position providing electric energy service to its member/ Id. limits, and is not addressing other issues such as owner customers at cost; or (iv) any other entity that 347 CL–CMOC–59720 at 4. whether or not their use may indicate spoofing in is wholly owned, directly or indirectly, by any one 348 CL–IATP–59701 at 2. violation of CEA section 4(c)(a)(5). or more of the foregoing.). See Federal Power Act 349 CL–Better Markets–59716 at 1–35, and 342 CL–NFP–59690 at 14–15. 201(f) Order at 19688. particularly at 32.

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commodity index fund speculators does in the relevant markets.351 The Commission Reproposal: The not provide liquidity, but rather takes Commission also notes that it currently Commission believes that recognizing net liquidity, dilutes the pool of market does not collect information to cross-commodity netting as requested information to be less reflective of effectively enforce any ratio of by the commenter would substantially fundamental forces, causes volatility, speculative trading, and has not done so expand the definition of referenced and causes an increased frequency of since the Commission eliminated Series contract and, thus, may weaken: (1) The contango attributed to frequent rolls ’03 reporting in 1981.352 The Reproposal protection of the price discovery from selling a nearby contract and does not make any changes to the function in the core referenced futures buying a deferred (second month) definition of referenced contract contract; (2) the prevention of excessive contract. The commenter noted that, pursuant to this comment. speculation; and (3) the prevention of broadly, speculators in commodity Finally, in response to the commenter market manipulation. Therefore, this futures historically constituted between who suggested that, in addition to Reproposal does not change the 15 and 30 percent of open interest excluding commodity index contracts as definition of referenced contract to without meaningfully disrupting the proposed, the Commission should accommodate cross-commodity netting. market and providing beneficial recognize as bona fide hedge positions Comments Received: One commenter intermediation between hedging those positions that offset a position in requested that all ‘‘nonfinancial producers and hedging consumers.350 a commodity index derivative contract commodity derivatives’’ used by Commission Reproposal: The by using the component futures commercial end-users for hedging Commission is reproposing the contracts, the Commission observes that purposes be expressly excluded from provision excluding commodity index it still believes, as discussed in the the definition of referenced contract contracts from the definition of December 2013 Position Limits (and so excluded from position limits). referenced contract as previously Proposal, that financial products do not The commenter also suggested that the proposed. meet the temporary substitute test. As Commission allow an end-user to Regarding commenters who requested such, the offset of financial risks arising identify a swap as being used to ‘‘hedge that the Commission alter the proposed from financial products is inconsistent or mitigate commercial risks’’ at the definition to include commodity index with the statutory definition of a bona time the swap is executed and noted derivative contracts, the Commission fide hedging position. The Commission that such trades are highly-customized notes that if it were to include such also declines in this Reproposal to bilateral agreements that are difficult to contracts, the Commission’s rules would accept the commenter’s request to convert into futures equivalents.354 The allow netting of such positions in exempt these offsetting positions using commenter also requested that commodity index contracts with other its authority under CEA section 4a(a)(7) ‘‘customary commercial agreements’’ be offsetting referenced contracts. The because it does not believe that excluded from referenced contract ability to net such commodity index permitting the offset of financial risks definition. The commenter stated that derivative contracts positions with other furthers the purposes of the these contracts may reference a core offsetting referenced contracts would Commission’s position limits regime as referenced futures contract or may be eliminate the need for a bona fide described in CEA section 4a(a)(3)(B). misinterpreted as directly or indirectly hedging exemption for such contracts. Finally, the commenter suggested as an linking to a core referenced futures Thus, the Commission believes such alternative that the Commission modify contract, but that the Commission has netting would contravene Congressional the definition of referenced contract to already determined that Congress did intent, as expressed in CEA section broadly exclude any derivative contracts not intend to regulate such agreements 4a(c)(B)(i) in its requirement to permit a that are used to offset commodity index as swaps.355 pass-thru swap offset only if the exposure. However, the Commission Commission Reproposal: This counterparty’s position would qualify as believes such a broad exclusion would, Reproposal does not amend the a bona fide hedge. at best, be too difficult to administer definition of referenced contract in Another commenter suggested and, at worst, provide an easy vehicle response to the request that including commodity index contracts for entities to evade position limits ‘‘nonfinancial commodity derivatives’’ under the definition of referenced regulations. used by commercial end-users for contract in conjunction with a class Comments Received: One commenter hedging purposes be expressly excluded limit (e.g., a separate limit for suggested that the Commission from the definition of referenced commodity index contracts compared to unnecessarily limited the scope of contract. The Commission understands all other categories of derivative permissible netting by not recognizing the comment to mean that when a contracts). The commenter suggested cross-commodity netting, particular transaction qualifies for the that the limit be set at a level aimed at recommending either a threshold end-user exemption, it should also be maintaining a particular ratio of correlation factor of 60 percent or an exempt from position limits by speculative trading in the market. In approach that would permit pro rata excluding such transactions from the response to this commenter, the netting to the extent of demonstrated definition of ‘‘referenced contract.’’ The Commission declines in this Reproposal correlation.353 commenter quotes language from the to propose class limits because it end-user exemption definition, which believes any adoption of a class limit 351 See also, December 2013 Position Limits was issued to provide relief from the would require a rationing scheme Proposal, 78 FR at 75741. clearing and trade execution mandates. wherein unrelated legal entities would 352 The Commission’s Series ’03 reports required The Commission notes that under the large traders to classify how much of their position CEA’s statutory language, the be limited by the positions of other was speculative and how much was hedging and unrelated legal entities. Further, the formed the basis of the earliest versions of the CFTC commercial end user exemption Commission is concerned that class Commitments of Traders Reports. See ‘‘Reporting limits (including the one proposed by Requirements for Contract Markets, Futures 354 CL–NFP–59690 at 9–12. Commission Merchants, Members of Exchanges and 355 CL–NFP–59690 at 13 (citing to Further the commenter) could impair liquidity Large Traders,’’ 46 FR 59960 (Dec. 8, 1981) Definition of ‘‘Swap,’’ ‘‘Security-Based Swap,’’ and (eliminating the routine of Series ’03 reports by ‘‘Security-Based Swap Agreement’’; Mixed Swaps; 350 CL–Better Markets–59716 at 5, and CL–Better large traders). Security-Based Swap Agreement Recordkeeping, 77 Markets–60401 at 4, 16–17. 353 CL–ISDA/SIFMA–59611 at 3 and 32–33. FR 48208 (Aug. 13, 2012).

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definition is broader than the bona fide Commission is proposing to amend the published by the Commission for many hedging definition. Under the canons of definition to clarify that a short position years.358 For example, the December statutory construction, when Congress is on a futures-equivalent basis, a short 2013 Position Limits Proposal noted writes one section differently than call option, a long put option, a short that the version of the staff glossary another, the differences should be underlying futures contract, or a swap currently posted on the CFTC Web site assumed to have different meaning. position that is equivalent to a short defines speculative position limit as Thus, the Commission believes that the futures contract. Though the substance ‘‘[t]he maximum position, either net more restrictive language in the bona of the definition is fundamentally long or net short, in one commodity fide hedging definition should be unchanged, the revised language should future (or option) or in all futures (or applied here. The definition of bona fide prevent unnecessary confusion over the options) of one commodity combined hedging position, as proposed in the application of futures-equivalency to that may be held or controlled by one December 2013 Position Limits different kinds of commodity derivative person (other than a person eligible for Proposal, as amended by the 2016 contracts. a hedge exemption) as prescribed by an Supplemental Position Limits Proposal, exchange and/or by the CFTC.’’ p. Speculative Position Limit and as reproposed here, would be The Commission received no consistent with the differences in the The term ‘‘speculative position limit’’ comments on the proposed definition, two definitions, as adopted by Congress. is currently not defined in § 150.1. In and is reproposing the definition The Commission notes that under this the December 2013 Position Limits without amendment. Reproposal, commercial end-users may Proposal, the Commission proposed to rely on any applicable bona fide hedge define the term ‘‘speculative position q. Spot-Month exemption. limit’’ to mean ‘‘the maximum position, Proposed Rule: In the December 2013 In response to the commenter’s either net long or net short, in a Position Limits Proposal, the concern regarding ‘‘customary commodity derivatives contract that Commission proposed to adopt a commercial agreements,’’ the may be held or controlled by one definition of ‘‘spot-month’’ that expands Commission reiterates its belief that person, absent an exemption, such as an upon the current § 150.1 definition.359 contracts that are exempted or excluded exemption for a bona fide hedging The definition, as proposed, specifically from the definition of ‘‘swap’’ are not position. This limit may apply to a addressed both physical-delivery considered referenced contracts and so person’s combined position in all contracts and cash-settled contracts, and are not subject to position limits. commodity derivative contracts in a clarified the duration of ‘‘spot-month.’’ o. Short Position particular commodity (all-months- Under the proposed definition, the combined), a person’s position in a ‘‘spot-month’’ for physical-delivery Proposed Rule: The term ‘‘short single month of commodity derivative commodity derivatives contracts would position’’ is currently defined in contracts in a particular commodity, or be the period of time beginning at of the § 150.1(c) to mean a short call option, a a person’s position in the spot-month of close of trading on the trading day long put option, or a short underlying commodity derivative contacts in a preceding the first day on which futures contract. In the December 2013 particular commodity. Such a limit may delivery notices could be issued or the Position Limits Proposal, the be established under federal regulations close of trading on the trading day Commission proposed to amend the or rules of a designated contract market preceding the third-to-last trading day, definition to state that a short position or swap execution facility. An exchange until the contract was no longer listed means a short call option, a long put may also apply other limits, such as a for trading (or available for transfer, option or a short underlying futures limit on gross long or gross short such as through exchange for physical contract, or a short futures-equivalent positions, or a limit on holding or transactions). The proposed definition swap. This proposed revision reflects controlling delivery instruments.’’ 356 included similar, but slightly different the fact that under the Dodd-Frank Act, As explained in the December 2013 language for cash-settled contracts, the Commission is charged with Position Limits Proposal, the proposed providing that the spot month would applying the position limits regime to definition is similar to definitions for begin at the earlier of the start of the swaps. position limits used by the Commission Comments Received: The Commission period in which the underlying cash- for many years,357 as well as glossaries received no comments regarding the settlement price was calculated or the proposed amendment to the definition close of trading on the trading day 356 December 2013 Position Limits Proposal, 78 of ‘‘short position.’’ preceding the third-to-last trading day FR at 75825. and would continue until the contract Commission Reproposal: Though no 357 Id. at 75701. As noted in the December 2013 commenters suggested changes to the Position Limits Proposal, ‘‘the various regulations definition of ‘‘short position,’’ the and defined terms included use of maximum person may hold or control in any one grain on any amounts ‘net long or net short,’ which limited what one contract market’’ as 2,000,000 bushels ‘‘in any Commission is concerned that the any one person could ‘hold or control,’ ‘one grain one future or in all futures combined.’’ Id. proposed definition, like the proposed on any one contract market’ (or in ‘in one 358 For example, the December 2013 Position definition of ‘‘long position’’ described commodity’ or ‘a particular commodity’), and ‘in Limits Proposal noted that the Commission’s supra, does not clearly articulate that any one future or in all futures combined.’ For annual report for 1983 includes in its glossary example, in 1936, Congress enacted the CEA, which ‘‘Position Limit: the maximum position, either net futures and options contracts are subject authorized the CFTC’s predecessor, the CEC, to long or net short, in one commodity future to position limits on a futures- establish limits on speculative trading. Congress combined which may be held or controlled by one equivalent basis in terms of the core empowered the CEC to ‘fix such limits on the person as prescribed by any exchange or by the referenced futures contract. amount of trading . . . as the [CEC] finds is CFTC.’’ Id. necessary to diminish, eliminate, or prevent such 359 December 2013 Position Limits Proposal, 78 Longstanding market practice has burden.’ [CEA section 6a(1) (Supp. II 1936)] It also FR at 75701–02; As noted in in the December 2013 applied position limits to futures and noted that the first speculative position limits were Position Limits Proposal, the definition proposed options on a futures-equivalent basis, issued by the CEC in December 1938, 3 FR 3145, would be an expansion upon the definition and the Commission believes that Dec. 24, 1938, and that those first speculative currently found in § 150.1, but greatly simplified position limits rules provided, also in § 150.1, for from the definition adopted in vacated § 151.3 (in practice ought to be made explicit in the limits on position and daily trading in grain for the Part 151 regulations, the ‘‘spot month’’ definition in order to prevent confusion. future delivery, and adopted a maximum amount definition in § 151.1 simply cited to the ‘‘spot Thus, in this Reproposal, the ‘‘net long or net short position which any one month’’ definition provided in § 151.3).

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cash-settlement price was determined. referenced futures contract and all Mercantile Exchange Live Cattle (LC) In addition, the proposed definition related physically-settled and cash- referenced contract, for which the spot included a proviso that, if the cash- settled referenced contracts, to assure month means the period of time settlement price was determined based that the definition works appropriately beginning at the close trading on the on prices of a core referenced futures in terms of how each underlying fifth business day of the contract contract during the spot month period nonfinancial commodity market month.371 for that core referenced futures contract, operates, and to ensure that commercial As noted above, in the December 2013 then the spot month for that cash-settled end-users of such nonfinancial Position Limits Proposal, spot month contract would be the same as the spot commodities can effectively use such was proposed to be defined to begin at month for that core referenced futures referenced contracts to hedge or mitigate the earlier of: (1) ‘‘the close of trading contract.360 commercial risks.366 on the trading day preceding the first Comments Received: The Commission The Commission also received the day on which delivery notices can be received several comments regarding recommendation from one commenter issued to the clearing organization’’; or the definition of spot month.361 One that the Commission should publish a (2) ‘‘the close of trading on the trading commenter noted that the definition of calendar listing the spot month for each day preceding the third-to-last trading the spot month for federal limits does Core Referenced Futures Contract to day’’—based on the comment letters not always coincide with the definition provide clarity to market participants received, the proposed definition of spot month for purposes of any and reduce the cost of identifying and resulted in some confusion.372 The exchange limits and assumes that the tracking the spot month.367 Commission observes that the current Commission did not intend for this to Commission Reproposal: For core definition also seems to be a source of happen. For example, the commenter referenced futures contracts, the some confusion when it defines ‘‘spot noted the proposed definition of spot Commission agrees with the commenter month,’’ in current CFTC Regulation month would commence at the close of that the definition of spot month for 150.1(a), to begin ‘‘at the close of trading trading on the trading day preceding the federal limits should be the same as the on the trading day preceding the first first notice day, while the ICE Futures definition of spot month for exchange day on which delivery notices can be US definition commences as of the limits. The Commission is therefore the issued to the clearing organization.’’ opening of trading on the second definition of spot month in this The Commission understands current business day following the expiration of Reproposal generally follows exchange DCM practice for physical-delivery regular option trading on the expiring practices. In the reproposed version, contracts permitting delivery before the futures contract. Regarding the COMEX spot month means the period of time close of trading generally is that the spot contracts, the commenter stated that the beginning at the earlier of the close of month begins at the start of the first exchange spot month commences at the business on the trading day preceding business day on which the clearing close of business, rather than at the the first day on which delivery notices house can issue ‘‘stop’’ notices to a close of trading, which would allow can be issued by the clearing clearing member carrying a long market participants to incorporate organization of a contract market, or the position, or, at the close of business on exchange of futures for related position close of business on the trading day the day preceding the first business day transactions (EFRPs) that occur after the preceding the third-to-last trading day, on which the clearing house can issue close of trading, but before the close of until the contract expires for physical ‘‘stop’’ notices to a clearing member business.362 Finally, the commenter delivery core referenced futures carrying a long position, but current requested the Commission ensure the contracts,368 except for the following: (a) DCM rules vary somewhat. For some definition of spot month for federal ICE Futures U.S. Sugar No. 11 (SB) ICE contracts,373 the spot month limits is the same as the definition of referenced contract for which the spot includes ‘‘any month for which delivery spot month for exchange limits for all month means the period of time notices have been or may be issued,’’ 374 referenced contracts.363 beginning at the opening of trading on and begins at the open of trading; 375 the Two commenters urged the the second business day following the Commission to reconsider its proposed expiration of the regular option contract meaning the end of delivery period or until cash- definition of spot month for cash-settled traded on the expiring futures contract; settled. 371 contracts that encompasses the entire (b) ICE Futures U.S. Sugar No. 16 (SF) In response to FIA’s comment, CL–FIA–59595 369 at 10, the Commission notes that the spot periods period for calculation of the settlement referenced contract, for which the for exchange-set limits on COMEX products begin price, preferring the current exchange spot month means the period of time at the close of trading and not the close of business. practice which is to apply the spot beginning on the third-to-last trading See http://www.cmegroup.com/market-regulation/ day of the contract month until the position-limits.html. However, the Commission month limit during the last three days understands that CME Group staff determines 364 370 before final settlement. One contract expires and (c) Chicago compliance with spot month limits in conjunction commenter noted its concern that the with the receipt of futures large trader reports. In proposed definition would discourage 366 CL–NFP–59690 at 19. consideration of the practicality of this approach, 367 CL–FIA–59595 at 10–11. and in light of the definition of reportable position, use of calendar month average price the Commission believes that it would be more contracts.365 368 As noted above, this Reproposal does not address the three cash-settled contracts (Class III practical, clear, and consistent with existing Another commenter recommended Milk, Feeder Cattle, and Lean Hogs) which, under exchange practices, for the spot month to begin ‘‘at that the Commission define ‘‘spot the December 2013 Position Limits Proposal, were the close of the market.’’ See CFTC Regulation month’’ in relation to each core included in the list of core referenced futures 15.00(p). contracts. Therefore, the reproposed spot month 372 As a note of clarification, in light of the definition does not address those three contracts. confusion of some commenters, position limits 360 See id. at 75825–6. 369 While the Commission realized that Sugar 16 apply to open positions; once the position isn’t 361 See, e.g., CL–FIA–59595 at 10, CL–NFP–59690 does not currently have a spot month, its delivery open the limits don’t apply. at 19, CL–NGSA–59673 at 44, and CL–ICE–59669 at period takes place after the last trading day (similar 373 See, e.g., Cotton No. 2. 5–6. to crude oil). Therefore, the Reproposal amends the 374 See ICE Rule 6.19. 362 CL–FIA–59595 at 10. spot month definition for Sugar No. 16 to mirror the 375 See, e.g., Cotton No. 2 Position Limits and 363 Id. three day period for other contracts that deliver Position Accountability information: ‘‘ICE (1) 364 See, e.g., CL–NGSA–59673 at 44, CL–ICE– after the end of trading. Delivery Month: Cocoa, Coffee ‘‘C’’, Cotton, World 59669 at 5–6. 370 In regard to the modifier ‘‘until the contract Cotton, FCOJ, Precious Metals—on and after First 365 See, CL–ICE–59669 at 5–6. expires,’’ the Commission views ‘‘expires’’ as Notice Day Sugar#11 on and after the Second

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CME spot month, as noted above, begins definition in this Reproposal, therefore, r. Spot-Month, Single-Month, and All- at the close of trading. However, the has been changed to correct this error. Months-Combined Position Limits Commission understands that the The revisions included in the Proposed Rule: In addition to a amended ‘‘spot month’’ definition, as reproposed definition addresses the definition for ‘‘spot month,’’ current reproposed herein, would be consistent concerns of the commenter who part 150 includes definitions for ‘‘single with the existing spot month practices suggested the Commission define the month,’’ and for ‘‘all-months’’ where of exchanges when enforcing the start of spot month according to each core ‘‘single month’’ is defined as ‘‘each the spot month limits in any of the 25 referenced futures contract and for cash- separate futures trading month, other core referenced futures contracts, based settled and physical delivery referenced than the spot month future,’’ and ‘‘all- on the timing of futures large trader contracts that are not core referenced months’’ is defined as ‘‘the sum of all reports, discussed below. futures trading months including the Furthermore, based on Commission futures contracts, although for clarity and brevity the Commission has chosen spot month future.’’ staff discussions with staff from several As noted in the December 2013 DCMs regarding exchange current to highlight contracts that are the exception to the general definition Position Limits proposal, vacated part practices, the Commission believes that 151 retained only the definition for spot rather than list each of the 25 core the spot month should begin at the same month, and, instead, adopted a referenced futures contracts and time as futures large trader reports are definition for ‘‘spot-month, single- multitude of referenced contracts submitted—that is, under the definition month, and all-months-combined of reportable position, the spot month separately. position limits.’’ The definition should begin ‘‘at the close of the In response to the commenters’ specified that, for Referenced Contracts 376 market.’’ The Commission views the concern regarding cash-settled based on a commodity identified in ‘‘close of the market’’ as consistent with referenced contracts, the Reproposal § 151.2, the maximum number of ‘‘the close of business.’’ changes the definition of spot month to contracts a trader could hold was as In consideration of the practicality of agree with the limits proposed in provided in § 151.4. this approach, and in light of the § 150.2. In the December 2013 Position In the December 2013 Position Limits definition of ‘‘reportable position,’’ the Limits Proposal, the Commission Proposal, as noted above, the Commission believes that it would be defined the spot month for certain cash- Commission proposed to amend § 150.1 more practical, clear, and consistent settled referenced contracts, including by deleting the definitions for ‘‘single with existing exchange practices, for the month,’’ and for ‘‘all-months,’’ but, spot month to begin ‘‘at the close of calendar month averaging contracts, to be a longer period than the spot month unlike the vacated part 151, the business.’’ In addition, as noted by one proposal did not include a definition for commenter,377 when the exchange spot period for the related core referenced futures contract. However, the ‘‘spot-month, single-month, and all- month commences at the close of months-combined position limits.’’ business, rather than at the close of Commission did not propose a limit for such contracts in proposed § 150.2, Instead, it proposed to adopt a trading, it would allow market definition for ‘‘speculative position participants to incorporate exchange of rendering superfluous that aspect of the proposed definition of spot month, at limits’’ that should obviate the need for futures for related position transactions these definitions.379 378 this time. The Commission is (‘‘EFRPs’’) that occur after the close Comments Received: The Commission of trading, but before the close of reproposing the definition of spot received no comments regarding the business. month without this provision, thereby deletion of these definitions. The Commission points out an addressing the concerns of the Commission Reproposal: This additional correction made to the commenters regarding the impact of the Reproposal, consistent with the reproposed definition, changing it from definition on calendar month averaging December 2013 Position Limits ‘‘preceding the first day on which contracts outside of the spot month for Proposal, eliminates the definitions for delivery notices can be issued to the the relevant core referenced futures ‘‘single month,’’ and for ‘‘all-months,’’ clearing organization of a contract contract. In order to make clearer the for the reasons provided above. market’’ to ‘‘preceding the first day on relevant spot month periods for which delivery notices can be issued by referenced contracts other than core s. Swap and Swap Dealer the clearing organization of a contract referenced futures contracts, the Proposed Rule: While the terms market’’ [emphasis added]. The Commission has included subsection (3) ‘‘swap’’ and ‘‘swap dealer’’ are not Commission understands that the spot of the definition that states that the spot currently defined in § 150.1, the periods on the exchanges commence the month for such referenced contracts is December 2013 Position Limits Proposal day preceding the first day on which the same period as that of the relevant amended § 150.1 to define these terms delivery notices can be issued by the core referenced futures contract. as they are defined in section 1a of the clearing organization of a contract Act and as further defined in section 1.3 market, not the first day on which The Commission believes that the of this chapter.’’ 380 notices can be issued to the clearing revised definition reproposed here Comments Received: The Commission organization. The ‘‘spot month’’ sufficiently clarifies the applicable spot received no comments on these month periods, which can also be definitions. Business Day following the expiration of the regular determined via exchange rulebooks and option contract traded on the expiring futures defined contract specifications, such 379 See Section III.A.1.r (Spot-month, single- contract.’’ https://www.theice.com/products/254/ that a defined calendar of spot months month, and all-months-combined position limits) Cotton-No-2-Futures. is not necessary. Further, a published above for a discussion of the proposed definition of 376 See current § 15.00(p). ‘‘speculative position limit.’’ 377 CL–FIA–59595 at 10. calendar would need to be revised every 380 7 U.S.C. 1a(47) and 1a(49); § 1.3(xxx) (‘‘swap’’) 378 The Commission notes that DCM year to update spot month periods for and § 1.3(ggg) (‘‘swap dealer’’). See Further determinations of allowable blocks, EFRPs, and each contract and each expiration. The Definition of ‘‘Swap Dealer,’’ ‘‘Security-Based Swap transfer trades, in regards to position limits, must Commission believes this constant Dealer,’’ ‘‘Major Swap Participant,’’ ‘‘Major also consider compliance with DCM Core Principle Security-Based Swap Participant’’ and ‘‘Eligible 9; discussion of the interplay is beyond the scope revision may lead to more confusion Contract Participant,’’ 77 FR 30596 (May 23, 2012); of this Reproposal. than it is meant to correct. see also, Swap Definition Rulemaking.

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Commission Reproposal: The fide hedging definition and risk complying with Core Principle IV Commission has determined to management exemptions for futures in regarding position limitations or repropose these definitions as originally financial instruments (now termed accountability.390 That guidance proposed, for the reasons provided excluded commodities).384 This provided, as an acceptable practice for above. guidance permitted exchanges, for cleared trades, that the ECM’s position purposes of exchange-set limits on limit rules may exempt bona fide 2. Bona Fide Hedging Definition excluded commodities, to recognize risk hedging positions. a. Bona Fide Hedging Position (BFH) management exemptions.385 In 2010, the Dodd-Frank Act added a Definition—Background In the 1990’s, the Commission directive, for purposes of Prior to the 1974 amendments to the allowed exchanges to experiment with implementation of CEA section 4a(a)(2), CEA, the definition of a bona fide substituting position accountability for the Commission to define a bona fide 386 hedging position was found in the levels for position limits. The CFMA, hedging position for physical statute. The 1974 amendments in 2000, codified, in DCM Core commodity derivatives consistent with, Principle 5, position accountability as in the Commission’s opinion, the authorized the newly formed 387 Commission to define a bona fide an acceptable practice. The CFMA, reasonably certain statutory standards in hedging position.381 The Commission however, did not address the definition CEA section 4a(c)(2). Those statutory published a final rule in 1977, providing of a bona fide hedging position. standards build on, but differ slightly With the passing of the CFMA in a general definition of a bona fide from, the Commission’s general 2000, the Commission’s requirements definition in rule 1.3(z)(1).391 The hedging position in § 1.3(z)(1).382 The for exchanges to adopt position limits Commission interprets those statutory Commission listed certain positions, and associated bona fide hedging standards as directing the Commission meeting the requirements of the general exemptions, in § 150.5, were rendered to narrow the bona fide hedging definition of a bona fide hedging mere guidance. That is, exchanges were position definition for physical position, in § 1.3(z)(2) (i.e., enumerated no longer required to establish limits commodities.392 The Commission bona fide hedging positions). The and no longer required to use the discusses those differences, below. Commission provided an application Commission’s general definition of a process for market participants to seek bona fide hedging position. b. BFH Definition Summary recognition of non-enumerated bona Nonetheless, the Commission continued Under the December 2013 Position fide hedging positions in §§ 1.3(z)(3) to guide exchanges to adopt position Limits Proposal, the Commission and 1.48. limits, particularly for the spot month in proposed a new definition of bona fide During the 1980’s, exchanges were physical-delivery physical commodity hedging position, to replace the current required to incorporate the derivatives, and to provide for definition in § 1.3(z), that would be Commission’s general definition of bona exemptions. applicable to positions in excluded fide hedging position into their The Farm Bill of 2008 authorized the commodities and in physical exchange-set position limit Commission to regulate swaps traded on commodities.393 The proposed 383 regulations. While the Commission exempt commercial markets (ECM) that definition was organized into an had established position limits on only the Commission determined to be a opening paragraph and five numbered a few commodity futures contracts in significant price discovery contract paragraphs. In the opening paragraph, § 150.2, Commission rule § 1.61 (SPDC).388 The Commission for positions in either excluded (subsequently incorporated into § 150.5) implemented these provisions in part 36 commodities or physical commodities, required DCMs to establish limits on of its rules.389 The Commission the proposed definition would have commodities futures not subject to provided guidance to ECMs in applied two general requirements: The federal limits. The Commission directed incidental test; and the orderly trading in § 1.61(a)(3) (subsequently 384 52 FR 34633 (Sept. 14, 1987) and 52 FR 27195 requirement. For excluded incorporated into § 150.5(d)(1)) that no (July 20, 1987). commodities, the Commission proposed DCM regulation regarding position 385 See December 2013 Position Limits Proposal, in paragraph (1) a definition that limits would apply to bona fide hedging 78 FR at 75704. 386 Exchange rules for position accountability conformed to the Commission’s 1987 positions as defined by a DCM in levels require a market participant whose position accordance with § 1.3(z)(1). exceeds an accountability level to consent 390 17 CFR part 36, App. B (2010). In 1987, the Commission provided automatically to requests of the exchange: (1) To 391 It should be noted that a 2011 final rule of the interpretive guidance regarding the bona provide information about a position; and (2) to not Commission would have amended the definition of increase or to reduce a position, if so ordered by a bona fide hedging position in § 1.3(z), to be the exchange. In contrast, a speculative position applicable only to excluded commodities, and 381 Those amendments to CEA section 4a(3), limit rule does not authorize an exchange to order would have added a new definition of a bona fide subsequently re-designated § 4a(c)(1), 7 U.S.C. a market participant to reduce a position. Rather, hedging position to Part 151, to be applicable to 6a(c)(1), provide that no rule of the Commission a position limit sets a maximum permissible size for physical commodities. Position Limits for Futures shall apply to positions which are shown to be bona a speculative position. The Commission notes that and Swaps, 76 FR 71626 (Nov.18, 2011). However, fide hedging positions, as such term is defined by it may require a market participant to provide prior to the compliance date for that 2011 the Commission. See, sec. 404 of the Commodity information about a position, for example, by rulemaking, a federal court vacated most provisions Futures Trading Commission Act of 1974, Pub. L. issuing a special call under § 18.05 to a trader with of that rulemaking, including the amendments to 93–463, 88 Stat. 1389 (Oct. 23, 1974). See 2013 a reportable position in futures contracts. the definition of a bona fide hedging position. Position Limits Proposal, 78 FR at 75703 for 387 DCM Core Principle 5 is codified in CEA International Swaps and Derivatives Ass’n v. additional discussion of the history of the definition section 5(d)(5), 7 U.S.C. 7(d)(5). See Section 111 of United State Commodity Futures Trading Comm’n, of a bona fide hedging position. the Commodity Futures Modernization Act of 2000, 887 F. Supp. 2d 259 (D.D.C. 2012). Because the 382 42 FR 42748 (Aug. 24, 1977). Previously, the Pub. L. No. 106–554, 114 Stat. 2763 (Dec. 21, 2000) Commission has not instructed Federal Register to Secretary of Agriculture, pursuant to section 404 of (CFMA). roll back the 2011 changes to the CFR, the current the Commodity Futures Trading Commission Act of 388 See § 13201 of the Food, Conservation and definition of a bona fide hedging position is found 1974 (Pub. L. 93–463), promulgated a definition of Energy Act of 2008, Pub. L. No. 110–246, 122 Stat. in the 2010 version of the Code of Federal bona fide hedging transactions and positions. 40 FR 1624 (June 18, 2008) (Farm Bill of 2008). These Regulations. 17 CFR 1.3(z) (2010). 111560 (March 12, 1975). That definition, largely provisions were subsequently superseded by the 392 See December 2013 Position Limits Proposal, reflecting the statutory definition previously in Dodd-Frank Act. 78 FR at 75705. effect, remained in effect until the newly- 389 66 FR 42270 (Aug. 10, 2001). Part 36 was 393 See December 2013 Position Limits Proposal, established Commission defined that term. Id. removed and reserved to conform to the 78 FR at 75702–23. In doing so, the Commission 383 46 FR 50938 at 50945 (Oct. 16, 1981). amendments to the CEA by the Dodd-Frank Act. proposed to remove and reserve § 1.3(z).

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interpretations permitting risk a swap that was used as a hedge; and, does not apply to over-the-counter management exemptions in excluded (c) re-organizes additional requirements markets, the Commission does not commodity contracts. For physical for enumerated hedges and define orderly trading in a bi-lateral commodities, the Commission proposed requirements for other recognition as a market, and this requirement imposes a in paragraph (2) to amend the current non-enumerated bona fide hedging duty on end users to monitor market general definition to conform to CEA position, apart from the general activities to ensure they do not cause a section 4a(c) and to remove the definition. significant market impact; additionally, application process in §§ 1.3(z)(3) and the commenter noted the anti-disruptive 1.48, that permits market participants to c. BFH Definition Discussion—Remove trading prohibitions and polices apply seek recognition of non-enumerated Incidental Test and Orderly Trading regardless of whether the orderly bona fide hedging positions. Rather, the Requirement trading requirement is imposed.403 Commission proposed that a market Proposed Rule: As noted above, the Similarly, another commenter urged the participant may request either a staff Commission proposed to retain, in its Commission to exempt commercial end- interpretative letter under § 140.99 394 or December 2013 Position Limits users from the orderly trading seek CEA section 4a(a)(7) exemptive Proposal,397 then proposed to remove, requirement, arguing that an orderly relief.395 Paragraphs (3) and (4) listed in its 2016 Supplemental Position trading requirement unreasonably enumerated exemptions. Paragraph (5) Limits Proposal,398 two general requires commercial end-users to listed the requirements for cross- requirements contained in the § 1.3(z)(1) monitor markets to measure the impact commodity hedges of enumerated definition of bona fide hedging position: of their activities without clear guidance exemptions. the incidental test; and the orderly from the Commission on what would In response to comments on the trading requirement. The incidental test constitute significant market impact.404 December 2013 Position Limits requires, for a position to be recognized Other commenters to the 2013 Proposal, in the 2016 Supplemental as a bona fide hedging position, that the Proposal requested the Commission Proposal, the Commission amended the ‘‘purpose is to offset price risks interpret the orderly trading proposed definition of bona fide incidental to commercial cash, spot, or requirement consistently with the hedging position.396 The amended forward operations.’’ The orderly Commission’s disruptive trading definition proposed in the 2016 trading requirement mandates that practices interpretation (i.e., a standard Supplemental Proposal would no longer ‘‘such position is established and of intentional or reckless conduct) and apply the two general requirements (the liquidated in an orderly manner in not to apply a negligence standard.405 incidental test and the orderly trading accordance with sound commercial Yet another commenter requested requirement). For excluded practices.’’ clarification on the process the commodities, the Commission again Comments Received: Commenters Commission would use to determine proposed paragraph (1) of the definition, generally objected to retaining the whether a position has been established substantially as in 2013. For physical incidental test and the orderly trading and liquidated in an orderly manner, commodities, the Commission again requirement in the definition of bona whether any defenses may be available, proposed to conform paragraph (2) more fide hedging position, as proposed in and what would be the consequences of closely to CEA section 4a(c), but also 2013.399 A number of commenters failing the requirement.406 proposed an application process for supported the Commission’s 2016 However, one commenter is market participants to seek recognition Supplemental Proposal to remove the concerned that eliminating the orderly of non-enumerated bona fide hedging incidental test and the orderly trading trading requirement for bona fide positions, without the need to petition requirement.400 hedging for swaps positions would the Commission. The Commission again Incidental Test: Commenters objected discriminate against market participants proposed paragraphs (3) through (5). to the incidental test, because that test in the futures and options markets. The In response to comments on both the is not included in the standards in CEA commenter noted that, if the December 2013 Position Limits Proposal section 4a(c) for the Commission to Commission eliminates this and the 2016 Supplemental Proposal, define a bona fide hedging position for requirement, the Commission could not the Commission is now reproposing the physical commodities.401 use its authority effectively to review definition of bona fide hedging position, However, other commenters noted exchange-granted exemptions for swaps generally as proposed in the 2016 their belief that eliminating the from position limits to prevent or 407 Supplemental Proposal, but with a few incidental test would permit swap diminish excessive speculation. Commission Reproposal: In the further amendments. First, for excluded dealers or purely financial entities to reproposed definition of bona fide commodities, the Commission clarifies avail themselves of bona fide hedging hedging position, the Commission is further the discretion of exchanges in exemptions, to the detriment of recognizing risk management eliminating the incidental test and the commercial hedgers.402 exemptions. Second, for physical Orderly trading requirement: One orderly trading requirement. Incidental Test: Under the commodities, the Commission: (a) commenter urged the Commission to Clarifies the scope of the general Reproposal, the incidental test has been eliminate the orderly trading definition of a bona fide hedging eliminated, because the Commission requirement, because this requirement position; (b) conforms that general views the economically appropriate test definition more closely to CEA section (discussed below) as including the 397 78 FR at 75706. 4a(c) by including recognition of 398 81 FR at 38462. concept of the offset of price risks positions that reduce risks attendant to 399 See 2016 Supplemental Position Limits Proposal, 81 FR at 38462. 403 See CL–COPE–59662 at 13. 394 Section 140.99 sets out general procedures and 400 See, e.g., CL–NCFC–60930 at 2, CL–FIA–60937 404 See CL–DEU–59627 at 5–7. requirements for requests to Commission staff for at 5 and 23, and CL–IECAssn–60949 at 5–7. 405 See, e.g., CL–FIA–59595 at 5, 33–34, CL–EEI– exemptive, no-action and interpretative letters. 401 See, e.g., CL–CME–58718 at 47, and CL– EPSA–59602 at 14–15, CL–ISDA/SIFMA–59611 at 395 See December 2013 Position Limits Proposal, NGFA–60941 at 2. 4, 39, CL–CME–59718 at 67, and CL–ICE–59669 at 78 FR 75719. 402 See, e.g., CL–IATP–60951 at 4, CL–AFR–60953 11. 396 See 2016 Supplemental Position Limits at 2, CL–Better Markets–60928 at 5, and CL– 406 See CL–Working Group–59693 at 14. Proposal, 81 FR at 38462–64. Rutkowski–60962 at 1. 407 See CL–IATP–60951 at 4.

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incidental to commercial cash, spot, or In regard to the anti-disruptive trading Commission Reproposal: After forward operations. It was noted in the prohibitions of CEA section 4c(a)(5), consideration of comments and review 2013 Position Limits Proposal that, those prohibitions apply to trading on of the record, the Commission has ‘‘The Commission believes the concept registered entities, but not to OTC determined in the Reproposal to apply of commercial cash market activities is transactions. It should be noted that the the economically appropriate test to also embodied in the economically anti-disruptive trading prohibitions in enumerated exemptions, as proposed.414 appropriate test for physical CEA section 4c(a)(5) make it unlawful to However, the Reproposal amends the commodities in [CEA section engage in trading on a registered entity proposed definition of a bona fide 4a(c)(2)].’’ 408 It should be noted the that ‘‘demonstrates intentional or hedging position for an excluded incidental test has been part of the reckless disregard for orderly execution commodity, to clarify that an exchange regulatory definition of bona fide of trading during the closing period’’ may otherwise recognize risk hedging since 1975,409 but that the (emphasis added); however, the management exemptions in an excluded requirement was not explained in the Commission has not, under the commodity, without regard to the 1974 proposing notice (‘‘proposed authority of CEA section 4c(a)(6), economically appropriate test. definition otherwise deviates in only prohibited the intentional or reckless Regarding risk management exemptions, minor ways from the hedging definition disregard for the orderly execution of the Commission notes that Appendix A presently contained in [CEA section transactions on a registered entity (which codifies the Commission’s two 4a(3)]’’).410 outside of the closing period. 1987 interpretations of the bona fide The Commission is not persuaded by The Commission notes that an hedging definition in the context of the commenters who believe exchange may impose a general orderly excluded commodities) includes eliminating the incidental test would trading on all market participants. examples of risk altering transactions, permit financial entities to avail Market participants may request such as a temporary increase in equity themselves of a bona fide hedging clarification from exchanges on their exposure relative to cash bond holdings. exemption, because the incidental test is trading rules. The Commission does not Such risk altering transactions appear essentially embedded in the believe that the absence of an orderly inconsistent with the Commission’s economically appropriate test. In trading requirement in the definition of interpretation of the economically addition, for a physical-commodity bona fide hedging position would appropriate test. Accordingly, the derivative, the reproposed definition, in discriminate against any particular Reproposal removes the economically mirroring the statutory standards of CEA trading venue for commodity derivative appropriate test from the guidance for section 4a(c), requires a bona fide contracts. exchange-recognized risk management hedging position to be a substitute for a d. BFH Definition Discussion— exemptions in excluded commodities. transaction taken or to be taken in the Excluded Commodities Regarding an exchange’s obligation to cash market (either for the market Proposed Rule: In both the 2013 comply with core principles pertaining participant itself or for the market Position Limits Proposal and the 2016 to position limits on excluded participant’s pass-through swap Supplement Proposal, the proposed commodities, as discussed further in counterparty), which generally would definition of bona fide hedging position § 150.5, the Commission clarifies that preclude financial entities from availing for contracts in an excluded commodity under the Reproposal, exchanges have themselves of a bona fide hedging included a standard that the position is reasonable discretion as to whether to exemption (in the absence of qualifying economically appropriate to the adopt the Commission’s definition of a for a pass-through swap offset reduction of risks in the conduct and bona fide hedging position, including exemption, discussed below). management of a commercial enterprise whether to grant risk management Orderly Trading Requirement: The (the economically appropriate test) and exemptions, such as those that would be Reproposal also eliminates the orderly also specified that such position should consistent with, but not limited to, the trading requirement. That provision has be either (i) specifically enumerated in examples in Appendix A to part 150. been a part of the regulatory definition paragraphs (3) through (5) of the That is, the set of examples in Appendix of bona fide hedging since March 12, definition of bona fide hedging position; A to part 150 is non-restrictive, as it is 1975 411 and previously was found in or (ii) recognized as a bona fide hedging guidance. The Reproposal also makes the statutory definition of bona fide position by a DCM or SEF consistent minor wording changes in Appendix A hedging position prior to the 1974 with the guidance on risk management to part 150, including to clarify an amendment removing the statutory exemptions in proposed Appendix A to exchange’s reasonable discretion in definition from CEA section 4a(3). part 150.412 As noted above, the 2016 granting risk management exemptions However, the Commission is not aware Supplemental Proposal would eliminate and to eliminate a reference to the of a denial of recognition of a position the two additional general requirements orderly trading requirement which has as a bona fide hedging position, as a (the incidental test and the orderly been deleted, as discussed above, but result of a lack of orderly trading. trading requirement). otherwise is adopting Appendix A as Further, the Commission notes that the Comments Received: One commenter proposed. meaning of the orderly trading believed that, to avoid an overly e. BFH Definition Discussion—Physical requirement is unclear in the context of restrictive definition due to the limited Commodities General Definition the over-the-counter (OTC) swap market set of examples provided by the or in the context of permitted off- Commission, only the general definition As noted in its proposal, the core of exchange transactions (e.g., exchange of of a bona fide hedging position should the Commission’s approach to defining futures for physicals). be applicable to hedges of an excluded bona fide hedging over the years has commodity.413 focused on transactions that offset a 408 See December 2013 Position Limits Proposal, 78 FR at 75707. 412 December 2013 Position Limits Proposal, 78 414 The Commission did not propose to apply to 409 40 FR 11560 (March 12, 1975). FR at 75707; 2016 Supplemental Position Limits excluded commodities any of the additional 410 39 FR 39731 (Nov. 11, 1974). Proposal, 81 FR at 38505. standards in the general definition applicable to 411 40 FR 11560 (Mar. 12, 1975). 413 CL–BG Group–59656 at 9. hedges of a physical commodity.

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recognized price risk.415 Once a bona General Definition: The Commission’s phrase ‘‘represents a substitute for fide hedge is implemented, the hedged proposed general definition for physical transactions taken or to be taken at a entity should be price insensitive commodity derivative contracts, later time in a physical marketing because any change in the value of the mirroring CEA section 4a(c)(2)(a), channel.’’ Because the definition in underlying physical commodity is offset specifies a bona fide hedging position is § 1.3(z)(1) includes the adverb by the change in value of the entity’s one that: ‘‘normally,’’ the Commission interpreted physical commodity derivative position. (a) Temporary substitute test: that provision to be merely a temporary Because a firm that has hedged its represents a substitute for transactions substitute criterion, rather than a test. price exposure is price neutral in its made or to be made or positions taken Accordingly, the Commission overall physical commodity position, or to be taken at a later time in the previously granted risk management the hedged entity should have little physical marketing channel; exemptions for persons to offset the risk incentive to manipulate or engage in (b) Economically appropriate test: is of swaps and other financial other abusive market practices to affect economically appropriate to the instruments that did not represent prices. By contrast, a party that reduction of risks in the conduct and substitutes for transactions or positions maintains a derivative position that management of a commercial enterprise; to be taken in a physical marketing leaves it with exposure to price changes and channel. However, given the statutory (c) Change in value requirement: is not neutral as to price and, therefore, change in direction, positions that arises from the potential change in the may have an incentive to affect prices. reduce the risk of such speculative value of assets, liabilities, or services, Further, the intention of a hedge swaps and financial instruments would whether current or anticipated. exemption is to enable a commercial no longer meet the requirements for a entity to offset its price risk; it was In addition to the above, the Commission’s proposed general bona fide hedging position under the never intended to facilitate taking on proposed definition in § 150.1. additional price risk. definition, mirroring CEA section Comments Received: A number of The Commission recognizes there are 4a(c)(2)(B)(i), also recognizes a bona fide commenters urged the Commission not complexities to analyzing the various hedging position that: to deny risk-management exemptions commercial price risks applicable to (d) Pass-through swap offset: reduces for financial intermediaries who utilize particular commercial circumstances in risks attendant to a position resulting referenced contracts to offset the risks order to determine whether a hedge from a swap that was executed opposite arising from the provision of diversified, exemption is warranted. These a counterparty for which the transaction commodity-based returns to the complexities have led the Commission, would qualify as a bona fide hedging intermediaries’ clients.418 from time to time, to issue rule changes, transaction under the general definition interpretations, and exemptions. above. However, other commenters noted the The Commission proposed another Congress, too, has periodically revised ‘‘proposed rules properly refrain from provision, based on the statutory the Federal statutes applicable to bona providing a general exemption to standards, to recognize as a bona fide a fide hedging, most recently in the Dodd- financial firms seeking to hedge their position that: financial risks from the sale of Frank Act. (e) Pass-through swap: is itself the 416 commodity-related instruments such as CEA section 4a(c)(1), as re- swap executed opposite a pass-through index swaps, Exchange Traded Funds designated by the Dodd-Frank Act, swap counterparty, provided that the (ETFs), and Exchange Traded Notes authorizes the Commission to define risk of that swap has been offset. (ETNs),’’ because such instruments are bona fide hedging positions ‘‘consistent The Commission received a number inherently speculative and may with the purposes of this Act.’’ CEA of comments on the December 2013 overwhelm the price discovery function section 4a(c)(2), as added by the Dodd- Position Limits Proposal and the 2016 of the derivative market.419 Frank Act, provides new requirements Supplemental Proposal. Those for the Commission to define bona fide concerning the incidental test and the Commission Reproposal: The hedging positions in physical orderly trading requirement are Reproposal would retain the temporary commodity derivatives ‘‘[f]or the discussed above. Others are discussed substitute test, as proposed. The purposes of implementation of [CEA below. Commission interprets the statutory section 4a(a)(2)] for contracts of sale for temporary substitute test as more future delivery or options on the i. Temporary Substitute Test and Risk stringent than the temporary substitute contracts of commodities [traded on Management Exemptions criterion in § 1.3(z)(1); 420 that is, the DCMs].’’ 417 Proposed Rule: The temporary Commission views the statutory test as substitute test is discussed in the 2013 narrowing the standards for a bona fide 415 December 2013 Position Limits Proposal, 78 Position Limits Proposal at 75708–9. As hedging position. Further, the FR at 75702–3. the Commission noted in the proposal, 416 7 U.S.C. 6a(c)(1). Commission believes that retaining a 417 The Reproposal provides for a phased it believes that the temporary substitute risk management exemption for swap approach to implementation of CEA section test is a necessary condition for intermediaries, without regard to the 4a(a)(2), to reduce the potential administrative classification of positions in physical purpose of the counterparty’s swap, burden on exchanges and market participants, and commodities as bona fide hedging would fly in the face of the statutory to facilitate adoption of monitoring policies, procedures and systems. See, e.g., December 2013 positions. The proposed test mirrors the restrictions on pass-through swap Position Limits Proposal, 78 FR at 75725. The first statutory test in CEA section offsets (requiring the position of the phase of implementation of CEA section 4a(a)(2), in 4a(c)(2)(a)(i). The statutory test does not pass-through swap counterparty to this Reproposal, initially sets federal limits on 25 include the adverb ‘‘normally’’ to core referenced futures contracts and their associated referenced contracts. The Commission is modify the verb ‘‘represents’’ in the 418 See, e.g., CL–FIA–59595 at 5, 34–35; CL– establishing a definition of bona fide hedging AMG–59709 at 2, 12–15; and CL–CME–59718 at position for physical commodities in connection purposes of exchange-set limits in contracts that are 67–69. with its implementation of CEA section 4a(a)(2), not yet subject to a federal limit. See below 419 See, e.g., CL–Sen. Levin–59637 at 8, and CL– applicable to federal limits. However, the regarding guidance and requirements under Better Markets–60325 at 2. Reproposal does not mandate adoption of that reproposed § 150.5 for exchange-set limits in 420 See December 2013 Position Limits Proposal, definition of a bona fide hedging position for physical commodities. 78 FR at 75709.

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qualify as a bona fide hedging spot month), and provided such should be deemed ‘‘economically transaction).421 exemptions are granted prior to the appropriate.’’ 430 Commenters suggested Proposed Rule on risk management compliance date of the final rule, once that a broader view of the types of risks exemption grandfather provisions: The adopted, and apply only to pre-existing considered to be ‘‘economically Commission proposed in § 150.2(f) and financial instruments as of the effective appropriate’’ should not be perceived as § 150.3(f) to grandfather previously date of that final rule. These two being at odds with the Commission’s granted risk-management exemptions, changes are intended to reduce the view of ‘‘price risk’’ because all of these as applied to pre-existing positions.422 potential for market disruption by risks can inform and determine price, Comments Received: Commenters forced liquidations, since a market noting that firms evaluate different risks requested that the Commission extend intermediary would continue to be able and determine a price impact based on the grandfather relief to permit pre- to offset risks of pre-effective-date a combination of their likelihood of existing risk management positions to financial instruments, pursuant to occurrence and the price impact in the be increased after the effective date of a previously-granted federal or exchange event of occurrence.431 limit.423 Commenters also requested risk management exemptions. Commission Reproposal: The that the Commission permit the risk The Reproposal clarifies that the Reproposal does not broaden the associated with a pre-existing position Commission will continue to recognize interpretation of the phrase to be offset by a futures position in a the offset of the risk of a pre-existing ‘‘economically appropriate.’’ The deferred contract month, after the financial instrument as bona fide using Commission notes that it has provided liquidation of an offsetting position in a a derivative position, including a interpretations and guidance over the nearby futures contract month.424 deferred derivative contract month years as to the meaning of Some commenters urged the entered after the effective date of a final ‘‘economically appropriate.’’ 432 The Commission not to deny risk- rule, provided a nearby derivative Commission reiterates its view that, to management exemptions for financial contract month is liquidated. However, satisfy the economically appropriate test intermediaries who utilize referenced under the Reproposal, such relief will and the change in value requirement of contracts to offset the risks arising from not be extended to an increase in CEA section 4a(c)(2)(A)(iii), the purpose the provision of diversified commodity- positions after the effective date of a of a bona fide hedging position must be based returns to the intermediaries’ limit, because that appears contrary to to offset price risks incidental to a clients.425 Congressional intent to narrow the commercial enterprise’s cash In contrast, other commenters noted definition of a bona fide hedging operations.433 that the proposed rules ‘‘properly position, as discussed above. The Commission notes that an refrain’’ from providing a general exchange is permitted to recognize non- exemption to financial firms seeking to ii. Economically Appropriate Test enumerated bona fide hedging positions hedge their financial risks from the sale Commission proposal: The under the process of § 150.9, discussed of commodity-related instruments such economically appropriate test is below, subject to assessment of the as index swaps, ETFs, and ETNs discussed in the 2013 Position Limits particular facts and circumstances, because such instruments are Proposal at 75709–10. The proposed where price risk arises from other types ‘‘inherently speculative’’ and may economically appropriate test mirrors of risk. The Reproposal does not, overwhelm the price discovery function the statutory test, which, in turn, however, allow the exchanges to utilize of the derivative market.426 Another mirrors the test in current § 1.3(z)(1). unbounded discretion in interpreting commenter noted, because commodity Comments received: Several ‘‘economically appropriate’’ in such index contracts are speculative, the commenters requested that the recognitions. The Commission believes Commission should not provide a Commission broadly interpret the that such a broad delegation is not regulatory exemption for such phrase ‘‘economically appropriate’’ to authorized by the CEA and, in the contracts.427 include more than just price risk, stating Commission’s view, would be contrary Commission Reproposal: The that there are other types of risk that are to the reasonably certain statutory Reproposal clarifies and expands the economically appropriate to address in standard of the economically relief in § 150.3(f) (previously granted the management of a commercial appropriate test. Further, as explained exemptions) by: (1) Clarifying that such enterprise including operational risk, in the discussion of § 150.9, exchange previously granted exemptions may liquidity risk, credit risk, locational risk, determinations will be subject to the apply to pre-existing financial and seasonal risk.428 Commission’s de novo review. instruments that are within the scope of Commenters suggested that if the Comments on gross vs. net hedging: A existing § 1.47 exemptions, rather than Commission objected to expanding its number of commenters requested that only to pre-existing swaps; and (2) interpretation of ‘‘economically the Commission recognize as bona fide recognizing exchange-granted non- appropriate’’ risks, then the Commission both ‘‘gross hedging’’ and ‘‘net enumerated exemptions in non-legacy should allow the exchanges to utilize hedging,’’ without regard to overall commodity derivatives outside of the discretion in their interpretations of the risk.434 Commenters generally spot month (consistent with the economically appropriate test.429 requested, as ‘‘gross hedging,’’ that an Commission’s recognition of risk Another commenter believed that the enterprise should be permitted the management exemptions outside of the Commission should provide ‘‘greater flexibility to use either a long or short flexibility’’ in the various bona fide derivative to offset the risk of any cash 421 See CEA section 4a(c)(2)(B)(i). hedging tests, because hedging that position, identified at the discretion of 422 See December 2013 Position Limits Proposal, reduces all the various types of risk 78 FR at 75734–5 and 75739–41. 430 CL–ICE–60929 at 10. 423 See, e.g., CL–AMG–59709 at 2, 18. 428 See, e.g., CL–NCGA–NGSA–60919 at 4, CL– 431 See, e.g., CL–ADM–60934 at 2–6, and CL– 424 See, e.g., id. at 18–19. EEI–EPSA–60925 at 14, CL–API–60939 at 2, CL– API–60939 at 2. 425 CL–FIA–59595 at 5,34–35; CL–AMG–59709 at CMC–60950 at 4–5, CL–NCFC–60930 at 2, CL– 432 See December 2013 Position Limits Proposal, 2, 12–15; and CL–CME–59718 at 67–69. ADM–60934 at 2–6, CL–FIA–60937 at 5 and 20, CL– 78 FR at 75709–10. 426 CL–Sen. Levin–59637 at 8; and CL–Better NGFA–60941 at 4, and CL–Associations–60972 at 2. 433 Id. at 75710. Markets–60325 at 2. 429 See, e.g., CL–CMC–60950 at 4–5, and CL– 434 See, e.g., CL–MGEX–60936 at 11, CL–CMC– 427 CL–CMOC–59720 at 4–5. Olam–59946 at 2–4. 60950 at 6, CL–Associations–60972 at 2.

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the commercial enterprise, irrespective Commission noted in 1977 that: ‘‘The systems in order to manage risk this of the commercial enterprise’s net cash previous statutory definition of bona way. The commenter requests that the market position.435 For example, a fide hedging transactions or positions Commission instead recognize that commenter contended that a contained in section 4a of the Act before current risk management tools are used commercial enterprise should be able to amendment by the CFTC Act and the effectively for positions that are below hedge fixed-price purchase contracts present definition permit persons to current limits and those tools remain (e.g., with a short futures position), classify as hedging any purchase or sale effective above position limit levels as without regard to the enterprise’s fixed- for future delivery which is offset by well.445 price sales contracts, even if such a their gross cash position irrespective of Commission Reproposal: The short derivative position may increase their net cash position.’’ 440 However, Reproposal declines to assess the bona the enterprise’s risk.436 One commenter under a full reading of that 1977 fides of a position based solely on stated that the ‘‘new proposed proposal, the Commission made clear whether a commercial enterprise can interpretation’’ of the ‘‘economically that gross hedging was appropriate in identify any particular cash position appropriate’’ test requires a commercial circumstances where ‘‘net cash within an aggregated person, the risks of enterprise to include, and consider for positions do not necessarily measure which such derivative position offsets. purposes of bona fide hedging, portions total risk exposure due to differences in The Commission believes that such an of its portfolio it would not otherwise the timing of cash commitments, the approach would run counter to the consider in managing risk.437 Another location of stocks, and differences in aggregation rules in § 150.4 and would commenter did not agree that market grades or types of the cash permit an enterprise to cherry pick cash participants should be required to commodity.’’ 441 Thus, the 1977 market exposures to justify exceeding calculate risk on a consolidated basis, proposal noted the Commission ‘‘does position limits, with either a long or because this approach would require not intend at this time to alter the short derivative position, even though commercial entities to build out new provisions of the present definition with such derivative position increases the systems. As an alternative, that respect to the hedging of gross cash enterprise’s risk. commenter requests the Commission position.’’ 442 At the time of the 1977 The Commission views a derivative recognize current risk management proposal, the ‘‘present definition’’ had position that increases an enterprise’s tools.438 been promulgated in 1975 by the risk as contrary to the plain language of Commission Reproposal: The Administrator of the Commodity CEA section 4a(c) and the Commission’s Reproposal retains the Commission’s Exchange Authority based on the bona fide hedging definition, which interpretation, as proposed, of statutory definition; and the requires that a bona fide hedging economically appropriate gross hedging: Administrator had interpreted the position ‘‘is economically appropriate to that in circumstances where net hedging statutory definition to recognize gross the reduction of risks in the conduct does not measure all risk exposures, an and management of a commercial hedging as bona fide in the context of 446 enterprise may appropriately enter into, a merchant who ‘‘may hedge his fixed- enterprise.’’ If a transaction that increases a for example, a calendar month spread price purchase commitments by selling commercial enterprise’s overall risk position as a gross hedge. A number of futures and at the same time hedge his should be considered a bona fide comments misconstrued the fixed-price sale commitments by buying hedging position, this would result in Commission’s historical interpretation futures,’’ rather than hedging only his position limits not applying to certain of gross and net hedging. The net position.443 Commission has not recognized Comments on specific, identifiable positions that should be considered speculative. For example, assume an selective identification of cash positions risk: Commenters requested the enterprise has entered into only two to justify a position as bona fide; rather, Commission consider as economically cash forward transactions and has no the Commission has permitted a regular appropriate any derivative position that inventory. The first cash forward practice of excluding certain a business can reasonably demonstrate transaction is a purchase contract (for a commodities, products, or by-products, reduces or mitigates one or more particular commodity for delivery at a in determining an enterprise’s risk specific, identifiable risks related to particular later date). The second cash position.439 As proposed, the individual or aggregated positions or forward transaction is a sales contract Reproposal requires such excluded transactions, based on its own business (for the same commodity for delivery on commodities to be de minimis or judgment and risk management policies, the same date as the purchase contract). difficult to measure, because a market whether risk is managed enterprise- Under the terms of the cash forward participant should not be permitted to wide or by legal entity, line of business, contracts, the enterprise may take ignore material cash market positions or profit center.444 One commenter delivery on the purchase contract and and enter into derivative positions that disagreed with what it called a ‘‘one- re-deliver the commodity on the sales increase risk while avoiding a position size-fits-all’’ risk management paradigm contract. Such an enterprise does not limit restriction; rather, such a market that requires market participants to have a net cash market position that participant’s speculative activity must calculate risk on a consolidated basis exposes it to price risk, because it has remain below the level of the because this approach would require both purchased and sold the same speculative position limit. commercial entities to build out new Note, however, under a partial commodity for delivery on the same date (such as cash forward contracts for reading of a preamble to a 1977 440 42FR 14832 at 14834 (Mar. 16, 1977). proposal, the Commission has appeared 441 Id. the same cargo of Brent crude oil). The to recognize gross hedging, without 442 Id. enterprise could establish a short regard to net risk, as bona fide; the 443 See, Letter from Roger R. Kauffman, Adm’r, derivative position that would offset the Commodity Exchange Authority, to Reid risk of the purchase contract; however, Bondurant, Cotton Exchange (Feb. 13, 1959) 435 that would increase the enterprise’s See, e.g., CL–Olam–59658 at 4–6. (emphasis added), cited in CL–Olam–59658 at 5. 436 price risk. Alternatively, the enterprise CL–FIA–59595 at 20–21. 444 See, e.g., CL–API–59694 at 4, CL–IECAssn– 437 CL–Working Group–60947 at 15. 59679 at 10–11, CL–APGA–59722 at 9–10, CL– 438 CL–CMC–60950 at 5. NCFC–59942 at 5, CL–EEI–EPSA–59602 at 15, and 445 CL–CMC–60950 at 5. 439 See, e.g., instructions to Form 204. CL–EEI-Sup–60386 at 7. 446 CEA section 4a(c)(2)(A)(ii).

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could establish a long derivative the Reproposal does not recognize as a meet the economically appropriate position that would offset the risk of the bona fide hedging position a derivative test.452 Rather, the Commission will sales contract; however, that would position that offsets either inputs or permit exchanges, under § 150.9, to increase the enterprise’s price risk. If outputs in a processing operation, make a facts-and-circumstances price risk reduction at the level of the absent additional facts and determination as to whether to aggregate person is not a requirement of circumstances. The Commission recognize such and other anticipatory a bona fide hedging position, such an reiterates its view that, as explained in hedges as non-enumerated bona fide enterprise could establish either a long the Commission’s 2013 Position Limits hedges, consistent with the or short derivative position, at its Proposal, by way of example, processing Commission’s recognition ‘‘that there election, and claim an exemption from by a soybean crush operation or a fuel can be a gradation of probabilities that position limits for either derivative blending operation may add relatively an anticipated transaction will position, ostensibly as a bona fide little value to the price of the input occur.’’ 453 commodity. In such circumstances, it hedging position. If either such position iii. Change in Value Requirement could be recognized as bona fide, would be economically appropriate for position limits would simply not apply the processor or blender to offset the Commission proposal: To satisfy the to such an enterprise’s derivative price risks of both the unfilled change in value requirement, the position, even though the enterprise had anticipated requirement for the input hedging position must arise from the no price risk exposure to the commodity commodity and the unsold anticipated potential change in the value of: (I) prior to establishing such derivative production; such a hedge would, for Assets that a person owns, produces, position and created price risk exposure example, fully lock in the value of manufactures, processes, or to the commodity by establishing the soybean crush processing.449 However, merchandises or anticipates owning, derivative position. Based on the under such circumstances, merely producing, manufacturing, processing, Commission’s experience and expertise, entering an outright derivative position or merchandising; (II) liabilities that a it believes that such a result (entering (i.e., either a long position or a short person owes or anticipates incurring; or either a long or short derivative position, at the processor’s election) (III) services that a person provides, appears to be risk increasing, since the purchases, or anticipates providing or position, whichever the market 454 participant elects) simply cannot be price risk of such outright position purchasing. The proposed definition recognized as a legitimate risk reduction appears greater than, and not offsetting incorporated the potential change in of, the price risk of anticipated value requirement in current that should be exempt from position 455 limits; rather, such a position should be processing and, thus, such outright § 1.3(z)(1). This provision largely mirrors the provision of CEA section considered speculative for purposes of position would not be economically 4a(c)(2)(A)(iii).456 position limits. appropriate to the reduction of risks. Comments on change in value: One The Commission notes that a Comments on economically commenter urged a more narrow commercial enterprise that wishes to appropriate anticipatory hedges: definition of bona fide hedging that separately manage its operations, in Commenters requested the Commission restricts exemptions to ‘‘commercial separate legal entities, may, under the recognize derivative positions as entities that deal exclusively in the aggregation requirements of § 150.4, economically appropriate to the production, processing, refining, establish appropriate firewalls and file a reduction of certain anticipatory risks, storage, transportation, wholesale or notice for an aggregation exemption, such as irrevocable bids or offers.450 retail distribution, or consumption of because separate legal entities with Commission Reproposal: The physical commodities.’’ 457 However, appropriate firewalls are treated as Commission has a long history of numerous commenters urged the separate persons for purposes of providing for the recognition, in Commission to enumerate new position limits. The Commission § 1.3(z)(2), as enumerated bona fide exemptions consistent with the change explained that an aggregation exemption hedging positions, of anticipatory in value requirement, such as for was appropriate in circumstances where hedges for unfilled anticipated requirements and unsold anticipated merchandising, as discussed below. the risk of coordinated activity is Commission Reproposal: The 447 production, under the process of mitigated by firewalls. Reproposal retains the change in value Comments on processing hedge: A § 1.48.451 The Reproposal continues to requirement as proposed, which mirrors commenter requested the Commission enumerate those two anticipatory CEA section 4a(c)(2)(A)(iii). Rather than recognize, as bona fide, a long or short hedges, along with two new anticipatory further restrict the types of commercial derivative position that offsets either hedges for anticipated royalties and entities who may avail themselves of a inputs or outputs in a processing contracts for services, as discussed operation, based on the business below. The Commission did not propose an 452 December 2013 Position Limits Proposal, 78 judgment of the commercial enterprise FR at 75720. that it might not be an appropriate time enumerated exemption for binding, 453 Id. at 75719. to hedge both inputs and outputs, and irrevocable bids or offers as the 454 Id. at 75710. requested the Commission withdraw the Commission believes that an analysis of 455 17 CFR 1.3(z) (2010). processing hedge example on pages the facts and circumstances would be 456 As noted in the December 2013 Position 75836–7 of the 2013 Position Limits necessary prior to recognizing such an Limits Proposal, 78 FR at 75710, CEA section exemption. Consequently, the 4a(c)(2)(A)(iii)(II) uses the phrase ‘‘liabilities that a Proposal (proposed example 5 in person owns or anticipates incurring.’’ The Appendix C to part 150).448 Reproposal does not provide for such an Commission interprets the word ‘‘owns’’ to be a Commission Reproposal: For the enumerated exemption. However, the typographical error, and interprets the word reasons discussed above regarding gross Commission withdraws the view that a ‘‘owns’’ to be ‘‘owes.’’ A person may owe on a binding, irrevocable bid or offer fails to liability, and may anticipate incurring a liability. If hedging and specific, identifiable risks, a person ‘‘owns’’ a liability, such as a debt instrument issued by another, then such person 447 See discussion under section II.B.3 (Criteria 449 December 2013 Position Limits Proposal, 78 owns an asset. Because assets are included in CEA for Aggregation Relief in Rule 150.4(b)(2)(i)) of the FR at 75709. section 4a(c)(2)(A)(iii)(I), the Commission interprets 2016 Final Aggregation Rule. 450 See, e.g., CL–Cargill–59638 at 2–4. ‘‘owns’’ to be ‘‘owes.’’ 448 CL–Cargill–59638 at 2–4. 451 17 CFR 1.3(z)(2) and 1.48 (2010). 457 CL–PMAA–NEFI–60952 at 2.

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bona fide hedging exemption under the positions in commodity derivative related to the fluctuations in value of change in value requirement, the contracts as hedges of storage or whatever would be the particular assets Commission notes that the reproposed transportation of the commodity (e.g., tractors, combines, silos, semi- definition also reflects the statutory underlying such contracts; and (2) trucks, rail cars, pipelines) to be used to requirement under the temporary positions that hedge the value of assets produce, process, store or transport the substitute test, that the hedging position owned, or anticipated to be owned, used commodity underlying the derivative. be a substitute for a position taken or to to produce, process, store or transport Comments on unfixed price be taken in a physical marketing the commodity underlying the commitments: Commenters channel, either by the market derivative.461 recommended the Commission participant or the market participant’s Commission Reproposal: The recognize, as a bona fide hedge, the pass-through swap counterparty. Commission notes that an exchange, fixing of the price of an unfixed price Comments on anticipatory under reproposed § 150.9, as discussed commitment, for example, to reduce the merchandising or storage: Numerous below, is permitted to recognize merchant’s operational risk and commenters asserted the Commission anticipated merchandising or potentially to acquire a commodity should recognize anticipatory anticipated purchase and storage, as through the delivery process on a merchandising as a bona fide hedge, as potential non-enumerated bona fide physical-delivery futures contract.463 included in CEA section 4a(c)(A)(iii), hedging positions, subject to assessment Another commenter provided an such as (1) a merchant desiring to lock of the particular facts and example of a preference to shift unfixed- in the price differential between an circumstances, including such price exposure on cash commitments unfixed price forward commitment and information as the market participant’s from daily index prices to the first-of- an anticipated offsetting unfixed price activities (taken or to be taken) in the month price under the NYMEX Henry forward commitment, where there is a physical marketing channel and Hub Natural Gas core referenced futures reasonable basis to infer that an arrangements for storage facilities. contract.464 A commenter suggested that offsetting transaction was likely to occur While the Commission previously the interpretation of a fixed price (such as in anticipation of shipping), (2) discussed its doubt that storage hedges contract should include ‘‘basis priced a bid or offer, where there is a generally will meet the economically contracts which are purchases or sales reasonably anticipated risk that such bid appropriate test, because the value with the basis value fixed between the or offer will be accepted, or (3) an fluctuations in a calendar month spread buyer and the seller against a prevailing anticipated purchase and/or anticipated in a commodity derivative contract will futures’’ contract; the commenter noted storage of a commodity, prior to likely have at best a low correlation such basis risk could be hedged with a anticipated merchandising (or usage).458 with value fluctuations in expected calendar month spread to lock in their Commenters recommended the returns (e.g., rents) on unfilled storage purchase and sale margins.465 Another Commission recognize unfilled storage capacity,462 the Commission now commenter requested the Commission capacity as the basis of a bona fide withdraws that discussion of doubt and, explicitly recognize index price hedge of, either (1) anticipated rents as reproposed, would review exchange- transactions as appropriate for a bona (e.g., a type of anticipated asset or granted non-enumerated bona fide fide hedging exemption, citing concerns liability), (2) anticipated merchandising, hedging exemptions for storage with an that the price of an unfixed price or (3) anticipated purchase and storage open mind. forward sales contract may fall below 459 prior to usage. By way of example, The Commission does not express a the cost of production.466 one commenter contended anticipated view as this time on one commenter’s Commission Reproposal: The rent on a storage asset is like an option assertion that the anticipated rent on a Commission affirms its belief that a and the appropriate hedge position storage asset is like an option; the reduction in a price risk is required 460 should be dynamically adjusted. Also commenter did not provide data under the economically appropriate test by way of example, another commenter regarding the relationship between of CEA section 4a(c)(2)(A)(ii); consistent suggested enumerated hedges should calendar spreads and the ‘‘profitability with the economically appropriate test, include (1) offsetting long and short of filling storage.’’ The Commission a potential change in value (i.e., a price notes that, under the Reproposal, an risk) is required under CEA section 458 See, e.g., CL–FIA–59595 at 30–31, CL–FIA– exchange could evaluate the particulars 60303 at 6, CL–EEI–EPSA–59602 at 17–18, CL–EEI– 4a(c)(2)(A)(iii). In both the reproposed 59945 at 6, CL–CMC–60950 at 6, CL–CMC–60391 at of such a situation in an application for and proposed definitions of bona fide 4–5, CL–CMC–60318 at 5, CL–CMC–59634 at 3, 20– a non-enumerated hedging position. hedging position, the incidental test 22, CL–Cargill–59638 at 2–4, CL–ADM–59640 at 2– Similarly, as reproposed, an exchange would require a reduction in price risk. 3, CL–Olam–59946 at 4, CL–BG Group–59656 at could evaluate the particulars of other 10–11, CL–ASCA–59667 at 2, CL–NGSA–60379 at Although the Reproposal deletes the 5, CL–NGSA–59674 at 2, 18–24, CL–Working situations, such as a commenter’s incidental test from the first paragraph Group–60383 at 15, CL–Working Group–59937 at example of storage or transportation of the bona fide hedging position 5–6, 10–12, CL–Working Group–59656 at 16–18, hedges. The Commission notes that it is definition (as discussed above), the 21–23, 26, CL–API–59694 at 5–6, CL–MSCGI–59708 not clear from the comments how the at 2–3, 18–20, CL–CME–59718 at 56–57, 59, CL– Commission notes that it interprets risk Armajaro–59729 at 1, CL–AFBF–59730 at 2, CL– value fluctuations of calendar month or in the economically appropriate test as NCFC–59942 at 2–4, CL–ICE–60310 at 4, CL–ICE– location differentials are related to the price risk, and does not interpret risk to 60387 at 9, CL–ISDA/SIFMA–59611 at 37–38, CL– fluctuations in value of storage or include operational risk. Interpreting COPE–59662 at 15–16, and CL–GSC–59703 at 3–4. transportation. Regarding a commenter’s 459 See, e.g., CL–Cargill–59638 at 2–4, CL–CME– risk to include operational risk would 59718 at 57–58, CL–NEM–59586 at 4, CL–FIA– examples of assets owned or anticipated broaden the scope of a bona fide 59595 32–33, CL–ISDA/SIFMA–59611 at 4, CL– to be owned, it is not clear how the hedging position beyond the CMC–59634 at 5, CL–LDC–59643 at 2, CL–BG value fluctuations of whatever would be Commission’s historical interpretation Group-59656 at 10, CL–COPE–59950 at 5, CL– the relevant hedging position (e.g., long, COPE–59662 at 14–15, CL—Working Group–59693 at 23–26, CL–GSC–59703 at 2–3, CL–AFBF–59730 short, or calendar month spread) are 463 See, e.g., CL–Olam–59946 at 4, and CL–NCFC at 2, CL–SEMP–59926 at 6–7, CL–EDF–60398 at 8– –59942 at 2–4. 9, CL–EDF–59961 at 2–3, CL–Andersons–60256 at 461 CL–EEI–EPSA–60925 at 13. 464 CL–NCGA–NGSA–60919 at 4–5. 1–3, and CL–SEMP–60384 at 4–5. 462 December 2013 Position Limits Proposal, 78 465 CL–NGFA–60941 at 4. 460 CL–ISDA/SIFMA–59611, Annex B at 7. FR at 75718. 466 CL–NCGA–NGSA–60919 at 5.

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and may have adverse impacts that are the event the spot (or nearby) month position.471 This proposal mirrors the inconsistent with the policy objectives price is higher than the deferred requirements in CEA section 4a(c)(B)(i). of limits in CEA section 4a(a)(3)(B). contract month price (referred to as The proposal also clarified that the The Commission has consistently backwardation, and characteristic of a swap itself is a bona fide hedging required a bona fide hedging position to spot cash market with supply position to the extent it is offset. be a position that is shown to reduce shortages), because such a calendar However, the Commission proposed price risk in the conduct and month futures spread would lock in a that it would not recognize as bona fide management of a commercial loss and may be indicative of an attempt hedges an offset in physical-delivery enterprise.467 By way of background, the to manipulate the spot (or nearby) contracts during the shorter of the last Commission notes, in promulgating the futures price. five days of trading or the time period definition of bona fide hedging position Regarding the risk of an unfixed price for the spot month in such physical- in § 1.3(z), it explained that a bona fide forward sales contract falling below the delivery commodity derivative contract hedging position ‘‘must be economically cost of production, the Reproposal (the ‘‘five-day’’ rule, discussed further appropriate to risk reduction, such risks enumerates a bona fide hedging below). must arise from operation of a exemption for unsold anticipated Comments received: As noted above, commercial enterprise, and the price production; the Commission clarifies, as commenters recommended that the fluctuations of the futures contracts discussed below, that such an Commission’s bona fide hedging used in the transaction must be enumerated hedge is available definition should reflect the standards substantially related to fluctuations of regardless of whether production has in CEA section 4a(c). One commenter the cash market value of the assets, suggested that the Commission broaden 468 been sold forward at an unfixed (that is, liabilities or services being hedged.’’ index) price. the pass-through swap offset provisions As noted above, the Dodd-Frank Act Comments on cash and carry: to accommodate secondary pass-through added CEA section 4a(c)(2), which Commenters requested the Commission transactions among affiliates within a copied the economically appropriate corporate organization to make ‘‘the test from the Commission’s definition in enumerate, as a bona fide hedging position, a ‘‘cash and carry’’ trade, most efficient and effective use of their § 1.3(z)(1). Thus, the Commission 472 where a market participant enters a existing corporate structures.’’ believes it is reasonable to interpret that Commission Reproposal: The statutory standard in the context of the nearby long futures position and a deferred short futures position, with the Commission agrees that the bona fide Commission’s historical interpretation hedging definition, in general, and the of § 1.3(z). intention to take delivery and carry the commodity for re-delivery.469 pass-through swap provision, in While the Commission has particular, should more closely reflect Commission Reproposal: The enumerated a calendar month spread as the statutory standards in CEA section Reproposal does not propose to a bona fide hedge of offsetting unfixed- 4a(c). Under the proposed definition, a enumerate a cash and carry trade as a price cash commodity sales and market participant who reduced the risk bona fide hedging position. A cash and purchases, the Reproposal will permit of a swap, where such swap was a bona carry trade appears to fail the temporary an exchange, under reproposed § 150.9, fide hedging position for that market substitute test, since such market to conduct a facts-and-circumstances, participant, would not have received participant is not using the derivative case-by-case review to determine recognition for the swap offset as a bona contract as a substitute for a position whether a calendar month spread is fide hedging position, as this provision taken or to be taken in the physical appropriately recognized as a bona fide in CEA section 4a(c)(2)(B)(ii) was not marketing channel. The long futures hedging position for only a cash mirrored in the proposed definition.473 commodity purchase or sales contract. position in the cash and carry trade is To adhere more closely to the statutory For example, assume a merchant enters in lieu of a purchase in the cash market. standards, the Reproposal recognizes into an unfixed-price sales contract (e.g., In the 2016 Supplemental Proposal, the such offset as a bona fide hedging priced at a fixed differential to a Commission asked whether, and subject position. Consistent with the proposal deferred month futures contract), and to what conditions (e.g., potential for offset of a pass-through swap, the immediately enters into a calendar facilitation of liquidity for a bona fide Reproposal imposes a five-day rule month spread to reduce the risk of the hedger of inventory), a cash and carry restriction on the offset in a physical- fixed basis moving adversely. It may not position might be recognized by an delivery contract of a swap used as a be economically appropriate to exchange as a spread exemption under bona fide hedge; however, as recognize as bona fide a long futures § 150.10, subject to the Commission’s de reproposed, an exchange listing a position in the spot (or nearby) month novo review.470 This issue is discussed physical-delivery contract may and a short futures position in a under § 150.10, regarding exchange recognize, on a case-by-case basis, such deferred calendar month matching the recognition of spread exemptions. merchant’s cash delivery obligation, in offset as a non-enumerated bona fide iv. Pass-Through Swap Offsets and hedging position pursuant to the 467 The Commission distinguishes operational Offsets of Hedging Swaps process in reproposed § 150.9. The Reproposal retains and clarifies risk, which may arise from a potential failure of a Commission proposal: The counterparty to a cash market forward transaction, in subparagraph (ii)(A) that the bona from price risks in the conduct and management of Commission proposed to recognize as fides of a pass-through swap may be a commercial enterprise. bona fide a commodity derivative 468 42 FR 14832 at 14833 (March 16, 1977) contract that reduces the risk of a 471 December 2013 Position Limits Proposal, 78 (proposed definition). The Commission also position resulting from a swap executed adopted the incidental test (requiring that the FR at 75710. ‘‘purpose is to offset price risks incidental to opposite a counterparty for which the 472 CL–NCGA–NGSA–60919 at 8–9. commercial cash or spot operations’’). 42 FR 42748 position at the time of the transaction 473 For example, assume a market participant at 42751 (Aug. 24, 1977) (final definition). would qualify as a bona fide hedging entered a swap as a bona fide hedging position and, Previously, the Secretary of Agriculture subsequently, offset (that is, lifted) that hedge using promulgated a definition of bona fide hedging a futures contract. The Commission’s original position that required a purpose ‘‘to offset price 469 See, e.g., CL–Armajaro–59729 at 2. proposal would not have recognized the lifting of risks incidental to commercial cash or spot 470 2016 Supplemental Position Limits Proposal, the hedge as a bona fide hedging transaction, operations.’’ 40 FR 11560 at 11561 (Mar. 12, 1975). 81 FR at 38479. although the statute does.

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determined at the time of the the definition, to also recognize as bona channel and such participant’s estimate, transaction by the intermediary. The fide any position that has been in good faith, of its reasonably expected clarification is intended to reduce the otherwise recognized as a non- activities to be taken in the physical burden on such intermediary of enumerated bona fide hedging position marketing channel. otherwise needing to confirm the by either a designated contract market In a clarifying change, the continued bona fides of its counterparty or a swap execution facility, each in Commission notes that the Reproposal over the life of the pass-through swap. accordance with § 150.9(a), or by the has re-designated the provisions In addition, the Reproposal retains, as Commission.475 proposed in subparagraph (2)(i)(D), in proposed, application of the five-day Comments received: Commenters new subparagraph 2(iii), regarding the rule to pass-through swap offsets in a objected to the requirement for a additional requirements for recognition physical-delivery contract. However, the position to be specifically enumerated of a position in a physical commodity Commission notes that under the in order to be recognized as bona fide, contract as a bona fide hedging position. Reproposal, an exchange listing a noting that the enumerated requirement Concurrent with this re-designation, the physical-delivery contract may is not supported by the legislative Commission notes the Reproposal re- recognize, on a case-by-case basis, a history of the Dodd-Frank Act, conflicts organizes, also for clarity, the pass-through swap offset (in addition to with longstanding Commission practice application of the five-day rule to pass- the offset of a swap used as a bona fide and precedent, and may be overly through swaps and hedging swaps in hedge), during the last five days of restrictive due to the limited set of subparagraph (2)(iii)(B), as discussed trading in a spot month, as a non- specific enumerated hedges.476 Other above.478 commenters recommended that the enumerated bona fide hedge pursuant to 3. Enumerated Hedging Positions the process in reproposed § 150.9. Commission expand the list of Further, the Reproposal retains the enumerated bona fide hedge positions, a. Proposed Enumerated Hedges recognition of a pass-through swap itself to encompass all transactions that In paragraph (3) of the proposed that is offset, not just the offsetting reduce risks in the conduct and definition of a bona fide hedging position (and, thus, permitting the management of a commercial enterprise, position, the Commission proposed four intermediary to exclude such pass- such as anticipatory merchandising enumerated hedging positions: (i) through swap from position limits, in hedges and other general examples.477 Hedges of inventory and cash addition to excluding the offsetting Commission Reproposal: In response commodity purchase contracts; (ii) position). to comments, the Reproposal retains, as hedges of cash commodity sales Regarding the request to broaden the proposed in 2016, a proposed definition contracts; (iii) hedges of unfilled pass-through swap offset provisions to that recognizes as bona fide, in addition anticipated requirements; and (iv) accommodate secondary pass-through to enumerated positions, any position hedges by agents.479 transactions among affiliates, the that has been otherwise recognized as a Comments received: Numerous Commission declines in this Reproposal non-enumerated bona fide hedging commenters objected to the provision in to broaden the pass-through swap offset position by either a designated contract proposed subparagraph (3)(iii)(A) that exemption beyond the provisions in market or a swap execution facility, would have limited recognition of a CEA section 4a(c)(2)(B)(i). However, the each in accordance with reproposed hedge for unfilled anticipated Commission notes that a group of § 150.9(a), or by the Commission. These requirements to one year for agricultural affiliates under common ownership is provisions for recognition of non- commodities. For example, commenters required to aggregate positions under enumerated positions are included in noted a need to hedge unfilled the Commission’s requirements in re-designated subparagraph (2)(iii)(C) of anticipated requirements for sugar for a § 150.4, absent an applicable aggregation the reproposed definition of a bona fide time period longer than twelve exemption. In the circumstance of hedging position. months.480 Similarly, other commenters aggregation of positions, recognition of The Commission notes that it is not noted there may be a need to offset risks a secondary pass-through swap possible to list all positions that would arising from investments in processing transaction would not be necessary meet the general definition of a bona capacity in agricultural commodities for among such an aggregated group, fide hedging position. However, the a period in excess of twelve months.481 because the group is treated as one Commission observes that the Other commenters recommended the person for purposes of position limits. commenters’ many general examples, Commission (1) remove the restriction which they recommended be included that unfilled anticipated requirement v. Additional Requirements for in the list of enumerated bona fide hedges by a utility be ‘‘required or Enumeration or Other Recognition hedging positions, generally did not encouraged to hedge by its public utility Commission proposal: In 2013, the provide sufficient context or facts and commission’’ because most public Commission proposed in subparagraph circumstances to permit the utility commissions do not require or (2)(i)(D) of the definition of a bona fide Commission to evaluate whether encourage such hedging, (2) expand the hedging position, that, in addition to recognition as a non-enumerated bona reach beyond utilities, by including satisfying the general definition of a fide hedging position would be bona fide hedging position, a position warranted. Context would be supplied, 478 However, as noted above, as reproposed, an would not be recognized as bona fide for instance, by the provision of the exchange listing a physical-delivery contract may unless it was enumerated in paragraph particular market participant’s historical recognize, on a case-by-case basis, a pass-through swap offset, or the offset of a swap used as a bona (3), (4), or (5)(discussed below), or activities in the physical marketing fide hedge, during the last five days of trading in recognized as a pass-through swap offset a spot month, as a non-enumerated bona fide hedge or pass-through swap.474 In 2016, in 475 2016 Supplemental Position Limits Proposal, pursuant to the process in reproposed § 150.9. response to comments on the 2013 81 FR at 38505. 479 December 2013 Position Limits Proposal, 78 proposed definition, the Commission 476 See, e.g., CL–CME–59718 at 47–53, and CL– FR at 75713. BG Group–59656 at 9. 480 See, e.g., Ex Parte No-869, notes of Feb. 25, proposed, in subparagraph (2)(i)(D)(2) of 477 See, e.g., CL–FIA–59595 at 32, CL–FIA–60303 2015 ex parte meeting with The Hershey Company, at 6, CL–API–60939 at 3, CL–AGA–60943 at 4, CL– The J.M. Smucker Co., Louis Dreyfus Commodities, 474 December 2013 Position Limits Proposal, 78 CMC–60950 at 6–9, CL–EEI–EPSA–60925 at 13, and Noble Americans Corp., et al. FR at 75711. CL–FIA–60937 at 5 and 21. 481 See, e.g., CL–NGFA–60941 at 8.

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entities designated as providers of last participant’s price risk to the input has c. Proposed Cross-Commodity Hedges resort who serve the same role as not been fixed. In paragraph (5) of the proposed utilities, and (3) clarify the meaning of definition of a bona fide hedging unfilled anticipated requirements, b. Proposed Other Enumerated Hedges Subject to the Five-Day Rule position, the Commission proposed to consistent with CFTC Staff Letter No. recognize as bona fide cross-commodity 482 12–07. In paragraph (4) of the proposed hedges.485 Cross-commodity hedging Commission Reproposal: The definition of a bona fide hedging would be conditioned on: (i) The Reproposal retains the enumerated position, the Commission proposed four fluctuations in value of the position in exemptions as proposed, with two other enumerated hedging positions: (i) the commodity derivate contract (or the amendments. First, the Commission Hedges of unsold anticipated commodity underlying the commodity agrees with the commenters’ request to production; (ii) hedges of offsetting derivative contract) being substantially remove the twelve month constraint on unfixed-price cash commodity sales and related to the fluctuations in value of hedging unfilled anticipated purchases; (iii) hedges of anticipated the actual or anticipated cash position requirements for agricultural royalties; and (iv) hedges of services.483 or pass-through swap (the substantially commodities, as that provision appears The Commission proposed to apply the related test); and (ii) the five-day rule no longer to be a necessary prudential five-day rule to all such positions. being applied to positions in any constraint. Second, the Commission physical-delivery commodity derivative Comments received on the five-day agrees with the commenters’ request to contract. The Commission proposed a rule: Numerous commenters requested remove the condition that a utility be non-exclusive safe harbor for cross- that the five-day rule be removed from ‘‘required or encouraged to hedge by its commodity hedges that would have two public utility commission.’’ the Commission’s other enumerated factors: A qualitative factor; and a Accordingly, the condition that a utility bona fide hedging positions, as that quantitative factor. be ‘‘required or encouraged to hedge by condition is not included in CEA Comments on cross-commodity its public utility commission’’ is section 4a(c). hedges: Numerous commenters omitted from the reproposed definition. Commission Reproposal on the five- requested the Commission withdraw the The Commission notes that under the day rule: The Commission is retaining safe harbor quantitative ‘‘test,’’ and Reproposal, a market participant, who is the prudential condition of the five-day noted such test is impracticable where not a utility, may request that an rule in the other enumerated hedging there is no relevant cash market price exchange consider recognizing a non- positions. The Commission has a long series for the commodity being enumerated exemption, as it is not clear history of applying the five-day rule, in hedged.486 Some commenters requested who would be appropriately identified its legacy agricultural federal position the Commission retain a qualitative as a ‘‘provider of last resort’’ and under limits, to hedges of unsold anticipated approach to assessing whether the what circumstance such person would production and hedges of offsetting fluctuations in value of the position in reasonably estimate its unfilled unfixed-price cash commodity sales and the commodity derivate contract are requirements. purchases. However, as discussed in substantially related to the fluctuations Consistent with CFTC Staff Letter No. relation to reproposed § 150.9, the in value of the actual or anticipated cash 12–07, the Commission affirms its belief Commission will permit an exchange, in position. that unfilled anticipated requirements effect, to remove the five-day rule on a One commenter urged the are those anticipated inputs that are case-by-case basis in physical-delivery Commission to clarify that market estimated in good faith and that have contracts, as a non-enumerated bona participants need not treat as not been filled. Under the Reproposal, fide hedging position, by applying the enumerated cross-commodity hedges an anticipated requirement may be exchange’s experience and expertise in strategies where the cash position being filled, for example, by fixed-price protecting its own physical-delivery hedged is the same cash commodity as purchase commitments, holdings of market. the commodity underlying the futures commodity inventory by the market contract even if the cash commodity is participant, or unsold anticipated Comments on other enumerated not deliverable against the contract. The production of the market participant. exemptions: As noted above, commenter believes that this However, an unfixed-price purchase commenters recommended removing clarification would verify that non- commitment does not fill an anticipated the twelve-month limitation on deliverable grades of certain requirement, in that the market agricultural production, as commodities could be deemed as the unnecessarily short in comparison to same cash commodity and thus not be 482 See, e.g., CL–Working Group–59693 at 27–28, the expected life of investment in deemed a cross-commodity hedge 484 CL–EEI–EPSA–55953 at 19. CFTC Staff Letter No. production facilities. subject to the five-day rule.487 12–07 notes that unfilled anticipated requirements may be recognized as the basis of a bona fide Commission Reproposal on other Commenters requested the hedging position or transaction under Commission enumerated exemptions: The Commission not apply a five-day rule to Regulation 151.5(a)(2)(ii)(C) when a commercial Reproposal removes the twelve-month cross-commodity hedges or, enterprise has entered into long-term, unfixed-price limitations on unsold anticipated alternatively, permit exchanges to supply or requirements contracts as the price risk of such ‘‘unfilled’’ anticipated requirements is not agricultural production and hedges of determine the appropriate facts and offset by an unfixed price forward contract as the services for agricultural commodities. circumstances where a market price risk remains with the commercial, even As noted above, that provision appears participant may be permitted to hold though the commercial enterprise has contractually no longer to be a necessary prudential such positions into the spot month, assured a supply of the commodity. Instead, the price risk continues until the forward contract’s constraint. Otherwise, the Reproposal price is fixed; once the price is fixed on the supply retains the other enumerated 485 December 2013 Position Limits Proposal, 78 contract, the commercial enterprise no longer has exemptions, as proposed. FR at 75716. price risk and the derivative position, to the extent 486 See, e.g., CL–ICE–60929 at 16, CL–NCGA– the position is above an applicable speculative NGSA–60919 at 6–7, CL–NCFC–60930 at 2–3, CL– position limit, must be liquidated in an orderly 483 December 2013 Position Limits Proposal, 78 API–60939 at 2, CL–NGFA–60941 at 8, CL–EEI– manner in accordance with sound commercial FR at 75714. EPSA–60925 at 10, and CL–IECAssn–60949 at 5–7. practices. 484 See, e.g., CL–NGFA–60941 at 8. 487 CL–CME–60926 at 6.

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noting that a cross-commodity hedge in Commission noted, for example, such 5. App. C to Part 150—Examples of a physical-delivery contract may be the an exemption could be similar to the Bona Fide Hedging Positions for best hedge of its commercial enumerated exemption for the offset of Physical Commodities 488 exposure. the risk of a fixed-price forward contract Commission proposal: The Commission Reproposal: The with a short futures position. Commission proposed a non-exhaustive Reproposal retains the cross-commodity Comments on trade option list of examples meeting the hedge provision in paragraph (5) of the requirements of the proposed definition definition of a bona fide hedging exemptions: Commenters requested that the Commission clarify that hedges of of a bona fide hedging position, noting position as proposed. However, for the that market participants could see reasons requested by commenters and commodity trade options be recognized as bona fide hedges, as would be whether their practices fall within the because of confusion regarding 492 available for other cash positions.490 list. application of a safe harbor, the Comments on examples: Comments Reproposal does not include the safe Commission Reproposal: The regarding the processing hedge example harbor quantitative test. If questions Commission agrees with the number 5 of proposed Appendix C to arise regarding the bona fides of a commenters and has determined to part 150 are discussed above. Another particular cross-commodity hedge, it address the request that commodity commenter requested the Commission would, as reproposed, be reviewed trade options should be recognized as affirm that aggregation is required based on facts and circumstances, the basis for a bona fide hedging pursuant to an express or implied including a market participant’s position, as would be available for other agreement when that agreement is to qualitative review of a particular cross- cash positions. The reproposed trade referenced contracts, and that commodity hedge. aggregation is not triggered by the The Reproposal retains the five-day definition of a bona fide hedging position adds new paragraph (6), condition in example number 7 of rule, because a market participant who proposed Appendix C to part 150, is hedging the price risk of a non- specifying that a commodity trade option meeting the requirements of where a Sovereign grants an option to a deliverable cash commodity has no farmer at no cost, conditioned on the need to make or take delivery on a § 32.3 may be deemed a cash commodity purchase or sales contract, farmer entering into a fixed-price physical-delivery contract. However, the forward sale.493 as the case may be, provided that such Commission notes that an exchange may Commission Reproposal: The consider, on a case-by-case basis in option is adjusted on a futures- Commission agrees with the commenter physical-delivery contracts, whether to equivalent basis. The reproposed that aggregation is required pursuant to recognize such cross-commodity definition also provides non-exclusive an express or implied agreement when positions as non-enumerated bona fide guidance on making futures-equivalent that agreement is to trade referenced hedges during the shorter of the last five adjustments to a commodity trade contracts. Proposed example number 7 days of trading or the time period for the option. For example, the guidance was focused on recognizing the spot month, by applying the exchange’s provides that the holder of a trade legitimate public policy objectives of a experience and expertise in protecting option, who has the right, but not the sovereign furthering the development of its own physical-delivery market, under obligation, to call the commodity at a a cash spot and forward market in the process of § 150.9. fixed price, may deem that trade option, agricultural commodities. To avoid 4. Commodity Trade Options Deemed converted on a futures-equivalent basis, confusion regarding the aggregation Cash Equivalents to be a position in a cash commodity policy under rule 150.4, in the purchase contract, for purposes of Reproposal, the Commission has revised Commission proposal: The example number 7, and has provided an Commission requested comment as to showing that the offset of such cash interpretation that a farmer’s synthetic whether the Commission should use its commodity purchase contract is a bona position of a long put option may be exemptive authority under CEA section fide hedging position. deemed a pass-through swap, for 4a(a)(7) to provide that the offeree of a Because the price risk of an option, purposes of a sovereign who has granted commodity option would be presumed including a trade option with a fixed a cash-settled call option at no cost to to be a pass-through swap counterparty strike price, should be measured on a such farmer in furtherance of a public for purposes of the offeror of the trade 491 futures-equivalent basis, the policy objective to induce such farmer option qualifying for the pass-through Commission has determined that under to sell production in the cash market. swap offset exemption.489 Alternatively, the reproposed definition, a trade option The Commission notes the combination the Commission, noting that forward should be deemed equivalent to a cash of a farmer’s forward sale agreement and contracts may serve as the basis of a commodity purchase or sales contract a granted call option is approximately bona fide hedging position exemption, only if adjusted on a futures-equivalent equivalent to a purchased put option. A proposed that it may similarly include basis. The Commission notes that it may farmer anticipating production or trade options as one of the enumerated not be possible to compute a futures- holding inventory may use such a long bona fide hedging exemptions. The equivalent basis for a trade option that position in a put option as a bona fide does not have a fixed strike price. Thus, hedging position. 488 See, e.g., CL–FIA–60937 at 22, CL–CCI–60935 at 8–9. under the reproposed definition, a The Reproposal also includes a 489 December 2013 Position Limits Proposal, 78 market participant may not use a trade number of conforming amendments and FR at 75711. The Commission also requested option as a basis for a bona fide hedging corrections of typographical errors. comment on whether it would be appropriate to position until a fixed strike price Specifically, it conforms example exclude commodity trade options from the number 4 regarding a utility to the definition of referenced contract. As discussed reasonably may be determined. above, the Commission has determined to exclude trade options from the definition of referenced 492 December 2013 Position Limits Proposal, 78 contract. Previous to this reproposed rule, the FR at 75739, 75828. 490 Commission observed that federal position limits See, e.g., CL–EEI–EPSA–60925 at 15. 493 CL–FIA–59595 at 35, CL–FIA–59566 at 3–7, should not apply to trade options. 81 FR 14966 at 491 See the discussion of the definition of futures- citing December 2013 Position Limits Proposal, 78 14971 (Mar. 21, 2016). equivalent in reproposed § 150.1, above. FR at 75837.

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changes to paragraph (3)(iii)(B) of the stated that it was considering setting containing estimates of deliverable bona fide hedging position definition, as initial spot month limits based on supply. CME submitted updated discussed above. The references in the estimated deliverable supplies estimates of deliverable supply for examples to a 12-month restriction on submitted by CME Group Inc. (‘‘CME’’) CBOT Corn (C), Oats (O), Rough Rice hedges of agricultural commodities have in 2013.496 The Commission suggested (RR), Soybeans (S), Soybean Meal (SM), also been removed because the that it might use the exchange’s Soybean Oil (SO), Wheat (W), and KC Reproposal eliminates those proposed estimated deliverable supplies if it HRW Wheat (KW); COMEX Gold (GC), restrictions from the reproposed could verify that they are reasonable.497 Silver (SI), Platinum (PL), Palladium enumerated bona fide hedging The Commission further stated that it (PA), and Copper (HG); NYMEX Natural positions, as discussed above. In was considering another alternative of Gas (NG), Light Sweet Crude Oil (CL), addition, based on discussions with using, in the Commission’s discretion, NY Harbor ULSD (HO), and RBOB cotton merchants, example number 6, the recommended level, if any, of the Gasoline (RB).499 ICE submitted regarding agent hedging, has been spot month limit as submitted by each estimates of deliverable supply for amended from a generic example to a DCM listing a core referenced futures Cocoa (CC), Coffee C (KC), Cotton No. 2 specific illustration of the hedge of contract (if lower than 25 percent of (CT), FCOJ–A (OJ), Sugar No. 11 (SB), cotton equities purchased by a cotton estimated deliverable supply).498 and Sugar No. 16 (SF).500 MGEX merchant from a producer, under the submitted an estimate of deliverable USDA loan program. Finally, the 2. Verification of Estimated Deliverable Supply supply for Hard Red Spring Wheat Reproposal corrects typographical errors (MWE).501 in example number 12, regarding the The Commission received comment The Commission is verifying that the hedge of copper inventory and the letters from CME, Intercontinental estimates for C, O, RR, S, SM, SO, W, cross-hedge of copper wire inventory, to Exchange (‘‘ICE’’) and Minneapolis and KW submitted by CME are correctly reflect the 25,000 pound unit Grain Exchange, Inc. (‘‘MGEX’’) reasonable. The Commission is verifying of trading in the Copper core referenced that the estimate for MWE submitted by futures contract, and deletes the establishing the initial levels of spot month MGEX is reasonable. The Commission is unnecessary reference to the price speculative position limit levels at the levels then relationship between the nearby and established by DCMs and listed in Appendix D to verifying that the estimates for CC, KC, part 150, December 2013 Position Limits Proposal, CT, OJ, SB, and SF submitted by ICE are deferred Copper futures contracts. 78 FR at 75739–40 (generally stating that the then current levels are high enough and raising them reasonable. The Commission is verifying B. § 150.2—Position Limits could cause problems with contract performance. that the estimates for GC, SI, PL, PA, 1. Setting Levels of Spot Month Limits E.g., CL–WGC–59558 at 1–2; CL–Sen. Levin–59637 and HG submitted by CME are at 7; CL–AFBF–59730 at 3; CL–NGFA–59956 at 2; reasonable. Finally, the Commission is In the December 2013 Position Limits CL–NGFA–60312 at 3; CL–NCBA–59624 at 3; CL– verifying that the estimates for NG, CL, Proposal, the Commission proposed to Bakers–59691 at 1. Several commenters expressed the view that DCMs are best able to determine HO, and RB submitted by CME are establish speculative position limits on appropriate spot month limits and the Commission reasonable. In verifying that all of these 28 core referenced futures contracts in should defer to their expertise. E.g., CL–NCBA– estimates of deliverable supply are physical commodities.494 59624 at 3; CL–Cactus–59660 at 3; CL–TCFA–59680 at 3; CL–NGFA–59610 at 2; CL–MGEX–59635 at 2; reasonable, Commission staff reviewed As stated in the December 2013 the exchange submissions and Position Limits Proposal, the CL–MGEX–59932 at 2; CL–MGEX–60380 at 1; CL– ICE–60311 at 1; CL–Thornton–59729 at 1. conducted its own research. Commission proposed to set the initial 496 December 2013 Position Limits Proposal, 78 Commission staff reviewed the data spot month position limit levels for FR at 75727. The CME July 1, 2013 deliverable submitted, confirmed that the data supply estimates are available on the Commission’s referenced contracts at the existing submitted accurately reflected the DCM-set levels for the core referenced Web site at http://www.cftc.gov/idc/groups/public/ source data, and considered whether the futures contracts because the @swaps/documents/file/ cmegroupdeliverable070113.pdf; see also December data sources were authoritative. Commission believed this approach to 2013 Position Limits Proposal, 78 FR at 75727, n. Commission staff considered whether be consistent with the regulatory 406. Several commenters supported using the the assumptions made by the exchanges objectives of the Dodd-Frank Act alternative level of spot-month position limits based in the submissions were acceptable, or amendments to the CEA and many on CME’s deliverable supply estimates as listed in Table 9 of the December 2013 Position Limits whether alternative assumptions would market participants are already used to Proposal, generally stating that the alternative lead to similar results. In response to those levels.495 The Commission also estimates are more up to date than the deliverable supply estimates underlying the spot month Commission staff questions about the exchange submissions, the Commission 494 See generally December 2013 Position Limits speculative position limits currently established by Proposal, 78 FR at 75725. The 28 core referenced the DCMs, and therefore more appropriate for use received revised estimates from futures contracts for which initial limit levels were in setting federal limits. E.g., CL–FIA–59595 at 3, exchanges. In some cases, Commission 8; CL–EEI–EPSA–59602 at 9; CL–CMC–59634 at 14; proposed are: Chicago Board of Trade (‘‘CBOT’’) staff conducted trade source interviews. Corn, Oats, Rough Rice, Soybeans, Soybean Meal, CL–Olam–59658 at 1, 3; CL–BG Group–59656 at 6; Soybean Oil and Wheat; Chicago Mercantile CL–COPE–59662 at 21; CL–Calpine–59663 at 3; CL– Commission staff replicated the Exchange Feeder Cattle, Lean Hog, Live Cattle and NGSA–59673 at 37; CL–NGSA–59900 at 11; CL– calculations included in the Class III Milk; Commodity Exchange, Inc., Gold, Working Group–59693 at 58–59; CL–CME–60406 at submissions. Silver and Copper; ICE Futures U.S. Cocoa, Coffee 2–3 and App. A; CL–CME–60307 at 4; CL–CME– C, FCOJ–A, Cotton No. 2, Sugar No. 11 and Sugar 59718 at 3, 20–23; CL–Sempra–59926 at 3–4; CL– No. 16; Kansas City Board of Trade Hard Winter BG Group–59937 at 2–3; CL–EPSA–59953 at 2–3; 499 CL–CME–61007 at 5. See also CL–CME– Wheat (on September 6, 2013, CBOT and the CL–ICE–59966 at 5–6; CL–ICE–59962 at 5; CL–US 61011; CL–CME–61012; CL–CME–60785 (earlier Kansas City Board of Trade (‘‘KCBT’’) requested Dairy–59597 at 4; CL–Rice Dairy–59601 at 1; CL– submission of deliverable supply estimates); CL– that the Commission permit the transfer to CBOT, NMPF–59652 at 4; CL–FCS–59675 at 5. CME–60435 (earlier submission of deliverable effective December 9, of all contracts listed on the 497 December 2013 Position Limits Proposal, 78 supply estimates); CL–CME–60406 (earlier KCBT, and all associated open interest); FR at 75727. The U.S. Chamber of Commerce’s submission of deliverable supply estimates). The Minneapolis Grain Exchange Hard Red Spring Center for Capital Markets Competitiveness Commission did not receive an estimate for Live Wheat; and New York Mercantile Exchange commented that the CFTC must update estimates of Cattle (LC). (‘‘NYMEX’’) Palladium, Platinum, Light Sweet deliverable supply, rather than relying on existing 500 CL–ICE–60786. ICE also submitted an estimate Crude Oil, NY Harbor ULSD, RBOB Gasoline and exchange-set spot month limit levels. CL–Chamber– for Henry Hub natural gas. CL–ICE–60684. Henry Hub Natural Gas. 59684 at 6–7. 501 CL–MGEX–61038 at Exhibit A; see also CL– 495 December 2013 Position Limits Proposal, 78 498 December 2013 Position Limits Proposal, 78 MGEX–60938 at 2 (earlier submission of deliverable FR at 75727. Several commenters supported FR at 75728. supply estimate).

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In verifying the exchange estimates of noted that it was considering using part Data Editing deliverable supply, the Commission is 20 data, should it determine such data Commission staff analyzed and not endorsing any particular to be reliable, in order to establish evaluated the quality of part 20 data for methodology for estimating deliverable higher initial levels in a final rule.507 the period from July 1, 2014 through supply beyond what is already set forth In the June 2016 Supplemental June 30, 2015 (‘‘Year 1’’), and the period in Appendix C to part 38 of the from July 1, 2015 through June 30, 2016 502 Proposal, the Commission noted that, Commission’s regulations. As since the December 2013 Position (‘‘Year 2’’).511 The Commission used circumstances change over time, Limits Proposal, the Commission open contracts as reported for each exchanges may need to adjust the worked with industry to improve the business day in the time periods, rather methodology, assumptions and quality of swap position data reported to than month-end open contracts, allowances that they use to estimate the Commission under part 20.508 The primarily because it lessens the impact deliverable supply to reflect then Commission also noted that, in light of of missing data. Averaging generally current market conditions and other the improved quality of such swap also smooths over errors in reporting relevant factors. The Commission when there is both under- and over- anticipates that it will base initial spot- position data reporting, the Commission intended to rely on part 20 swap reporting, both of which the month position limits on the current Commission observed in the part 20 verified exchange estimates as and to position data, given adjustments for obvious errors (e.g., data reported based data. By calculating a daily average for the extent described below, unless an 512 on a unit of measure, such as an ounce, each month for each reporting entity, exchange provides additional updates one calculates a reporting entity’s open during the Reproposal comment period rather than a futures-equivalent number of contracts), to establish initial levels of contracts on a ‘‘representative day’’ for that the Commission can verify as each month. The Commission then reasonable. federal non-spot month limits on futures and swaps in a final rule. summed the open contracts for each 3. Single-Month and All-Months- reporting entity on this representative Combined Limits Comments Received: Commenters day, to determine the average open requested that the Commission delay interest for a particular month.513 Commission Proposal: In the the imposition of hard non-spot month First, for each of Year 1 and Year 2, December 2013 Position Limits limits until it has collected and Commission staff identified all reported Proposal, the Commission proposed to evaluated complete open interest positions in swaps that do not satisfy set the level of single-month and all- data.509 the definition of referenced contract as months-combined limits (collectively, Commission Reproposal: The proposed in the December 2013 Position non-spot month limits) based on total Limits Proposal 514 and removed those open interest for all referenced contracts Commission has determined that certain 503 part 20 large trader position data, after positions from the data set. For in a commodity. The Commission example, swaps settled using the price also proposed to estimate average open processing and editing by Commission staff as described below,510 is reliable. of the LME Gold PM Fix contract do not interest based on the largest annual meet the definition of referenced average open interest computed for each The Commission has determined to repropose the initial non-spot month contract for the gold core referenced of the past two calendar years, using futures contract (GC) but positions either month-end open contracts or position limit levels based on the combination of such adjusted part 20 reported based on these types of swaps open contracts for each business day in represented 14% of records submitted the time period, as the Commission swaps data and data on open interest in 504 physical commodity futures and options finds in its discretion to be reliable. 511 There is no part 20 swaps data for Sugar No. For setting the levels of initial non-spot from the relevant exchanges, as 16 (SF). month limits, the Commission proposed described below. The Commission is 512 A reporting entity is a clearing member or a to use open interest for calendar years using two 12-month periods of data, swap dealer required to report large trader position 2011 and 2012 in futures contracts, covering a total of 24 months, rather data for physical commodity swaps, as defined in than two calendar years of data, as is 17 CFR 20.1. options thereon, and in swaps that are 513 Because there may be missing data, using open significant price discovery contracts that practicable, in reproposing the initial contracts for each business day in the time period are traded on exempt commercial non-spot month position limit levels. that a reporting entity submits a report may markets.505 The Commission explained overestimate open interest, compared to taking a straight average of the open contracts over all that it had reviewed preliminary data represented the lower bounds for the initial levels business days in the time period. However, the submitted to it under part 20, but that the Commission would establish in final rules. Commission believes it is reasonable to assume that preliminarily decided not to use it for 507 December 2013 Position Limits Proposal, 78 the open position in swaps for a reporting entity purposes of setting the initial levels of FR at 75734. The Commission also stated that it was failing to report for a particular business day is considering using data from swap data repositories, more accurately reflected by that reporting entity’s single-month and all-months-combined as practicable. Id. The Commission has determined average reported open swaps for the month, rather position limits because the data prior to that it is not yet practicable to use data from swap than zero. Hence, in choosing this approach, the January 2013 was less reliable than data data repositories. Commission chooses to repropose higher non-spot submitted later.506 The Commission 508 2016 Supplemental Position Limits Proposal, month limit levels. 81 FR at 38459. 514 This adjustment may have removed fewer than 509 E.g., CL–FIA–59595 at 3, 14; CL–EEI–EPSA– all of the reported positions in swaps that do not 502 17 CFR part 38, Appendix C. 59602 at 10–11; CL–MFA–60385 at 4–7; CL–MFA– satisfy the definition of referenced contract as 503 December 2013 Position Limits Proposal, 78 59606 at 22–23; CL–ISDA/SIFMA–59611 at 28–29; adopted, and therefore may have resulted in a FR at 75729. The Commission currently sets the CL–CMC–59634 at 13; CL–Olam–59658 at 3; CL– higher level of open interest (which would result single-month and all-months-combined limits based COPE–59662 at 22; CL–Calpine–59663 at 4; CL– in a higher limit level). For instance, swaps on total open interest for a particular commodity CCMC–59684 at 4–5; CL–NFP–59690 at 20; CL–Just reported under part 20 include trade options, and futures contract and options on that futures Energy–59692 at 4; CL–Working Group–59693 at the Commission is reproposing an amended contract, on a futures-equivalent basis. 62. definition of ‘‘referenced contract’’ to expressly 504 December 2013 Position Limits Proposal, 78 510 Where relevant and practicable, Commission exclude trade options. See the discussion of the FR at 75730. staff consulted and followed the Office of defined term ‘‘referenced contract’’ under § 150.1, 505 Id. Management and Budget Standards and Guidelines above. Because part 20 does not require trade 506 December 2013 Position Limits Proposal, 78 for Statistical Surveys, September 2006, available at options to be identified, the Commission could not FR at 75733. Thus, the initial levels as proposed in https://www.whitehouse.gov/sites/default/files/ exclude records of trade options from open interest the December 2013 Position Limits Proposal omb/inforeg/statpolicy/standards_stat_surveys.pdf. or position size.

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under part 20 by reporting entities for from this deletion are set forth in Table referenced contracts, the Commission gold swaps. The percentage of average 1 below. Other adjustments to the data reports only the 11 commodities that daily open interest excluded from the are described below. Because not all required this type of exclusion. adjusted part 20 swaps data resulting commodities required exclusion of non-

TABLE III–B–1—PERCENT OF ADJUSTED AVERAGE DAILY OPEN INTEREST EXCLUDED AS NOT MEETING THE DEFINITION OF REFERENCED CONTRACT

Year 1 Year 2 percent of percent of excluded excluded Core referenced futures contract adjusted adjusted open interest open interest (%) (%)

Cotton No. 2 (CT) ...... 0.22 0.00 Sugar No. 11 (SB) ...... 0.05 0.00 Gold (GC) ...... 42.59 0.00 Silver (SI) ...... 48.10 0.00 Platinum (PL) ...... 9.12 5.36 Palladium (PA) ...... 56.87 6.87 Copper (HG) ...... 37.58 0.25 Natural Gas (NG) ...... 12.49 12.52 Light Sweet Crude (CL) ...... 3.60 0.83 New York Harbor ULSD (HO) ...... 0.96 1.74 RBOB Gasoline (RB) ...... 1.34 1.30

Second, Commission staff checked of trading). For example, a position in Commission staff could discern neither and edited the remaining data to COMEX gold is reported as 100,000 and a reason nor a reasonable adjustment, mitigate certain types of errors. the notional value might be reported as were not included. For example, Commission staff identified three $13,000,000, when the price of gold is Commission staff deleted all swap general types of reporting errors and $1300 and the COMEX gold contract is position data reports submitted by one made edits to adjust the data for: for 100 ounces, indicating that the swap dealer from its analysis because (i) Positions that were clearly reported position should have been reported as the reports were inexplicably in units of a commodity when they 100 futures-equivalent contracts. Staff anomalous in light of other available should have been reported in the corrected such reported swaps position information, reasonable assumptions number of gross futures-equivalent data and included the corrected data in and Commission expertise. As another contracts. For example, a position in the data set. example, one reporting entity reported gold (GC) with a futures contract unit of extremely large values for only certain trading of 100 ounces might be reported (iii) Positions reported multiple times per day or otherwise extremely different types of positions. After speaking with as 480,000 contracts, when other the reporting entity, Commission staff available information, reasonable from surrounding days’ reported open interest. In some cases, reporting determined that there was no systematic assumptions, consultation with adjustment to be made, but that the reporting entities and/or Commission entities submitted the same report using different reporting identifiers, for the actual positions were, in fact, small. expertise indicate that the position Hence, Commission staff did not should have been reported as 4,800 same day. In other cases, a position include such reported swaps position contracts (that is, 480,000 ounces would inexplicably spike for one day, to data in its analysis. divided by 100 ounces per contract). a multiple of other days’ reported open Commission staff corrected such interest. When Commission staff The number of principal records reported swaps position data and checked with the reporting entity, the edited, resulting from the edits relating included the corrected data in the data reporting entity confirmed that the to the three types of edits to erroneous set. reports were, indeed, erroneous. position reports noted above, is set forth (ii) Positions that are not obviously Commission staff did not include such in Table 2 below. A principal record is reported in units of a commodity but incorrectly reported duplicative swaps a report of a swaps open position where appear to be off by one or more decimal position data in its analysis. In other the reporting entity is a principal to the places (e.g., a position is overstated, but cases, positions that were clearly swap, as opposed to a counterparty not by a multiple of the contract’s unit reported incorrectly, but for which record.

TABLE III–B–2—PERCENTAGE OF PRINCIPAL RECORDS ADJUSTED BY EDIT TYPE AND UNDERLYING COMMODITY, REFERENCED CONTRACTS ONLY

Number of Number of records records Edit type adjusted adjusted year 1 year 2 (%) (%)

Corn (C) ...... (i) ...... 0.00 0.0001 (iii) ...... 0.00 0.66 Oats (O) ...... (iii) ...... 0.00 0.20 Rough Rice (RR) ...... (iii) ...... 0.38 0.00

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TABLE III–B–2—PERCENTAGE OF PRINCIPAL RECORDS ADJUSTED BY EDIT TYPE AND UNDERLYING COMMODITY, REFERENCED CONTRACTS ONLY—Continued

Number of Number of records records Edit type adjusted adjusted year 1 year 2 (%) (%)

Soybeans (S) ...... (i) ...... 0.00 0.03 (iii) ...... 2.38 1.46 Soybean Meal (SM) ...... (iii) ...... 0.00 0.41 Soybean Oil (SO) ...... (iii) ...... 9.15 4.93 Wheat (W) ...... (i) ...... 0.00 0.01 (iii) ...... 1.77 0.71 Wheat (MWE) ...... (iii) ...... 0.043 0.002 Wheat (KW) ...... (iii) ...... 1.34 0.68 Cocoa (CC) ...... (i) ...... 0.001 0.0005 (iii) ...... 1.79 0.25 Coffee C (KC) ...... (i) ...... 0.00 0.01 (iii) ...... 5.33 0.60 Cotton No. 2 (CT) ...... (iii) ...... 16.76 5.59 FCOJ–A (OJ) ...... (iii) ...... 13.30 17.43 Sugar No. 11 (SB) ...... (i) ...... 0.00 0.0009 (iii) ...... 1.21 0.54 Live Cattle (LC) ...... (i) ...... 0.002 0.00 (iii) ...... 45.65 15.50 Gold (GC) ...... (i) ...... 1.99 0.02 (ii) ...... 0.32 0.00 (iii) ...... 91.45 89.04 Silver (SI) ...... (i) ...... 3.01 0.19 (iii) ...... 93.08 89.52 Platinum (PL) ...... (i) ...... 2.75 0.01 (ii) ...... 0.33 0.01 (iii) ...... 23.51 21.11 Palladium (PA) ...... (i) ...... 0.62 0.00 (ii) ...... 0.30 0.00 (iii) ...... 32.97 22.29 Copper (HG) ...... (i) ...... 4.94 0.48 (iii) ...... 20.80 16.82 Natural Gas (NG) ...... (i) ...... 0.01 1.03 (iii) ...... 7.68 3.80 Light Sweet Crude (CL) ...... (i) ...... 0.001 0.003 (iii) ...... 9.53 8.43 New York Harbor ULSD (HO) ...... (i) ...... 0.01 0.0006 (iii) ...... 29.58 4.33 RBOB Gasoline (RB) ...... (i) ...... 0.22 0.60 (iii) ...... 30.46 24.62

Some records also appeared to average daily open interest for positions summing these two gross positions contain errors attributable to other resulting from inter-affiliate transactions would overestimate the open swaps as factors that Commission staff could and duplicative reporting of positions 325 contracts—50 contracts more than detect and for which Commission staff due to transactions between reporting there actually should be. For this can correct. For example, there were entities. For an example of duplicative reason, Commission staff used the instances where the reporting entity reporting by reporting entities (which is counterparty accounts of each reporting misreported the ownership of the reporting in terms of futures-equivalent entity to flag counterparty accounts of position, i.e., principal vs. counterparty. contracts), assume Swap Dealer A and other reporting entities. Commission Commission staff corrected the Swap Dealer B have an open swap staff then used the daily average of the misreported ownership data and equivalent to 50 futures contracts, Swap gross positions for these accounts to included the corrected data in the data Dealer A also has a swap equivalent to reduce the amount of average daily open set. Such corrections are important to ensure that data is not double counted. 25 futures contracts with End User X, swaps. Similarly, Commission staff In Year 1, eight reporting entities and Swap Dealer B has a swap flagged the counterparty accounts for required an adjustment to the reported equivalent to 200 futures contracts with entities that are affiliates of each position ownership information. In Year End User Y. The total open swaps in reporting entity in order to adjust the 2, five reporting entities required an this scenario is equivalent to 275 futures amount of average daily open swaps. adjustment to the reported position contracts. However, Swap Dealer A will These adjustments to the Year 1 data are ownership information. report a gross position of 75 contracts reflected in Table 3 below, and the Third, in the part 20 large trader swap and Swap Dealer B will report a gross corresponding adjustments to the Year 2 data, staff checked and adjusted the position of 250 contracts. Simply data are reflected in Table 4 below.

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TABLE III–B–3—AVERAGE DAILY OPEN INTEREST IN YEAR 1 ADJUSTED FOR DUPLICATE AND AFFILIATE REPORTING BY UNDERLYING COMMODITY

Average adjusted Average adjusted daily open Average daily open interest reporting Paired swaps for adjusted daily interest reporting entity duplication open interest entity duplication & affiliates removed removed

Corn (C) ...... 655,492 522,566 359,715 Oats (O) ...... 684 667 646 Rough Rice (RR) ...... 916 640 362 Soybeans (S) ...... 157,017 139,608 109,858 Soybean Meal (SM) ...... 125,444 99,795 71,887 Soybean Oil (SO) ...... 74,831 64,854 55,265 Wheat (W) ...... 272,839 229,453 162,999 Wheat (MGE) ...... 3,430 3,021 1,944 Wheat (KW) ...... 14,918 14,213 9,436 Cocoa (CC) ...... 15,207 13,792 11,257 Coffee C (KC) ...... 31,540 28,539 24,164 Cotton No. 2 (CT) ...... 51,442 42,806 35,102 FCOG–A (OJ) ...... 160 142 121 Sugar No. 11 (SB) ...... 279,355 256,887 211,994 Live Cattle (LC) ...... 46,361 36,999 23,626 Gold (GC) ...... 79,778 64,363 47,727 Silver (SI) ...... 19,373 14,678 9,867 Platinum (PL) ...... 25,145 24,530 21,566 Palladium (PA) ...... 2,044 1,939 1,929 Copper (HG) ...... 31,143 28,718 22,859 Natural Gas (NG) ...... 4,100,419 3,603,368 2,866,128 Light Sweet Crude (CL) ...... 2,039,963 1,875,660 1,587,450 NY Harbor ULSD (HO) ...... 178,978 161,617 138,360 RBOB Gasoline (RB) ...... 103,586 100,021 81,822

TABLE III–B–4—AVERAGE DAILY OPEN INTEREST IN YEAR 2 ADJUSTED FOR DUPLICATE AND AFFILIATE REPORTING BY UNDERLYING COMMODITY

Average adjusted Average adjusted daily open Average daily open interest reporting Paired swaps for adjusted daily interest reporting entity duplication open interest entity duplication & affiliates removed removed

Corn (C) ...... 1,265,639 960,088 641,014 Oats (O) ...... 1,029 858 480 Rough Rice (RR) ...... 396 250 4 Soybeans (S) ...... 453,419 351,279 235,679 Soybean Meal (SM) ...... 282,123 209,023 134,399 Soybean Oil (SO) ...... 282,207 198,744 125,106 Wheat (W) ...... 437,711 334,136 222,420 Wheat (MWE) ...... 15,167 9,511 3,079 Wheat (KW) ...... 65,533 47,722 29,563 Cocoa (CC) ...... 141,526 100,564 56,853 Coffee C (KC) ...... 97,128 74,739 51,846 Cotton No. 2 (CT) ...... 137,295 99,496 60,477 FCOJ–A (OJ) ...... 1,137 640 5 Sugar No. 11 (SB) ...... 717,967 558,423 382,816 Live Cattle (LC) ...... 102,131 77,783 52,330 Gold (GC) ...... 62,804 50,054 36,029 Silver (SI) ...... 9,306 6,207 3,510 Platinum (PL) ...... 2,575 2,507 2,285 Palladium (PA) ...... 889 857 823 Copper (HG) ...... 82,479 65,187 47,365 Natural Gas (NG) ...... 4,239,581 3,828,739 3,331,141 Light Sweet Crude (CL) ...... 2,318,074 2,050,270 1,744,137 NY Harbor ULSD (HO) ...... 170,316 117,004 65,721 RBOB Gasoline (RB) ...... 102,094 66,560 30,477

Staff made numerous significant units rather than the number of gross did not meet the definition of referenced adjustments to the part 20 data for futures-equivalent contracts and the contract. natural gas, due to numerous reports in large number of reports of swaps that

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The Commission continues to be Commission stated that it was alternative, the Commission stated that concerned about the quality of data considering using 25 percent of an it was considering setting initial spot submitted in large trader reports exchange’s estimate of deliverable month position limit levels at a pursuant to part 20 of the Commission’s supply if the Commission verified the recommended level, if any, submitted regulations. Commissioners and staff estimate as reasonable.519 As a further by a DCM (if lower than 25 percent of have expressed concerns about data estimated deliverable supply).520 reporting publicly on a variety of to retain the legacy speculative limits for In determining the levels at which to occasions.515 Nevertheless, the enumerated agricultural products. The ‘‘enumerated’’ agricultural products refer to the list repropose the initial speculative Commission anticipates that over time of commodities contained in the definition of position limits, the Commission part 20 submissions will become more ‘‘commodity’’ in CEA section 1a; 7 U.S.C. 1a. This considered, without limitation, the list of agricultural contracts includes nine currently reliable and intensive efforts by recommendations of the exchanges as Commission staff to process and edit traded contracts: Corn (and Mini-Corn), Oats, Soybeans (and Mini-Soybeans), Wheat (and Mini- well as data to which the exchanges do raw data will become less necessary. As wheat), Soybean Oil, Soybean Meal, Hard Red not have access. In considering these stated in the December 2013 Position Spring Wheat, Hard Winter Wheat, and Cotton No. and other factors, the Commission 2. See 17 CFR 150.2. The position limits on these Limits Proposal, for setting subsequent became very concerned about the effect levels of non-spot month limits, the agricultural contracts are referred to as ‘‘legacy’’ limits because these contracts on agricultural of alternative limit levels on traders in Commission proposes to estimate commodities have been subject to federal positions the cash-settled referenced contracts. A average open interest in referenced limits for decades. This commenter stated, ‘‘There DCM has reasonable discretion in contracts using data reported pursuant is no appreciable support within our industry or, 516 as far as we know, from the relevant exchanges to establishing the manner in which it to parts 16, 20, and/or 45. It is move beyond current levels .... Changing current complies with core principle 5 crucial, therefore, that market limits, as proposed in the rule, will have a negative regarding position limits.521 As the participants make sure they submit impact on futures-cash market convergence and Commission observed in the December accurate data to the Commission, and will compromise contract performance.’’ CL–AFBF– 59730 at 3. Contra CL–ISDA/SIFMA–59611 at 32 2013 Position Limits Proposal, ‘‘there resubmit data discovered to be (setting initial spot-month limits at the existing may be a range of spot month limits, erroneous, because subsequent limit exchange-set levels would be arbitrary because the including limits set below 25 percent of exchange-set levels have not been calibrated to levels will be based on that data. deliverable supply, which may serve as Reporting is at the heart of the apply as ‘‘a ceiling on the spot-month positions that a trader can hold across all exchanges for futures, practicable to maximize . . . [the] Commission’s market and financial options and swaps’’); CL–ICE–59966 at 6 (‘‘the policy objectives [set forth in section surveillance programs, which are Proposed Rule . . . effectively halves the present 4a(a)(3)(B) of the CEA].’’ 522 The position limit in the spot month by aggregating critical to the Commission’s mission to Commission must also consider the protect market participants and promote across trading venues and uncleared OTC swaps’’). See also CL–ISDA/SIFMA–59611 at 3 (the spot competitiveness of futures markets.523 market integrity. Failure to meet month limit methodology is ‘‘both arbitrary and Thus, the Commission accepts the reporting obligations to the Commission unjustified’’). recommendations of the exchanges and 519 December 2013 Position Limits Proposal, 78 by submitting reports and data that has determined to repropose federal contain errors and omissions in FR at 75727. The Commission also stated that if the Commission could not verify an exchange’s limits below 25 percent of deliverable violation of the part 20 regulations may estimate of deliverable supply for any commodity supply, where setting a limit level at subject reporting entities to enforcement as reasonable, the Commission might adopt the less than 25 percent of deliverable actions and remedial sanctions.517 existing DCM-set level or a higher level based on the Commission’s own estimate, but not greater supply does not appear to restrict 4. Setting Levels of Spot-Month Limits than would result from the exchange’s estimated unduly positions in the cash-settled deliverable supply for a commodity. In the December 2013 Position Limits referenced contracts. The exchanges One commenter was unconvinced that estimated retain the ability to adopt lower Proposal, the Commission proposed to deliverable supply is ‘‘the appropriate metric for set the initial spot month speculative determining spot month position limits’’ and exchange-set limit levels than the initial position limit levels for referenced opined that the ‘‘real test’’ should be whether limits ‘‘allow convergence of cash and futures so that contracts at the existing DCM-set levels 25% of a market.’’); CL–IECA–59964 at 3 (25 futures markets can still perform their price percent of deliverable supply ‘‘is a lot of market for the core referenced futures discovery and risk management functions.’’ CL– power in the hands of speculators’’). One contracts.518 As an alternative, the NGFA–60941 at 2. Another commenter stated, commenter stated that ‘‘position limits should be ‘‘While 25% may be a reasonable threshold, it is set low enough to restore a commercial hedger based on historical practice rather than 515 majority in open interest in each core referenced See, e.g., CFTC Staff Advisory No. 15–66, contemporary analysis, and it should only be used available at http://www.cftc.gov/idc/groups/public/ contract,’’ CL–IATP–60323 at 5 (suggesting in a as a guideline, rather than formally adopted as a later submission that position limits at 5–10 percent @lrlettergeneral/documents/letter/15-66.pdf hard rule. Deliverable supply is subject to (reminding swap dealers and major swap of estimated deliverable supply in each covered numerous environmental and economic factors, and contract applied on an aggregated basis might participants of their swap data reporting is inherently not susceptible to formulaic ‘‘enable commercial hedgers to regain for all obligations); Remarks of Chairman Timothy Massad calculation on a yearly basis.’’ CL–MGEX–60301 at covered contracts their pre-2000 average share of 70 before the ABA Derivatives and Futures Law 1. Another commenter expressed the view that the percent of agricultural contracts’’). CL–IATP–60394 Committee, 2016 Winter Meeting, Jan. 22, 2016, 25 percent formula is not ‘‘appropriately calibrated at 2. One commenter supported expanding position available at http://www.cftc.gov/PressRoom/ to achieve the statutory objective’’ set forth in limits ‘‘to ensure rough or approximate convergence SpeechesTestimony/opamassad-37 (improving data section 4a(a)(3)(B)(i) of the CEA, 7 U.S.C. of futures and underlying cash at expiration.’’ CL– reporting). 6a(a)(3)(B)(i). CL–CME–60926 at 3. Another Thornton–59702 at 1. 516 December 2013 Position Limits Proposal, 78 commenter opined that because the Commission FR at 75734. ‘‘has not established a relationship between Several commenters supported setting limits 517 The CFTC announced its first case enforcing ‘estimated deliverable supply’ and spot-month based on updated estimates of deliverable supply the Reporting Rules in September 2015. See Order: potential for manipulation or excessive which reflect current market conditions. E.g., CL– Australia and New Zealand Banking Group Ltd. speculation,’’ the 25 percent formula is arbitrary. ICE–59966 at 5; CL–FIA–59595 at 8; CL–EEI–EPSA– (‘‘ANZ’’), available at http://www.cftc.gov/idc/ CL–ISDA/SIFMA–59611 at 31. 59602 at 9; CL–MFA–59606 at 5; CL–CMC–59634 at 14; CL-Olam-59658 at 3; CL–CCMC–59684 at 6– groups/public/@lrenforcementactions/documents/ Several commenters opined that 25 percent of 7. legalpleading/enfaustraliaorder091715.pdf (the deliverable supply is too high. E.g., CL–AFR–59685 520 Order finds that during the period from at least at 2; CL-Tri-State Coalition for Responsible December 2013 Position Limits Proposal, 78 March 1, 2013 through November 30, 2014, ANZ Investment-59682 at 1; CL–CMOC–59720 at 3; CL– FR at 75728. filed large trader reports that routinely contained WEED–59628 (‘‘Only a lower limit would ensure 521 CEA section 5(d)(1)(B), 7 U.S.C. 7(d)(1)(B). errors). market stability and prevent market 522 December 2013 Position Limits Proposal, 78 518 December 2013 Position Limits Proposal, 78 manipulation.’’); CL–Public Citizen-60313 at 1 FR at 75729. FR at 75727. One commenter urged the Commission (‘‘There is no good reason for a single firm to take 523 CEA section 15(a)(2)(B), 7 U.S.C. 19(a)(2)(B).

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speculative position limit levels that the the Hard Red Spring Wheat (MWE) core position limit levels for these eight Commission reproposes today. referenced futures contract submitted by contracts as proposed in the December MGEX are reasonable. 2013 Position Limits Proposal. These a. CME and MGEX Agricultural Nevertheless, the Commission has Contracts initial levels track the existing DCM-set determined to repropose the initial levels for the core referenced futures As explained above, the Commission speculative spot month position limit contracts; 526 therefore, as noted in the has verified that the estimates of levels for C, O, RR, S, SM, SO, W and December 2013 Position Limits deliverable supply for each of the CBOT KW at the recommended levels Proposal, many market participants are Corn (C), Oats (O), Rough Rice (RR), submitted by CME,524 all of which are already used to these levels.527 The Soybeans (S), Soybean Meal (SM), lower than 25 percent of estimated Commission continues to believe this Soybean Oil (SO), Wheat (W) core deliverable supply.525 As is evident referenced futures contract, the Hard from the table set forth below, this also approach is consistent with the Red Winter Wheat (KW) core referenced means that the Commission is regulatory objectives of the Dodd-Frank futures contract submitted by CME, and reproposing the initial speculative Act amendments to the CEA.

TABLE III–B–5—CME AGRICULTURAL CONTRACTS—SPOT MONTH LIMIT LEVELS

Previously 25% of estimated Reproposed Contract proposed deliverable speculative limit level 528 supply 529 limit level

C ...... 600 900 600 O ...... 600 900 600 RR ...... 600 2,300 600 S ...... 600 1,200 600 SM ...... 720 2,000 720 SO ...... 540 3,400 540 W 530 ...... 600 1,000 600 KW ...... 600 3,000 600

The Commission has also determined lower than 25 percent of estimated position limit levels for W and KW.533 to repropose the initial speculative spot deliverable supply.532 This is an Upon deliberation, the Commission month position limit level for MWE at increase from the previously proposed accepts the recommendation of 1,000 contracts, which is the level level of 600 contracts and is greater than MGEX.534 requested by MGEX 531 and just slightly the reproposed speculative spot month

TABLE III–B–6—CME AND MGEX AGRICULTURAL CONTRACTS—SPOT MONTH

Unique persons over spot month limit Reportable Core referenced futures contract Basis of spot-month level Limit level persons spot Cash settled Physical deliv- month only contracts ery contracts

Corn (C) ...... CME recommendation ...... † 600 0 36 1,050 25% DS ...... 900 0 20 Oats (O) ...... CME recommendation ...... † 600 0 0 33 25% DS ...... 900 0 0 Soybeans (S) ...... CME recommendation ...... † 600 0 22 929 25% DS ...... 1,200 0 14 Soybean Meal (SM) ...... CME recommendation ...... † 720 0 14 381 25% DS ...... 2,000 0 *

524 CL–CME–61007 at 5. hard red spring wheat; i.e., the contracts are for 534 The difference between an estimate of 4,000 525 The Commission noted in the December 2013 different products. contracts, which would result in a limit level of Position Limits Proposal ‘‘that DCMs historically 531 CL–MGEX–61038 at 2; see also CL–MGEX– 1,000, and 4,005 contracts, which results in a limit have set or maintained exchange spot month limits 60938 at 2 (earlier submission of deliverable supply level of 1,100 contracts, is small enough that the at levels below 25 percent of deliverable supply.’’ estimate). Commission’s prior statements regarding the 25% 532 December 2013 Position Limits Proposal, 78 FR at The difference is due to rounding. The MGEX formula are instructive. As stated in the December estimate of 4,005 contract equivalents for MWE 75729. 2013 Position Limits Proposal, the 25 percent deliverable would have supported a spot-month 526 See CL–CME–61007 (specifying lower limit level of 1,100 contracts (rounded up to the formula ‘‘is consistent with the longstanding exchange-set limit levels for W and RR in certain next 100 contracts). The Commission noted in the acceptable practices for DCM core principle 5 circumstances). December 2013 Position Limits Proposal ‘‘that which provides that, for physical-delivery 527 December 2013 Position Limits Proposal, 78 DCMs historically have set or maintained exchange contracts, the spot-month limit should not exceed FR at 75727. spot month limits at levels below 25 percent of 25 percent of the estimated deliverable supply.’’ 528 December 2013 Position Limits Proposal, 78 deliverable supply.’’ December 2013 Position Limits December 2013 Position Limits Proposal, 78 FR at FR at 75839 (Appendix D to Part 150—Initial Proposal, 78 FR at 75729. 75729. The Commission continues to believe, based 533 Position Limit Levels). Most commenters who supported establishing on its experience and expertise, that the 25 percent the same level of speculative limits for each of the 529 formula is an ‘‘effective prophylactic tool to reduce Rounded up to the next 100 contracts. three wheat core referenced futures contracts 530 The W core referenced futures contract refers focused on parity in the non-spot months. However, the threat of corners and squeezes, and promote to soft red winter wheat, the KW core reference some commenters did support wheat party in the convergence without compromising market futures contract refers to hard red winter wheat, and spot month. See, e.g., CL–CMC–59634 at 15; CL– liquidity.’’ December 2013 Position Limits Proposal, the MWE core reference futures contract refers to NCFC–59942 at 6. 78 FR at 75729.

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TABLE III–B–6—CME AND MGEX AGRICULTURAL CONTRACTS—SPOT MONTH—Continued

Unique persons over spot month limit Reportable Core referenced futures contract Basis of spot-month level Limit level persons spot Cash settled Physical deliv- month only contracts ery contracts

Soybean Oil (SO) ...... CME recommendation ...... † 540 0 21 397 25% DS ...... 3,400 0 0 Wheat (W) ...... CME recommendation ...... † 600 0 11 444 25% DS ...... 1,000 0 6 Wheat (MWE) ...... Parity w/CME recommendation ...... † 600 0 * 102 25% DS ...... †† 1,000 0 * Wheat (KW) ...... CME recommendation ...... † 600 0 4 250 25% DS (MW) ...... 1,000 0 * 25% DS (KW) ...... 3,000 0 * Rough Rice (RR) ...... CME recommendation ...... † 600 0 0 91 25% DS ...... 2,300 0 0 Reproposed speculative position limit levels are shown in bold. ‘‘25% DS’’ means 25 percent of the deliverable supply as estimated by the exchange listing the core referenced futures contract. † Denotes existing limit level. †† Limit level requested by MGEX. * Denotes fewer than 4 persons.

The Commission’s impact analysis analysis. The Commission believes that The Commission has determined to reveals no traders in cash settled setting initial speculative levels at 25 repropose the initial speculative spot contracts in any of C, O, S, SM, SO, W, percent of deliverable supply would, month position limit levels for the CC, MWE, KW, or RR, and no traders in based upon logic and the Commission’s KC, CT, OJ, SB, and SF 538 core physical delivery contracts for O and impact analysis, affect fewer traders in referenced futures contracts at 25 RR, above the initial speculative limit the C, S, SM, SO, W and KW physical percent of estimated deliverable supply, levels for those contracts. The delivery contracts. Consistent with its based on the estimates of deliverable Commission found varying numbers of statement in the December 2013 supply submitted by ICE.539 As is traders in the C, S, SM, SO, W, MWE, Position Limits Proposal, the evident from the table set forth below, KW physical delivery contracts over the Commission believes that accepting the this also means that the Commission is initial levels, but the numbers were very recommendation of the DCM to set these reproposing initial speculative position small for MWE and KW.535 Because the lower levels of initial spot month limits limit levels that are significantly higher levels that the Commission reproposes will serve the objectives of preventing than the levels for these six contracts as today for C, O, S, SM, SO, W, KW, and excessive speculation, manipulation, previously proposed. As stated in the squeezes and corners,536 while ensuring RR maintain the status quo for those December 2013 Position Limits sufficient market liquidity for bona fide contracts, the Commission assumes that Proposal, the 25 percent formula ‘‘is hedgers in the view of the listing DCM some or possibly all of such traders over consistent with the longstanding and ensuring that the price discovery the initial levels are hedgers. Hedgers function of the market is not acceptable practices for DCM core may have to file for an applicable disrupted.537 principle 5 which provides that, for exemption, but hedgers with bona fide physical-delivery contracts, the spot- hedging positions should not have to b. Softs month limit should not exceed 25 reduce their positions as a result of As explained above, the Commission percent of the estimated deliverable speculative position limits per se. Thus, has verified that the estimates of supply.’’ 540 The Commission continues the number of traders in the C, S, SM, deliverable supply for each of the IFUS to believe, based on its experience and SO, W and KW physical delivery Cocoa (CC), Coffee ‘‘C’’ (KC), Cotton No. expertise, that the 25 percent formula is contracts who would need to reduce 2 (CT), FCOJ–A (OJ), Sugar No. 11 (SB), an ‘‘effective prophylactic tool to reduce speculative positions below the initial and Sugar No. 16 (SF) core referenced the threat of corners and squeezes, and limit levels should be lower than the futures contracts submitted by ICE are promote convergence without numbers indicated by the impact reasonable. compromising market liquidity.’’ 541

TABLE III–B–7—IFUS SOFT AGRICULTURAL CONTRACTS—SPOT MONTH LIMIT LEVELS

Previously 25% of estimated Reproposed Contract proposed deliverable speculative limit level 542 supply 543 limit level

CC ...... 1,000 5,500 5,500

535 Four or fewer traders. 538 One commenter supported considering DCMs historically have set or maintained exchange 536 Contra CL–ISDA/SIFMA–59611 at 55 ‘‘tropicals (sugar/coffee/cocoa) . . . separately from spot month limits at levels below 25 percent of (proposed spot month limits ‘‘are almost certainly those agricultural crops produced in the US deliverable supply.’’ December 2013 Position Limits domestic market.’’ CL–Thornton–59702 at 1; see far smaller than necessary to prevent corners or Proposal, 78 FR at 75729. also CL–Armajaro–59729 at 1. squeezes’’). 541 December 2013 Position Limits Proposal, 78 539 CL–IFUS–60807. 537 FR at 75729. December 2013 Position Limits Proposal, 78 540 December 2013 Position Limits Proposal, 78 FR at 75729. FR at 75729. The Commission also noted ‘‘that

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TABLE III–B–7—IFUS SOFT AGRICULTURAL CONTRACTS—SPOT MONTH LIMIT LEVELS—Continued

Previously 25% of estimated Reproposed Contract proposed deliverable speculative limit level 542 supply 543 limit level

KC ...... 500 2,400 2,400 CT ...... 300 1,600 1,600 OJ ...... 300 2,800 2,800 SB ...... 5,000 23,300 23,300 SF ...... 1,000 7,000 7,000

level of 450 contracts. Of 616 reportable contracts, the Commission’s impact The Commission did not receive any persons, the Commission’s impact analysis did not reveal any unique estimate of deliverable supply for the analysis did not reveal any unique person trading cash settled spot month CME Live Cattle (LC) core referenced person trading cash settled or physical contracts who would have held futures contract from CME, nor did CME delivery spot month contracts who positions above the initial levels that the recommend any change in the limit would have held positions above this Commission adopts today; as illustrated level for LC. In the absence of any such level for LC. below, lower levels would mostly have update, the Commission is reproposing With respect to the IFUS CC, KC, CT, affected small numbers of traders in the initial speculative position limit OJ, SB, and SF core referenced futures physical delivery contracts.

TABLE III–B–8—IFUS SOFT AGRICULTURAL CONTRACTS—SPOT MONTH

Unique persons over spot month limit Reportable Core referenced futures contract Basis of spot-month level Limit level persons spot Cash settled Physical deliv- month only contracts ery contracts

Cocoa (CC) ...... 15% DS ...... 3,300 0 0 164 25% DS ...... †† 5,500 0 0 Coffee ‘‘C’’ (KC) ...... 15% DS ...... 1,440 0 * 336 25% DS ...... †† 2,400 0 * Cotton No. 2 (CT) ...... 15% DS ...... 960 0 * 122 25% DS ...... †† 1,600 0 0 FCOJ–A (OJ) ...... 15% DS ...... 1,680 0 0 38 25% DS ...... †† 2,800 0 0 Sugar No. 11 (SB) ...... 15% DS ...... 13,980 * 10 443 25% DS ...... †† 23,300 0 * Sugar No. 16 (SF) ...... 15% DS ...... 4,200 0 0 12 †† 25% DS ...... †† 7,000 0 0 Reproposed speculative position limit levels are shown in bold. ‘‘15% DS’’ means 15 percent of the deliverable supply as estimated by the exchange listing the core referenced futures contract and is in- cluded to provide information regarding the distribution of reportable traders. ‘‘25% DS’’ means 25 percent of the deliverable supply as estimated by the exchange listing the core referenced futures contract. †† Limit level requested by ICE. * Denotes fewer than 4 persons.

c. Metals (HG) core referenced futures contracts percent of estimated deliverable submitted by CME are reasonable. supply.545 In the case of GC and SI, this As explained above, the Commission Nevertheless, the Commission has is a doubling of the current exchange-set has verified that the estimates of determined to repropose the initial limit levels.546 In the case of HG, the deliverable supply for each of the speculative spot month position limit initial level is the same as the existing COMEX Gold (GC), COMEX Silver (SI), levels for GC, SI, and HG at the DCM-set level for the core referenced NYMEX Platinum (PL), NYMEX recommended levels submitted by futures contract and lower than the level Palladium (PA), and COMEX Copper CME,544 all of which are lower than 25 previously proposed.

TABLE III–B–9—CME METALS CONTRACTS—SPOT MONTH LIMIT LEVELS

Previously 25% of estimated Reproposed Contract proposed deliverable speculative limit level 547 supply 548 limit level

GC ...... 3,000 11,200 6,000

542 December 2013 Position Limits Proposal, 78 545 The Commission noted in the December 2013 546 One commenter cautioned against raising limit FR at 75839–40 (Appendix D to Part 150—Initial Position Limits Proposal ‘‘that DCMs historically levels for GC to 25 percent of deliverable supply, Position Limit Levels). have set or maintained exchange spot month limits and expressed concern that higher federal limits at levels below 25 percent of deliverable supply.’’ 543 Rounded up to the next 100 contracts. would incentivize exchanges to raise their own December 2013 Position Limits Proposal, 78 FR at 544 limits. CL–WGC–59558 at 2–4. CL–CME–61007 at 5. 75729.

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TABLE III–B–9—CME METALS CONTRACTS—SPOT MONTH LIMIT LEVELS—Continued

Previously 25% of estimated Reproposed Contract proposed deliverable speculative limit level 547 supply 548 limit level

SI ...... 1,500 5,600 3,000 PL ...... 500 900 100 PA ...... 650 900 ¥500 HG ...... 1,200 1,100 1,000

The Commission has also determined reproposes today for PL, PA, and HG while setting initial speculative levels at to repropose the initial speculative spot maintain the status quo for those 25 percent of deliverable supply would, month position limit level for PL at 100 contracts, the Commission assumes that based upon logic and the Commission’s contracts and PA at 500 contracts, some or possibly all of such traders over impact analysis, affect fewer traders in which are the levels recommended by the reproposed levels are hedgers. The the metals physical delivery contracts, CME. In the case of PL and PA, the Commission reiterates the discussion consistent with its statement in the reproposed level is the same as the above regarding agricultural contracts: December 2013 Position Limits existing DCM-set level for the core hedgers may have to file for an Proposal, the Commission believes that referenced futures contract, and a applicable exemption, but hedgers with setting these lower levels of initial spot decrease from the previously proposed bona fide hedging positions should not month limits will serve the objectives of levels of 500 and 650 contracts, have to reduce their positions as a result preventing excessive speculation, respectively. of speculative position limits per se. 550 The Commission found varying Thus, the number of traders in the manipulation, squeezes and corners, numbers of traders in the GC, SI, PL, metals physical delivery contracts who while ensuring sufficient market PA, and HG physical delivery contracts would need to reduce speculative liquidity for bona fide hedgers in the over the initial levels, but the numbers positions below the reproposed limit view of the listing DCM and ensuring were very small except for PA.549 levels should be lower than the numbers that the price discovery function of the Because the levels that the Commission indicated by the impact analysis. And, market is not disrupted.

TABLE III–B–10—CME METAL CONTRACTS—SPOT MONTH

Unique persons over spot month limit Reportable Core referenced futures contract Basis of spot-month level Limit level persons spot Cash settled Physical deliv- month only contracts ery contracts

Gold (GC) ...... CME recommendation ...... 6,000 * * 518 25% DS ...... 11,200 0 0 Silver (SI) ...... CME recommendation ...... 3,000 0 0 311 25% DS ...... 5,600 0 0 Platinum (PL) ...... CME recommendation ...... † 500 13 * 235 25% DS ...... 900 10 * 50% DS ...... 1,800 * 0 Palladium (PA) ...... CME recommendation ...... † 100 6 14 164 25% DS ...... 900 0 0 Copper (HG) ...... CME recommendation ...... † 1,000 0 * 493 25% DS ...... 1,100 0 * Reproposed speculative position limit levels are shown in bold. ‘‘25% DS’’ means 25 percent of the deliverable supply as estimated by the exchange listing the core referenced futures contract. ‘‘50% DS’’ means 50 percent of the deliverable supply as estimated by the exchange listing the core referenced futures contract and is in- cluded to provide information regarding the distribution of reportable traders. † Denotes existing exchange-set limit level. * Denotes fewer than 4 persons.

The Commission’s impact analysis month limit levels for PL and PA at the referenced contracts. The Commission reveals no unique persons in the SI and lower levels recommended by CME notes those limits would appear to HG cash settled referenced contracts, would impact a few traders in PL and impact more traders in the physical- and very few unique persons in the cash PA cash settled contracts. delivery PA contract than in the cash- settled GC referenced contract, whose The Commission has carefully settled PA contract, while fewer traders positions would have exceeded the considered the numbers of unique would be impacted in the physical- initial limit levels for those contracts. persons that would be impacted by each delivery PL contract than in the cash- Based on the Commission’s impact of the cash-settled and physical-delivery settled PL contract (in any event, few analysis, setting the initial federal spot spot month limits in the PL and PA traders would appear to be affected).551

547 December 2013 Position Limits Proposal, 78 549 Fewer than four unique persons. 551 In this regard, the Commission notes that CME FR at 75840 (Appendix D to Part 150—Initial 550 Contra CL–ISDA/SIFMA–59611 at 55 did not have access to the Commission’s impact Position Limit Levels). (proposed spot month limits ‘‘are almost certainly analysis when CME recommended levels for its 548 Rounded up to the next 100 contracts. far smaller than necessary to prevent corners or physical-delivery core referenced futures contracts. squeezes’’).

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The Commission also observed the deliverable supply for each of the the levels for these four contracts as distribution of those cash-settled traders NYMEX Natural Gas (NG), Light Sweet previously proposed. As stated in the over time; as reflected in the open Crude (CL), NY Harbor ULSD (HO), and December 2013 Position Limits interest table discussed below regarding RBOB Gasoline (RB) core referenced Proposal, the 25 percent formula ‘‘is setting non-spot month limits, it can be futures contracts submitted by CME are consistent with the longstanding readily observed that open interest in reasonable. acceptable practices for DCM core each of the cash-settled PL and PA The Commission has determined to principle 5 which provides that, for referenced contracts was markedly repropose the initial speculative spot physical-delivery contracts, the spot- month position limit levels for the NG, lower in the second 12-month period month limit should not exceed 25 CL, HO, and RB core referenced futures (year 2) than in the prior 12-month percent of the estimated deliverable contracts at 25 percent of estimated period (year 1). Accordingly, the supply.’’ 553 The Commission continues Commission accepts the CME deliverable supply which, in the case of to believe, based on its experience and recommended levels in PL and PA CL, HO, and RB is higher than the levels expertise, that the 25 percent formula is referenced contracts. recommended by CME.552 As is evident from the table set forth below, this also an ‘‘effective prophylactic tool to reduce d. Energy means that the Commission is the threat of corners and squeezes, and As explained above, the Commission reproposing speculative position limit promote convergence without has verified that the estimates of levels that are significantly higher than compromising market liquidity.’’ 554

TABLE III–B–11—CME ENERGY CONTRACTS—SPOT MONTH LIMIT LEVELS

Previously 25% of estimated Reproposed Contract proposed deliverable speculative limit level 555 supply 556 limit level

NG ...... 1,000 2,000 2,000 CL ...... 3,000 10,400 10,400 HO ...... 1,000 2,900 2,900 RB ...... 1,000 6,800 6,800

The levels that CME recommended for traders in both cash settled and physical would to some degree maintain the NG, CL, HO, and RB are twice the delivery contracts. For NG, the status quo in natural gas because each existing exchange-set spot month limit Commission is reproposing the physical of the NYMEX and ICE cash-settled levels. Nevertheless, the Commission is delivery limit at 25% of deliverable natural gas contracts, which settle to the reproposing speculative spot month supply, as recommended by CME; 557 final settlement price of the physical limit levels at 25 percent of deliverable the Commission is also reproposing a delivery contract, include a conditional supply for CL, HO, and RB because the conditional spot month limit exemption spot month limit exemption of 5,000 Commission believes that higher levels of 10,000 for cash-settled contracts in contracts (for a total of 10,000 will lessen the impact on a number of natural gas only.558 This exemption contracts).559 However, neither the

552 CL–CME–61007 at 5. One commenter opined applied a spot-month position limit for cash-settled over a commodity), it does not address the problem that 25 percent of deliverable supply would result contracts in natural gas at a level of five times the of undue speculative influence on futures prices.’’); in a limit level that is too high for natural gas, and level of the limit for the physical delivery core CL-Better Markets-60401 at 17 (‘‘There is no suggest 5 percent as an alternative that ‘‘would referenced futures contract. See Position Limits for justification for treating cash and physically-settled provide ample liquidity and significantly reduce Futures and Swaps, 76 FR 71626, 71687 (Nov. 18, contracts differently in any month, and settlement the potential for excessive speculation.’’ CL– 2011). characteristics should not be a determinant of the Industrial Energy Consumers of America–59964 at 559 Some commenters supported retaining a ability to exceed the limits in any month.’’). One 3. Another commenter supported increasing ‘‘the conditional spot month limit in natural gas. E.g., commenter urged the Commission ‘‘to eliminate the spot-month position limit levels for Henry Hub CL–ICE–60929 at 12 (‘‘Any changes to the current requirement that traders hold no physical-delivery Natural Gas referenced contracts to be consistent terms of the Conditional Limit would disrupt position in order to qualify for the conditional spot- with CME Group’s or ICE’s estimates of deliverable present market practice for no apparent reason. month limit exemption’’ in order to maintain supply and more generally the significant new Furthermore, changing the limits for cash-settled liquidity in the NYMEX natural gas futures contracts would be a significant departure from sources of natural gas.’’ CL–NGSA–59674 at 3. contract. CL–BG Group–59656 at 6–7. See also CL– 553 current rules, which have wide support from the December 2013 Position Limits Proposal, 78 NGSA–59674 at 38–39 (supporting the higher broader market as evidenced by multiple public FR at 75729. conditional spot month limit in natural gas without 554 comments supporting no or higher cash-settled December 2013 Position Limits Proposal, 78 restricting positions in the underlying physical FR at 75729. limits.’’). Contra CL-Sen. Levin–59637 at 7 (‘‘The proposed higher limit for cash settled contracts is delivery contract); CL–EEI–EPSA–59602 at 10 (the 555 December 2013 Position Limits Proposal, 78 Commission should permit ‘‘market participants to FR at 75840 (App. D to part 150—Initial Position ill-advised. It would not only raise the affected position limits to levels where they would be rely on higher speculative limits for cash-settled Limit Levels). contracts while still holding a position in the 556 effectively meaningless, it would also introduce Rounded up to the next 100 contracts. market distortions favoring certain contracts and physical-delivery contract’’); CL–APGA–59722 at 8 557 One commenter expressed concern about certain exchanges over others, and potentially (the Commission should condition the spot month setting the spot month limit for natural gas swaps disrupt important markets, including the U.S. limit exemption for cash settled natural gas at the same level as for the physically settled natural gas market that is key to U.S. contracts by precluding a trader from holding more futures contract, because some referenced contracts manufacturing.’’); CL-Public Citizen–59648 at 5 than one quarter of the deliverable supply in cease to be economically equivalent ‘‘during the (‘‘Congress, in allowing an exemption for bona fide physical inventory). Cf. CL–CME–59971 at 3 limited window at expiry.’’ CL–BG Group–59937 at hedgers but not pure speculators, could not (eliminate the five times natural gas limit because 3. possibly have intended for the Commission to it ‘‘encourages participants to depart from, or 558 This exemption for up to 10,000 contracts implement position limits that allow market refrain from establishing positions in, the primary would be five times the spot month limit of 2,000 speculators to hold 125 percent of the estimated physical delivery contract market and instead opt contracts, consistent with the December 2013 deliverable supply. Once again, while this for the cash-settled derivative contract market, Position Limits Proposal. See December 2013 exception for cash-settled contracts would avoid especially during the last three trading days when Position Limits Proposal, 78 FR at 75736–8. Under market manipulations such as corners and squeezes the five times limit applies. By encouraging vacated § 151.4, the Commission would have (since cash-settled contracts give no direct control departure from the primary contract market, the five

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NYMEX and ICE penultimate contracts, swaps, are currently subject to any spot exemption greater than 25% of which settle to the daily settlement month position limit. In addition, the deliverable supply for cash settled price on the next to last trading day of Commission’s impact analysis suggests contracts in natural gas would the physical delivery contract, nor OTC that a conditional spot month limit potentially benefit many traders. TABLE III–B–12—ENERGY CONTRACTS—SPOT MONTH

Unique persons over spot month limit Reportable Core referenced futures contract Basis of spot-month level Limit level persons spot Cash settled Physical deliv- month only contracts ery contracts

Natural Gas (NG) ...... CME recommendation ...... 2,000 131 16 1,400 50% DS ...... 4,000 77 * Conditional Exemption ...... 10,000 20 0 Light Sweet Crude (CL) ...... CME recommendation ...... †† 6,000 19 8 1,733 25% DS ...... 10,400 16 * 50% DS ...... 20,800 * 0 NY Harbor ULSD (HO) ...... CME recommendation ...... 2,000 24 11 470 25% DS ...... 2,900 15 5 50% DS ...... 5,800 5 0 RBOB Gasoline (RB) ...... CME recommendation ...... 2,000 23 14 463 25% DS ...... 6,800 * 0 50% DS ...... 13,600 0 0 Reproposed speculative position limit levels are shown in bold. ‘‘25% DS’’ means 25 percent of the deliverable supply as estimated by the exchange listing the core referenced futures contract. ‘‘50% DS’’ means 50 percent of the deliverable supply as estimated by the exchange listing the core referenced futures contract and is included to provide informa- tion regarding the distribution of reportable traders. †† CME recommended a step-down spot month limit of 6,000/5,000/4,000 contracts in the last three days of trading. * Denotes fewer than 4 persons.

5. Setting Levels of Single-Month and market power of a speculator that could Commission’s experience since 2011 All-Months-Combined Limits otherwise be used to cause unwarranted with non-spot month speculative price movements.’’ 561 position limit levels for the Hard Red The Commission has determined to a. CME and MGEX Agricultural Winter Wheat (KW) and Hard Red use the futures position limits formula, Spring Wheat (MWE) core referenced 10 percent of the open interest for the Contracts futures contracts, the Commission is first 25,000 contracts and 2.5 percent of The Commission is reproposing the reproposing the limit levels for those the open interest thereafter, to repropose non-spot month speculative position two commodities at the current level of the non-spot month speculative position limit levels for the Corn (C), Oats (O), 12,000 contracts rather than reducing limits for referenced contracts, subject Rough Rice (RR), Soybeans (S), Soybean to the details and qualifications set forth Meal (SM), Soybean Oil (SO), and them to the lower levels that would in this Notice.560 The Commission Wheat (W) core referenced futures result from applying the 10, 2.5 percent 563 continues to believe that ‘‘the non-spot contracts based on the 10, 2.5 percent formula. month position limits would restrict the open interest formula.562 Based on the

times limit encourages a process of de-liquefying CMC–59634 at 11. Some commenters also urged the the belief that the 10, 2.5 percent formula would the benchmark physically delivered futures market Commission to wait until it has reliable data before result in non-spot month limits that ‘‘are much too and directly affects the determination of the final establishing non-spot month limits. See, e.g., CL– high to adequately regulate excessive speculation settlement price for the NYMEX NG contract- the EEI–EPSA–59602 at 11; CL–FIA–59595 at 3, 14; CL– that might lead to price fluctuations.’’ CL–Tri-State– very same price that a position representing five MFA–60385 at 5; CL–ISDA/SIFMA–59611 at 29; 59682 at 1. To ‘‘address the cumulative, disruptive times the physical limit will settle against.’’). CL–Olam–59658 at 1, 3. See also discussion of part effect of traders who hold large, but not dominant 560 As noted in the December 2013 Position 20 data adjustments under § 150.2, below. Contra positions,’’ one commenter suggested basing non- Limits Proposal, the Commission has used the 10, CL–O SEC–59972 (‘‘corners and other supply spot month position limits on ‘‘an acceptable total 2.5 percent formula in administering the level of the fluctuations can occur during non-spot months’’). level of speculation that approximates the historic legacy all-months position limits since 1999. A commenter who did not support adopting non- ratio of hedging to investor/speculative trading.’’ December 2013 Position Limits Proposal, 78 FR at spot month limits suggested a fall-back position of CL–A4A–59714 at 4. See CL-Better Markets–60401 75729–30. adopting ‘‘any months limits’’ but not ‘‘all months at 4 (‘‘Historically, speculators in commodity Several commenters did not support establishing limits,’’ and suggested an alternative 10, 5 percent futures have constituted between 15%–30% of non-spot month limits. See, e.g., CL–ISDA/SIFMA– formula in specified circumstances. CL-Working market activity, and within this range speculators 59611 at 27 (‘‘There is no justification whatsoever Group–59693 at 62. See also CL–CME–59718 at 44 productively facilitated effective hedging without for non-spot-month limits.’’); CL–EEI–EPSA–59602 (supporting a 10, 5 percent formula). One meaningfully disrupting or independently shaping at 10 (‘‘limits outside the spot month are not commenter supported abolishing single month the market’s behavior.’’). limits ‘‘in favor of an ‘‘all months’’ or gross position necessary’’); CL–AMG–59709 at 10 (the 561 December 2013 Position Limits Proposal, 78 that would effectively allow the player to adapt Commission should ‘‘decline to adopt non-spot- FR at 75730. their position to the realities of an agricultural crop month position limits’’); CL–CME–59718 at 39 (the 562 Proposal’s non-spot-month position limit formula that doesn’t flow in equal monthly chunks.’’ CL- One commenter expressed concern ‘‘that should be withdrawn’’); CL–CAM–60097 at 2 Thornton–59702 at 1. Another commenter stated proposed all-months-combined speculative position (‘‘Non-spot month limits are neither necessary nor that ‘‘[p]osition limits should be a function of the limits based on open interest levels is not appropriate.’’); CL–BG Group–60383 at 2 (‘‘Any liquidity of the market,’’ CL–MFA–59606 at 21, and necessarily the appropriate methodology and could final rule should be limited to a federally mandated asserted that applying the 10, 2.5 percent formula lead to contract performance problems.’’ This spot-month limit (not any/all month limits).’’). will result in ‘‘a self-reinforcing cycle of lower open commenter urged ‘‘that all-months-combined limits Some of these same commenters supported position interest and lower position limits in successive be structured to ‘telescope’ smoothly down to accountability in the non-spot months rather than years.’’ CL–MFA–59696 at 22. Another commenter legacy spot-month limits in order to ensure limits. See, e.g., CL–EEI–EPSA–59602 at 10, CL– supported ‘‘tying the overall non-spot month continued convergence.’’ CL–NGFA–60312 at 4. FIA–59595 at 3, CL–MFA–60385 at 5, CL–ISDA/ position limits to an acceptable aggregate (market- 563 One commenter supported a higher limit for SIFMA–59611 at 29, CL–Calpine–59663 at 3–4, CL– wide) level of speculation, and tying individual KW than proposed to promote growth and to enable Working Group-60396 at 10, CL–EDF–60398 at 4, trader limits to that aggregate level.’’ CL-Public liquidity for Kansas City hedgers who often use the CL–ICE–59966 at 8, CL–BG Group-60383 at 2, CL– Citizen–59648 at 4. Another commenter expressed Chicago market. CL-Citadel-59717 at 8. Another Continued

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TABLE III–B–13—CME AND MGEX AGRICULTURAL CONTRACTS—NON-SPOT MONTH LIMIT LEVELS

Previously Reproposed Contract Current proposed speculative limit level limit level limit level

C ...... 33,000 53,500 62,400 O ...... 2,000 1,600 5,000 RR ...... 1,800 2,200 5,000 S ...... 15,000 26,900 31,900 SM ...... 6,500 9,000 16,900 SO ...... 8,000 11,900 16,700 W 564 ...... 12,000 16,200 32,800 KW ...... 12,000 6,500 12,000 MWE ...... 12,000 3,300 12,000

Maintaining the status quo for the limit level for W, as 32,800 contracts criterion, such as percentage of open non-spot month limit levels for the KW appears to be extraordinarily large in interest, the Commission has and MWE core referenced futures comparison to open interest in the KW historically recognized that there can contracts means there will be partial and MWE markets, and the limit levels ‘‘result . . . a range of acceptable wheat parity.565 The Commission has for KW and MWE are already larger than position limit levels.’’ 566 determined not to raise the reproposed a limit level based on the 10, 2.5 percent limit levels for KW and MWE to the formula. Even when relying on a single TABLE III–B–14—CME AND MGEX AGRICULTURAL CONTRACTS—NON-SPOT MONTHS

Open interest Unique persons above Reportable Core-referenced futures Initial limit level persons in contract limit level market— Year Futures Swaps Total All months Single month all months

Corn (C) ...... 1 1,829,359 359,715 2,189,074 62,400 * * 2,606 2 1,779,977 641,014 2,420,991 Oats (O) ...... 1 10,097 646 10,743 5,000 0 0 173 2 11,223 480 11,703 Rough Rice (RR) ...... 1 10,585 362 10,948 5,000 0 0 281 2 12,769 4 12,773 Soybeans (S) ...... 1 973,037 109,858 1,082,895 31,900 6 4 2,503 2 962,636 235,679 1,198,315 Soybean Meal (SM) ...... 1 422,611 71,887 494,498 16,900 5 4 978 2 463,549 134,399 597,948 Soybean Oil (SO) ...... 1 421,114 55,265 476,379 16,700 5 4 1,034 2 464,373 125,106 589,478 Wheat (W) ...... 1 1,072,107 162,999 1,235,105 32,800 * * 1,867 2 1,010,342 222,420 1,232,762 Wheat (MWE) ...... 1 67,653 1,944 69,596 † 5,000 10 7 342 2 66,608 3,079 69,687 12,000 0 0 Wheat (KW) ...... 1 169,059 9,436 178,495 † 8,100 9 8 718 2 216,236 29,563 245,799 12,000 * * Year 1 = July 1, 2014 to June 30, 2015 Year 2 = July 1, 2015 to June 30, 2016 Reproposed speculative position limit levels are shown in bold. † Application of the 10, 2.5 percent formula would result in a level lower than the level adopted by the Commission in 2011. * Denotes fewer than 4 persons.

levels for the CC, KC, CT, OJ, SB, SF and based on the 10, 2.5 percent open b. Softs LC 567 core referenced futures contracts interest formula. The Commission is reproposing non- spot month speculative position limit

commenter supported setting ‘‘a non-spot month and combined position limit of no less than 12,000 at 8; CL–CMC–60950 at 11; CL–CME–59718 at 44; months combined limits in continuously produced for all three wheat contracts.’’ CL–MGEX–60301 at CL–AFBF–59730 at 4; CL–MGEX–59932 at 2; CL– non-storable commodities such as livestock . . . 1. Contra CL–O SEC–59972 at 7–8 (commending MGEX–60301 at 1; CL–MGEX–59610 at 2–3; CL– will reduce the liquidity needed by hedgers in ‘‘the somewhat more restrictive limitations . . . on MGEX–60936 at 2–3; CL–NCFC–59942 at 6; CL– deferred months who often manage their risk using wheat trading’’). NGFA–59956 at 3. strips comprised of multiple contract months.’’ CL– 566 564 The W core referenced futures contract refers Revision of Speculative Position Limits, 57 FR AFBF–59730 at 3–4. One commenter requested that to soft red winter wheat, the KW core reference 12770, 12766 (Apr. 13, 1992). See also Revision of the Commission withdraw its proposal regarding Speculative Position Limits and Associated Rules, non-spot month limits, citing, among other things, futures contract refers to hard red winter wheat, and 63 FR 38525, 38527 (July 17, 1998). Cf. December the Commission’s previous approval of exchange the MWE core reference futures contract refers to 2013 Position Limits Proposal, 78 FR at 75729 rules lifting all-months-combined limits for live hard red spring wheat; i.e., the contracts are for (there may be range of spot month limits that cattle contracts ‘‘to ensure necessary deferred different products. maximize policy objectives). month liquidity.’’ CL–CME–59718 at 4. Another 565 Several commenters supported adopting 567 One commenter expressed concern that too commenter expressed concern that non-spot month equivalent non-spot month position limits for the high non-spot month limit levels could lead to a limits would have a negative impact on live cattle three existing wheat referenced contracts traders. repeat of convergence problems experienced by market liquidity. CL–CMC–59634 at 12–13. See also See, e.g., CL–FIA–59595 at 4, 15; CL–CMC–60391 certain contracts and that ‘‘the imposition of all CL–CME–59718 at 41.

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TABLE III–B–15—SOFTS AND OTHER AGRICULTURAL CONTRACTS—NON-SPOT MONTH LIMIT LEVELS

Previously Reproposed Contract proposed speculative limit level 568 limit level

CC ...... 7,100 10,200 KC ...... 7,100 8,800 CT ...... 8,800 9,400 OJ ...... 2,900 5,000 SB ...... 23,500 38,400 SF ...... 1,200 7,000 LC ...... 12,900 12,200

Set forth below is a summary of the impact analysis for softs and live cattle. TABLE III–B–16—SOFTS AND OTHER AGRICULTURAL CONTRACTS—NON-SPOT MONTHS

Open interest Unique persons above Reportable Core-referenced futures Initial limit level persons in contract limit level market— Year Futures Swaps Total All months Single month all months

Cocoa (CC) ...... 1 240,984 11,257 252,240 10,200 12 7 682 2 273,134 56,853 329,987 Coffee C (KC) ...... 1 211,051 24,164 235,215 8,800 6 * 1,175 2 223,885 51,846 275,731 Cotton No. 2 (CT) ...... 1 238,580 35,102 273,682 9,400 13 8 1,000 2 239,321 60,477 299,798 FCOJ–A (OJ) ...... 1 16,883 121 17,004 5,000 ...... * * 242 2 16,336 5 16,341 Sugar No. 11 (SB) ...... 1 1,016,271 211,994 1,228,265 38,400 14 9 874 2 1,077,452 382,816 1,460,268 Sugar No. 16 (SF) ...... 1 8,385 0 8,385 7,000 * 0 22 2 9,608 0 9,608 Live Cattle (LC) ...... 1 387,896 23,626 411,522 12,200 9 * 1,436 2 350,147 52,330 402,478 Year 1 = July 1, 2014 to June 30, 2015. Year 2 = July 1, 2015 to June 30, 2016. Reproposed speculative position limit levels are shown in bold. * Denotes fewer than 4 persons.

c. Metals levels for the GC, SI, PL, PA, and HG on the 10, 2.5 percent open interest 569 The Commission is reproposing non- core referenced futures contracts based formula. spot month speculative position limit

568 December 2013 Position Limits Proposal, 78 569 One commenter was concerned that applying Commission to ‘‘apply a consistent methodology to FR at 75839–40 (App. D to part 150—Initial the 10, 2.5 percent formula to open interest for gold both spot and non-spot months.’’ CL–WGC–59558 Position Limit Levels). would result in a lower non-spot month limit level at 5. than the spot month limit level, and urged the

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TABLE III–B–17—CME METALS CONTRACTS—NON-SPOT MONTH LIMIT LEVELS

Previously Reproposed Contract proposed speculative limit level limit level

GC ...... 21,500 19,500 SI ...... 6,400 7,600 PL ...... 5000 5,000 PA ...... 5000 5,000 HG ...... 5,600 7,800

Set forth below is a summary of the impact analysis for metals.570

TABLE III–B–18—CME METALS CONTRACTS—NON-SPOT MONTHS

Open interest Unique persons above limit Reportable Core-ref- Initial limit level persons in erenced fu- level market—all tures contract Year Futures Swaps Total All months Single month months

Gold (GC) ..... 1 618,738 47,727 666,465 19,500 19 17 1,557 2 667,495 36,029 703,525 Silver (SI) ..... 1 218,028 9,867 227,895 7,600 15 18 1,023 2 203,645 3,510 207,155 Platinum (PL) 1 70,151 21,566 91,717 5,000 26 26 842 2 70,713 2,285 72,997 Palladium (PA) ...... 1 37,488 1,929 39,417 5,000 * * 580 2 28,276 823 29,099 Copper (HG) 1 170,784 22,859 193,643 7,800 19 12 1,457 2 186,525 47,365 233,890 Year 1 = July 1, 2014 to June 30, 2015 Year 2 = July 1, 2015 to June 30, 2016 Reproposed speculative position limit levels are shown in bold. * Denotes fewer than 4 persons.

d. Energy levels for the NG, CL, HO, and RB core the 10, 2.5 percent open interest 571 The Commission is reproposing non- referenced futures contracts based on formula. spot month speculative position limit

570 One commenter expressed concern that Commission’s non-spot-month position limits is limits will hamper legitimate hedging activity.’’ CL– imposing non-spot position limits on copper would random and arbitrarily inflexible with no Citadel–59717 at 7–8. Another commenter negatively affect liquidity as evidenced by the relationship to preventing excessive speculation or suggested setting limit levels based on customary number of unique persons affected. CL–CMC–59634 manipulation.’’ CL–CME–59718 at 41. position size. CL–APGA–59722 at 6. This at 13, n. 26. Another commenter cited the number 571 One commenter suggested deriving non-spot commenter also supported setting the single month of unique traders with all-months overages as month limit levels for the CL, HO, and RB limit at two-thirds of the all months combined limit shown in the open interest data for the GC, SI and referenced contracts from the usage ratios for U.S. in order to relieve market congestion as traders exit PL contracts in the December 2013 Position Limits crude oil and oil products rather than open interest or roll out of the next to expire month into the spot Proposal as an indication that ‘‘the impact of the and expressed concern that ‘‘unnecessarily low month. CL–APGA–59722 at 7.

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TABLE III–B–19—CME ENERGY CONTRACTS—NON-SPOT MONTH LIMIT LEVELS

Previously Reproposed Contract proposed speculative limit level limit level

NG ...... 149,600 200,900 CL ...... 109,200 148,800 HO ...... 16,100 21,300 RB ...... 11,800 15,300

Set forth below is a summary of the impact analysis for energy contracts.

TABLE III–B–20—CME ENERGY CONTRACTS—NON-SPOT MONTHS

Open interest Unique persons above limit Reportable Core-ref- Initial limit level persons in erenced fu- level market—all tures contract Year Futures Swaps Total All months Single month months

Natural Gas (NG) ...... 1 4,919,841 2,866,128 7,785,969 200,900 * 0 1,846 2 4,628,471 3,331,141 7,959,612 Light Sweet Crude (CL) 1 4,071,681 1,587,450 5,659,130 148,800 0 0 2,673 2 4,130,131 1,744,137 5,874,268 NY Harbor ULSD (HO) 1 638,040 138,360 776,400 21,300 6 * 760 2 587,796 65,721 653,518 RBOB Gaso- line (RB) ... 1 448,598 81,822 530,420 15,300 8 7 837 2 505,849 30,477 536,327 Year 1 = July 1, 2014 to June 30, 2015. Year 2 = July 1, 2015 to June 30, 2016. Reproposed speculative position limit levels are shown in bold. * Denotes fewer than 4 persons.

6. Subsequent Levels of Limits Commission Reproposal: The b. Re-setting Levels of Spot-Month The Commission notes that many of Commission has determined to Limits the comments referenced above, repropose this provision as previously proposed in the December 2013 Position Commission Proposal: The regarding setting initial position limits, Commission proposed in § 150.2(e)(3) to are also discussed below, regarding re- Limits Proposal, and reiterates that it reset each spot month limit at a level no setting levels of limits. will fix subsequent levels no less frequently than every two calendar greater than one-quarter of the estimated a. General Procedure for Re-Setting years. The Commission is not proposing spot-month deliverable supply, based Levels of Limits to establish a procedural requirement to on the estimate of deliverable supply Commission Proposal: The reset limit levels more frequently than provided by the exchange listing the Commission proposed in § 150.2(e)(2) every two years, because as the core referenced futures contract. The that it would fix subsequent levels of frequency of reset increases, the burdens Commission proposed that it could, in its discretion, rely on its own estimate speculative position limits no less on market participants to update of deliverable supply. The Commission frequently than every two calendar compliance systems and strategies, and further proposed that, alternatively, it years, in accordance with the on exchanges to submit deliverable could set spot-month limits based on procedures in § 150.2(e)(3) for spot- supply estimates and reset exchange month limits and § 150.2(e)(3) for non- the recommended level of the exchange limit levels, also increase. The spot-month limits, discussed below.572 listing the core referenced futures Commission believes that a two year The Commission proposed it would contract, if lower than 25 percent of timetable should reduce burdens on publish such subsequent levels on its estimated deliverable supply.574 market participants while still Web site. Comments Received: Commenters Comments Received: Regarding maintaining limits based on recent market data. Should higher limit levels generally recommended the § 150.2(e)(2), commenters requested the Commission enhance predictability and Commission review the level of limits be desired, exchanges or market participants may petition the reduce uncertainty for market more frequently than every two years to participants, by either restricting how address changes that may occur within Commission to change limit levels much adjustment would be made to the the commodities markets.573 within the two year period. position limit level, or having the 572 December 2013 Position Limits Proposal, 78 discretion to not alter position limit FR at 75728. 60325 at 2–3; CL–Better Markets–60401 at 19–20; 573 CL–Public Citizen–59648 at 5; CL–AFR–59711 CL–CMOC–59720 at 3; CL–Cota–59706 at 2; CL– 574 December 2013 Position Limits Proposal, 78 at 2; CL–IECA–59713 at 3; CL–Better Markets– RF–60372 at 3. FR at 75728.

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levels, for example, if there have not One commenter recommended that the derivative positions to a proportion of been problems with convergence.575 deliverable supply estimate for natural the deliverable supply of the Commenters were divided regarding gas should include supplies that are commodity, spot month position limits the proposed methodology for available at other major locations in reduce the possibility that a market computing spot month position limit addition to the specific futures delivery participant can use derivatives, levels (which is calculated by location of Erath, Louisiana, because including referenced contracts, to affect determining a figure that is no more commercials at these locations use the the price of the cash commodity (and than 25 percent of estimated deliverable futures contract for hedging and price vice versa). Limiting a speculative supply).576 Several commenters stated basing and basing spot month limits on position based on a percentage of that the proposed formula for setting a more limited delivery area would be deliverable supply also restricts a spot month limits based on 25 percent too restrictive.584 In estimating speculative trader’s ability to establish a of deliverable supply results in spot deliverable supply, one commenter leveraged position in cash-settled month position limits that would be too recommended that the Commission not derivative contracts, diminishing that high and may result in contract include supplies that do not meet trader’s incentive to manipulate the performance issues.577 Other delivery specifications.585 The same cash settlement price. Commenters did commenters thought the formula results commenter said that DCMs should not provide evidence that would suggest in spot-month position limits that provide documentation if including that the open interest formula would would be too low and hinder market long term supply agreements in respond more effectively to these liquidity.578 Yet another requested that deliverable supply estimates to enable concerns, and the Commission does not the Commission do further research to the Commission to verify the believe that using open interest would determine whether deliverable supply information. The commenter expressed be preferable for calculating spot-month or open interest was a better means of concern about financial holding position limit levels. setting spot month position limits, and companies’ ability to own, warehouse In addition, setting the limit levels at apply the same metric (deliverable and trade physical commodities and no greater than 25 percent of deliverable supply or open interest) to spot month urged the Commission to assess how supply has historically been effective on limits and to non-spot month limits.579 such firms might affect deliverable both the federal and exchange level to Several commenters recommended that supply.586 combat corners and squeezes. In the the Commission consider an alternative Commission Reproposal: The preamble to the final rules for vacated means of limiting excessive speculation, Commission is reproposing to reset each Part 151, the Commission noted that the that is, by setting position limits at a spot-month limit, in its discretion, 25 percent of deliverable supply level low enough to restore a hedger either: Based on 25 percent of formula appears to ‘‘work effectively as majority in open interest in each core deliverable supply as estimated by an a prophylactic tool to reduce the threat referenced futures contract.580 exchange listing the core referenced of corners and squeezes and promote In estimating deliverable supply, futures contract; to the existing spot- convergence without compromising some commenters recommended that month position limit level (that is, not market liquidity.’’ Commenters did not the Commission include supply that is changing such level); or to the provide evidence to support claims that subject to long-term supply contracts, recommended level of the exchange this historical formula is no longer arguing that such supply can be readily listing the core referenced futures effective. made available for futures delivery.581 contract, but not greater than 25 percent In response to concerns that 25 One commenter recommended that the of estimated deliverable supply. In the percent of deliverable supply may result Commission permit the inclusion in the alternative, if the Commission elects to in a limit level that is too high, the deliverable supply calculation of rely on its own estimate of deliverable Commission notes that exchanges can supplies that can be readily transported supply, it will first publish that estimate and often do—and are permitted under to the futures delivery location.582 for comment in the Federal Register. reproposed § 150.5(a) to—set limits at a Another commenter recommended that Thus, the Commission accepts the level lower than 25 percent of estimated the deliverable supply estimate should commenter’s recommendation that the deliverable supply, which allows the include related commodities that a DCM Commission have discretion to retain exchanges to alter exchange-set limits allows to be used to liquidate a futures current spot-month position limit levels. easily based on changing market position through an EFP transaction.583 In this regard, the Commission provides, conditions. in reproposed § 150.2(e)(3)(ii)(B), that an In response to commenters’ 575 CL–FIA–60303 at 8, Agricultural Advisory exchange need not submit an estimate of suggestion to restore a hedger majority, Committee Meeting Transcript at 126–134 (Dec. 9, deliverable supply, if the exchange the Commission notes such an 2014). provides notice to the Commission, not alternative may fail the requirements of 576 E.g., CL–WGC–59558 at 5; CL–MFA–60385 at less than two calendar months before CEA section 4a(a)(3)(B)(iv) to ensure 4–6; CL–ISDA/SIFMA–59611 at 3, 31, 55–56, and sufficient liquidity for bona fide 63–64; CL–MGEX–59610 at 2; CL–NGFA–59681 at the due date for its submission of an 4–5. estimate, that it is recommending the hedgers. Hedgers may not be transacting 577 See, e.g., CL–WGC–59558 at 5; CL–Public Commission not change the spot-month on opposite sides of the market Citizen–60313 at 1; CL–Tri-State–59682 at 1–2; CL– limit, and the Commission accepts such simultaneously and, thus, need AFR–59711 at 2; CL–WEED–59628 at 1; CL– speculators to provide liquidity. Simply Industrial Energy Consumers of America–59671 at recommendation. 3; CL–CMOC–59720 at 3; CL–IATP–60394 at 2; CL– The Commission notes that it has long changing the proportion of hedgers in NGFA–59681 at 4–5. used deliverable supply as the basis for the market does not mean that the 578 CL–ISDA/SIFMA–59611 at 55; CL–Armajaro– spot month position limits due to markets would operate more efficiently 59729 at 1; CL–CAM–60097 at 3–4. concerns regarding corners, squeezes, for bona fide hedgers. In addition, in 579 CL–WGC–59558 at 5. and other settlement-period order to adopt the commenter’s 580 E.g., CL–IATP–60323 at 5; CL–IATP–60394 at suggestion, the Commission would need 2; CL–RF–60372 at 3. manipulative activity. By restricting 581 CL–FIA–59595 at 3, 9–10; CL–NGSA–59941 at to reintroduce the withdrawn ’03 series 15. 584 CL–CAM–60097 at 3–4. forms which required traders to identify 582 CL–MFA–59606 at 18; CL–MFA–60385 at 6. 585 CL–IATP–60323 at 6. which positions were speculative and 583 CL–MSCGI–59708 at 2, 11. 586 CL–IATP–60323 at 7. which were hedging, since any entity,

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even a commercial end-user, can the Commission notes that exchanges Commission responds that it is deferring establish speculative positions. may set limits at a level lower than the the imposition of position limits on the In response to commenters’ federal limits in order to more readily Class III Milk contract, as discussed suggestions regarding methods for adapt to changing market conditions. below.593 The Commission also estimating deliverable supply, the Should higher limit levels be desired, observes that reproposed § 150.9 Commission notes that deliverable exchanges may petition the Commission permits market participants to apply supply estimates are calculated and or the Commission may determine to directly to the exchanges to obtain an submitted by DCMs. Guidance for change limit levels within the two year exemption to exceed speculative calculating deliverable supply can be period. Thus, the flexibility to change position limits. found in Appendix C to part 38. limit levels more frequently than every Several commenters recommended Amendments to part 38 are beyond the two years is already permitted by the that the Commission consider an scope of this rulemaking. However, such reproposed rules and the Commission is alternative means of limiting guidance already provides that not changing the timeline. speculative traders, by setting position deliverable supply calculations are One commenter recommended that limits at a level low enough to restore estimates based on what ‘‘reasonably the Commission ‘‘adopt final rules that a hedger majority in open interest in 594 can be expected to be readily available’’ give the Commission the flexibility to each core referenced futures contract. (including estimates of long-term supply increase position limits immediately or As discussed above, the Commission is that can be shown to be regularly made with little delay so that the market can concerned that ‘‘restoring’’ a hedger available for futures delivery). accurately respond to external forces majority may not ensure sufficient without violating position limits’’ or, in liquidity for bona fide hedgers. Hedgers c. Re-Setting Levels of Non-Spot-Month the alternative, ‘‘include peak open may not be transacting on opposite sides Limits interest levels beyond the most recent of the market simultaneously and, thus, Commission Proposal—General two years when it determines the level need speculators to provide liquidity. Procedure: For setting subsequent levels of open interest on which to base Simply changing the proportion of of non-spot month limits no less position limits.590 In response, the hedgers in the market does not mean frequently than every two calendar Commission notes that using peak open that the markets would operate more years, the Commission proposed in interest figures, as opposed to an efficiently for bona fide hedgers. In § 150.3(e)(4) to use the open interest average, as reproposed, may not addition, in order to implement this formula: 10 percent of the first 25,000 necessarily represent an accurate suggestion, the Commission would need to reintroduce the long defunct ’03 contracts and 2.5 percent of the open portrait of current market conditions. series forms which required traders to interest thereafter (10, 2.5 percent Using the most recent two years of data identify which positions were formula).587 is designed to ensure that the non-spot- speculative and which were hedging, Comments Received and Commission month limit levels are set relative to the current size of the market. because any entity, even a commercial Response: ‘‘In order to enhance the end-user, can establish speculative predictability and reduce uncertainty in Several commenters expressed the view that the proposed limits based on positions. business planning,’’ one commenter One commenter noted that the open recommended that the Commission the open interest formula would result in limit levels that are too high and interest formula permits a speculator to ‘‘adjust limits gradually and by no more hold a larger percentage of open interest than a minimum percentage in one would not accomplish the goal of 591 in a smaller commodity market and thus biennial cycle.’’ 588 The Commission reducing excessive speculation. In response, the Commission believes the the formula’s entire rationale seems declines this suggestion because, as 595 open interest formula provides a level ‘‘arbitrary . . . and . . . capricious.’’ explained below, the Commission is The Commission acknowledges that, reproposing a minimum non-spot that is low enough to reduce the potential for excessive speculation and because of the way the 10, 2.5 percent month limit level of 5,000 contracts; formula works, a speculator in a market market participants would be certain market manipulation without unduly impairing liquidity for bona fide with open interest of fewer than 25,000 that in no circumstance would the limit contracts may have a larger share of the hedgers. Under the rules reproposed level fall below that figure. Also, open interest than a speculator in a today, both the Commission and the because exchanges can set limits at market with an open interest of greater levels below the federal limit level, a exchanges would have flexibility to impose non-spot month limit levels at change in the federal limit may not have Jacoby–59622 at 1; CL–Pedestal–59630 at 2; CL– an effect on exchange limit levels. the greater of the open interest formula, Darigold–59651 at 1–2; CL–Traditum–59655 at 1; the spot month limit level, or 5,000 CL–Leprino–59707 at 2; CL–IDFA–59771 at 1–2; Several commenters recommended CL–Fonterra–59608 at 1–2; CL–NCFC–59613 at 6; that the Commission review the levels contracts. Several commenters expressed the CL–NMPF–59936 at 2; CL–DFA–59621 at 7–8; CL– of position limits more frequently than Glanbia Foods–60316 at 1; CL–Leprino Foods– view that the proposed limits based on once every two years to address changes 59707 at 2; CL–NMPF–59936 at 2. the open interest formula would result 593 that may occur within the commodities Some commenters urged the Commission to in limit levels for dairy contracts that establish an individual month position limit in markets.589 In response these concerns, are too low and would restrict hedging Class III Milk equal to the spot month limit but no 592 less than 3,000 contracts net, and an all-months- 587 December 2013 Position Limits Proposal, 78 use by limiting liquidity. The limit as a multiple of four times the spot month FR at 75729. limit, to foster needed liquidity in the non-spot 588 CL–FIA–60303 at 8. This commenter did not CL–RF–60372 at 3 (‘‘review position limits every months. See, e.g., CL–NCFC–59942 at 6. Another recommend any specific percentage limitation. six months’’). commenter urged an all-months-limit in Class III 589 E.g., CL–Public Citizen–59648 at 5 (annually); 590 CL–MFA–59606 at 21. Milk of ten times the spot month limit for a similar CL–AFR–II at 2 (greater frequency); CL–Better 591 E.g., CL–Tri-State–59682 at 1–2; CL–A4A– reason. CL–U.S. Dairy–59597 at 4. These comments Markets–60325 at 2–3 (‘‘[b]iennial updates . . . are 59714 at 3; CL–Better Markets–59716 at 24; CL– are now moot. completely inadequate’’); CL–Better Markets–59716 APGA–59722 at 3, 6; CL–AFBF–59730 at 3; CL– 594 E.g., CL–IATP–60323 at 5; CL–IATP–60394 at at 34 (biennial updates values ‘‘the input of swap NGFA–59681 at 5. 2; CL–RF–60372 at 3; CL–A4A–59686 at 4; CL– dealers and their trade groups over that of 592 E.g., CL–U.S. Dairy–59597 at 4, 6; CL–Hood– Better Markets–59716 at 5; CL–Better Markets– commercial hedgers’’); CL–CMOC–59720 at 3 59582; CL–McCully–59592 at 1; CL–Rice Dairy– 60325 at 2. (annual consultation with hedgers and end users); 59601 at 1; CL–Agri-Mark–59609 at 1–2; CL– 595 CL–USCF–59644 at 3–4.

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than 25,000 contracts. The Commission hedgers with positions in multiple publish on the Commission’s Web page responds that it is by design that the 10, contracts could establish positions in estimates of average open interest in 2.5 percent open interest formula various ratios without violating a referenced contracts on a monthly basis provides that a speculator may hold a position limit, provided they comply to make it easier for market participants larger percentage of total open interest with the bona fide hedging position to estimate changes in levels of position in a smaller market, potentially definition and any applicable limits.600 Finally, the Commission providing liquidity for bona fide requirements. The Commission also proposed under § 150.2(e)(4)(iv) to hedgers in such a smaller market. As notes that the process in reproposed establish minimum non-spot month open interest increases, the 2.5% § 150.10 exempting certain spread levels of 1,000 contracts for agricultural marginal increase results in limit levels positions may allow speculators some commodity contracts and 5,000 that become a progressively smaller flexibility in inter- and intra-commodity contracts for exempt commodity percentage of total open interest, spreads for the purpose of providing contracts. essentially placing a greater emphasis liquidity to bona fide hedgers. Comments Received and Commission on deterring market manipulation and One commenter suggested the Response: Regarding the time period for protecting the price discovery process in Commission consider setting position average open interest, as noted above, a larger market. limits on ‘‘customary position size’’ one commenter recommended that the Another commenter suggested that which had been used for setting non- Commission, as an alternative, ‘‘include the Commission use a 10, 5 percent spot month limits by the Commission in peak open interest levels beyond the open interest formula rather than a 10, the past and which the commenter most recent two years when it 2.5 percent formula as proposed, argues is a more effective means of determines the level of open interest on arguing that the 10, 5 percent formula curtailing large speculative positions.598 which to base position limits.’’ 601 In has worked well for certain agricultural In response, the Commission believes response, the Commission notes that futures markets and should be applied the 10, 2.5 percent formula has been using peak open interest figures, as more broadly. Alternatively, this effective in preventing excessive opposed to an average, as reproposed, commenter said that Commission speculation without unduly limiting may not necessarily represent an should use the 10, 5 percent formula for liquidity for bona fide hedgers. The accurate portrait of current market at least spread positions.596 The Commission notes when the ‘‘customary conditions. Commission notes the 10, 2.5 percent position size’’ methodology was used to Regarding data sources for average formula has produced limit levels that set non-spot-month limit levels, such open interest, several commenters noted should sufficiently maximize the CEA levels were below the levels established that the open interest data used by the section 4a(a)(3)(B) criteria, and the using 10, 2.5 percent formula. Commission in determining the non- Commission does not believe increasing Commission Reproposal Regarding spot month limits was not complete the marginal percentage is necessary. A General Procedure for Re-Setting Levels since it did not include all OTC swaps larger limit such as would be produced of Non-Spot Month Limits: The data and that the Commission should from a 10, 5 percent formula may not Commission has determined to correct this deficiency before it sets the adequately prevent excessive repropose the 10, 2.5 percent formula, limits using the open interest speculation. In the preamble to the generally as proposed in the December formula.602 In response, the proposed rules, the Commission noted 2013 Position Limits Proposal, for the Commission notes it used futures- that the 10, 2.5 percent formula was first reasons discussed above. However, the equivalent open interest for swaps proposed in 1992, and the commenter Commission has determined, in reported under part 20, in determining has not provided sufficient justification response to requests by commenters the initial non-spot month limits, as for moving away from this established requesting wheat parity, as discussed discussed above, and believes this data standard. above, to provide that it may determine also is acceptable for re-setting limit One commenter recommended that not to change the level of a non-spot levels, as reproposed. the Commission consider commodity- month limit. This would permit, for The Commission received no related ratios in establishing limits, such example, the Commission to continue to comments regarding publication of as the ratio between crude oil and its retain a level of 12,000 contracts for the average open interest. products, diesel (30 percent) and non-spot month limits in the KW and Regarding minimum levels for non- gasoline (50 percent), rather than on MWE contracts, even if average open spot month limits, some commenters separate open interest formulas applied interest did not exceed 405,000 urged the Commission to afford itself to each.597 In response, the Commission contracts (which is the level that, when the flexibility to set non-spot month notes setting limit levels based on the applying the 10, 2.5 percent formula, limits at least as high as the spot-month open interest of a related commodity would result in a limit of 12,000 position limit, rather than base the non- may result in limit levels that are too contracts). spot month limit strictly on the open large to be effective in the smaller Commission Proposal for Time interest formula in cases where the commodity markets. For example, based Periods, Data Sources, Publication and latter would result in a relatively small 603 on the levels proposed in this release in Minimum Levels for Re-Setting Levels of limit that would hinder liquidity. Appendix D, implementing a limit for Non-Spot Month Limits: Under The Commission accepts these NYMEX RBOB Gasoline equal to 50 proposed in § 150.2(e)(4)(i) and (ii), the 600 percent of the crude oil limit, as Commission would estimate average Id. suggested by the commenter, would 601 CL–MFA–59606 at 21. open interest in referenced contracts 602 E.g., CL–DBCS–59569 at 6; CL–FIA–59595 at result in a limit almost 10 times the size using data reported for each of the last 14; CL–EEI–60386 at 11; CL–MFA–59606 at 5, 20, otherwise indicated by the open interest two calendar years pursuant to parts 16, 22–23; CL–ISDA/SIFMA–59611 at 29, including formula, and would equal almost 28 20, and/or 45.599 The Commission also footnote 108; CL–CMC–59634 at 13; CL–Olam– percent of total average open interest in 59658 at 3; CL–COPE–59662 at 22; CL–Calpine– proposed under § 150.2(e)(4)(iii) to 59663 at 4; CL–Chamber–59684 at 5; CL–NFP– the RBOB referenced contract. Further, 59690 at 20; CL–Just Energy–59692 at 4; CL– 598 CL–APGA–59722 at 6. Working Group–59693 at 62; CL–Working Group– 596 CL–Working Group–59693 at 62. 599 December 2013 Position Limits Proposal, 78 60396 at 8–10; CL–Citadel–59717 at 4–5. 597 CL–Citadel–59717 at 7–8. FR at 75734. 603 CL–ICE–59966 at 6; CL–U.S. Dairy–59597 at 4.

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commenters’ recommendation. Upon settled contracts in other exempt any person, contract, or consideration of proposing minimum commodities.609 Several commenters transaction from any position limit initial non-spot month limits, as suggested limit levels that do not follow requirement the Commission discussed above, the Commission is the proposed formulae for determining establishes.615 removing the distinction between limit levels for both spot and non-spot- Current exemptions: The three agricultural and exempt commodities. month limits due to the unique aspects existing exemptions in current This change would establish a of cash-settled core referenced futures § 150.3(a), promulgated prior to the minimum non-spot month limit level of contracts, including the relatively large enactment of the Dodd-Frank Act, are 5,000 contracts in either agricultural or cash market and trading strategies not part of the Commission’s regulatory exempt commodities. found in other core referenced futures framework for speculative position Commission Reproposal: The markets.610 limits.616 First, current § 150.3(a)(1) Commission has determined to Commission Determination: The exempts positions shown to be bona repropose these provisions generally as Commission, as part of the phased fide hedging positions from federal proposed in the December 2013 Position approach to implementing position position limits.617 Second, current Limits Proposal, but with the changes limits on all physical commodity § 150.3(a)(3) exempts spread positions described above to provide flexibility derivative contracts, is deferring action between single months of a futures for a higher minimum level of non-spot so that it may, at a later date: (1) Clarify contract (and/or, on a futures-equivalent month limits. the application of limits to cash-settled basis, options) outside of the spot 7. Deferral of Limits on Cash-Settled core referenced futures contracts; and month, provided a trader’s spread Core Referenced Futures Contracts (2) consider further which method to position in any single month does not use to determine a level for a spot- exceed the all-months limit.618 Third, Commission Proposal: month limit for a cash-settled core under current § 150.3(a)(4), positions The Commission proposed, but is not referenced futures contract. The carried for an eligible entity 619 in the reproposing, positon limits on three Commission notes that the December separate account of an independent cash-settled core referenced futures account controller (‘‘IAC’’) 620 that contracts: CME Class III Milk; CME 2013 Position Limits Proposal discussed 604 spot-month limits primarily in the manages customer positions need not be Feeder Cattle; and CME Lean Hogs. aggregated with the other positions Comments Received: Commenters context of protecting the price discovery owned or controlled by that eligible raised concerns with these cash-settled process by preventing corners and 611 entity (the ‘‘IAC exemption’’).621 contracts and how they fit within the squeezes. There was limited federal position limits regime. While discussion of cash-settled core referenced futures contracts.612 The 615 7 U.S.C. 6a(a)(7). Section 737 of the Dodd- many of these concerns were raised in Frank Act added CEA section 4a(a)(7). The the context of the dairy industry, they Commission did not propose alternate Commission interprets CEA section 4a(a)(7) to apply to all three cash-settled core means of calculating limit levels for provide the Commission with plenary authority to referenced futures contracts. Concerns cash-settled core referenced futures grant exemptive relief from position limits, contracts in the December 2013 Position consistent with the purposes of the CEA. raised include: (1) How to apply spot Specifically, under Section 4a(a)(7), the month limits in a contract that is cash- Limits Proposal. Commission ‘‘by rule, regulation, or order, may settled; 605 (2) the ‘‘five-day rule’’ for C. § 150.3—Exemptions exempt, conditionally or unconditionally, any bona fide hedging; 606 and (3) the length person, or class of persons, any swap or class of 607 1. Current § 150.3 swaps, any contract of sale of a commodity for of the spot month period. future delivery or class of such contracts, any Commenters contended that the Statutory authority: CEA section option or class of options, or any transaction or Commission’s rationale in the December 4a(c)(1) exempts positions that are class of transactions from any requirement it may 2013 Position Limits Proposal focused shown to be bona fide hedging establish . . . with respect to position limits.’’ on concerns with physical-delivery 616 For completeness, the Commission notes it positions, as defined by the previously provided an exemption in § 150.3(a)(2) contracts, which the commenters Commission, from any Commission rule for spreads of futures positions which offset option believe do not apply to cash-settled core establishing speculative position limits positions. However, the Commission removed and referenced futures contracts because under CEA section 4a(a).613 In addition, reserved that provision once it was rendered there is no physical delivery process obsolete by the Commission determination to CEA section 4a(a)(1) authorizes the impose speculative limits on a trader’s net position and because the contracts settle to Commission to exempt transactions in futures and options combined, rather than government-regulated price series normally know to the trade as separately. 58 FR 17973 at 17979 (April 7, 1993). (through the USDA).608 Commenters ‘‘spreads.’’ 614 Further, CEA section 617 17 CFR 150.3(a)(1). The term bona fide were concerned that the Commission’s 4a(a)(7) authorizes the Commission to hedging position is currently defined at 17 CFR ‘‘one-size-fits-all’’ approach 1.3(z) (2010). As discussed above, the Commission is reproposing a new definition of bona fide discriminates against participants in 609 CL–DFA–59948 at 6. hedging position in § 150.1. dairy and livestock because the spot- 610 CL–Rice Dairy–59601 at 1; CL–US Dairy– 618 The Commission clarifies that a spread month limit is effectively smaller 59597 at 3; CL–NMPF–59652 at 4; CL–DFA–59948 position in this context means a short position in compared to the separate spot-month at 4–5. a single month of a futures contract and a long limits for physical-delivery and cash- 611 For example, the Commission stated that position in another contract month of that same concerns regarding corners and squeezes are most futures contract, outside of the spot month, in the acute in the markets for physical-delivery contracts same crop year. The short and/or long positions 604 Each of these contracts is cash settled to a U.S. in the spot month. December 2013 Position Limits may also be in options on that same futures Department of Agriculture price series; Feeder Proposal, 78 FR at 75737. contract, on a futures equivalent basis. Such spread Cattle and Lean Hogs settle to a CME-calculated 612 See, e.g., December 2013 Position Limits positions, when combined with any other net index of daily USDA livestock prices, while Class Proposal 78 FR at 75688, including n. 82. positions in the single month, must not exceed the III Milk settles to the monthly USDA Class III Milk 613 7 U.S.C. 6a(c)(1). Section 737 of the Dodd- all-months limit set forth in current § 150.2, and price. Frank Act did not substantively change CEA section must be in the same crop year. 17 CFR 150.3(a)(3). 605 CL–Rice Dairy–59960 at 1; CL–US Dairy– 4a(c)(1) (renumbering existing provision by 619 ‘‘Eligible entity’’ is defined in current 17 CFR 59597 at 3–4; CL–NMPF–59652 at 4; CL–DFA– inserting ‘‘(1)’’ after ‘‘(c)’’). 150.1(d). 59948 at 4–5. 614 7 U.S.C. 6a(a)(1). Section 737 of the Dodd- 620 ‘‘Independent account controller’’ is defined 606 CL–NMPF–59652 at 5; CL–DFA–59948 at 8. Frank Act did not change the Commission’s in current 17 CFR 150.1(e). 607 CL–NGSA–59674 at 44; CL–ICE–59669 at 5–6. authority to exempt spreads under CEA section 621 17 CFR 150.3(a)(4). See also discussion of the 608 See, e.g., CL–US Dairy–59597 at 3–4. 4a(a)(1). IAC exemption in the 2016 Final Aggregation Rule.

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2. Proposed § 150.3 accommodate processes proposed in proposed in §§ 150.9–11.625 The In the December 2013 Position Limits other sections of part 150. Specifically, Commission addresses those comments Proposal, the Commission proposed a the Commission proposed under in the discussion of the definition of number of organizational and § 150.3(a)(1)(i) exemptions for those bona fide hedging position in § 150.1, substantive amendments to § 150.3, bona fide hedging positions that have above, and in the discussion of the generally resulting in an increase in the been recognized by a DCM or SEF in processes proposed in §§ 150.9–11, number of exemptions to speculative accordance with proposed §§ 150.9 and below. The Commission did not receive position limits. First, the Commission 150.11. The Commission also proposed comments specific to the conforming proposed to amend the three under § 150.3(a)(1)(iv) exemptions for revisions to § 150.3(a). exemptions from federal speculative those spread positions that have been Commission Reproposal: The limits contained in current § 150.3. recognized by a DCM or SEF in Commission is reproposing § 150.3(a) as These previously proposed amendments accordance with proposed § 150.10. previously proposed in the December would update cross references, relocate Recognition of other positions exempted 2013 Position Limits Proposal, with the IAC exemption and consolidate it under proposed § 150.3(e) was re- conforming changes consistent with the with the Commission’s separate numbered as subsection (v) from reproposed definition of a bona fide proposal to amend the aggregation subsection (iv) of § 150.3(a)(1) of the hedging position in § 150.1, which requirements of § 150.4,622 and delete 2013 Position Limits Proposal. includes positions that are recognized the calendar month spread provision Comments Received: The Commission by a DCM or SEF in accordance with received no comments on the proposed reproposed § 150.9 or § 150.11, or by the which is unnecessary under changes to 624 § 150.2 that would set the level of each conforming changes to § 150.3. The Commission, and conforming changes single month position limit to that of the Commission addresses comments on the consistent with the process for spread all-months position limit. Second, the IAC exemption in its final rule positions recognized by a DCM or SEF Commission proposed to add amending the aggregation policy under in accordance with reproposed § 150.10, exemptions from the federal speculative § 150.4, published separately. or by the Commission. Commission Reproposal: The position limits for financial distress Commission is reproposing these c. Proposed Additional Exemptions situations, certain spot-month positions amendments as previously proposed in From Position Limits in cash-settled referenced contracts, and the December 2013 Position Limits i. Financial Distress Exemption— grandfathered pre-Dodd-Frank and § 150.3(b) transition period swaps. Third, the Proposal. Commission proposed to revise b. Positions Which May Exceed Proposed Rule: The Commission recordkeeping and reporting Limits—§ 150.3(a) proposed to add in § 150.3(b) an requirements for traders claiming any exemption from position limits for Proposed Rule: In the December 2013 market participants in financial distress exemption from the federal speculative Position Limits Proposal, the position limits. circumstances, upon the Commission’s Commission listed positions which may approval of a specific request.626 For a. Proposed Amendments to Existing exceed limits in proposed § 150.3(a). example, the Commission recognized Exemptions Such positions included: (i) Bona fide that, in periods of financial distress, it Proposed Rule: In the December 2013 hedging positions as defined in § 150.1; may be beneficial for a financially Position Limits Proposal, the (ii) financial distress positions sound market participant to take on the Commission proposed to update cross- exempted under § 150.3(b); (iii) positions (and corresponding risk) of a references within § 150.3 to reflect other conditional spot month limit positions less stable market participant. The changes in part 150. Specifically, the exempted under § 150.3(c); and (iv) Commission explained that it has Commission proposed: To update other positions exempted under historically provided an exemption from references to the bona fide hedging § 150.3(e). Proposed § 150.3(a) also position limits in these types of definition to § 150.1 from § 1.3(z); to provided that all such positions may situations in order to avoid sudden require that those filing for exemptive exceed limits only if recordkeeping liquidations that could potentially relief must meet the reporting requirements in § 150.3(g) are met and reduce liquidity, disrupt price requirements in part 19; and to add a any applicable reporting requirements discovery, and/or increase systemic risk. cross-reference to aggregation provisions in part 19 are met. The Commission therefore proposed to In the 2016 Supplemental Position in proposed § 150.4. codify this historical practice. The Commission also proposed to Limits Proposal, the Commission Comments Received: One commenter move the existing IAC exemption to proposed to revise § 150.3(a) to include, requested the non-exclusive § 150.4, thereby deleting the current in addition to bona fide hedging circumstances for the financial distress exemption in § 150.3(a)(4). The positions as defined in § 150.1, exemption be clarified by adding ‘‘bud Commission also proposed to delete the positions that are recognized by a DCM not limited to’’ after the word ‘‘include’’ spread exemption in current § 150.3, or SEF in accordance with § 150.9 or to permit other situations not listed.627 because it noted that the proposed non- § 150.11 as well as spread positions Commission Reproposal: In response spot month limits rendered such an recognized by a DCM or SEF in to the commenter, the Commission exemption unnecessary.623 accordance with § 150.10. clarifies that the circumstances under In the 2016 Supplemental Position Comments Received: The Commission which a financial distress exemption Limits Proposal, the Commission received many comments on the may be claimed include, but are not proposed to conform § 150.3(a) to definition of bona fide hedging in limited to, the specific scenarios in the § 150.1, as well as on the processes definition. However, the Commission 622 See November 2013 Aggregation Proposal. See believes that the proposed definition also 2016 Final Aggregation Rule. 624 The Commission received many comments on 623 Under the 2016 Supplemental Position Limits the changes to the bona fide hedging definition in 625 Proposal, DCMs and SEFs that are trading facilities § 150.1 and the processes for exchange recognition Id. would have authority to grant spread exemptions to of exemptions in §§ 150.9–11. See discussion of the 626 December 2013 Position Limits Proposal, 78 both exchange and federal position limits. See infra bona fide hedging definition, above, and of the FR at 75736. discussion of §§ 150.5 and 150.10. processes in §§ 150.9–11, below. 627 CL–CME–59718 at 71.

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sufficiently articulates that the list of post-effective date positions, allowing a recognizing exchange-granted non- potential circumstances for claiming the market participant to offset the risk of enumerated exemptions in non-legacy financial distress exemption is non- the position provided the offsetting commodity derivatives outside of the exclusive, and, therefore, is reproposing position is not held into a spot month. spot month (consistent with the the definition as previously proposed. The Commission is reproposing Commission’s recognition of risk § 150.3(d) as proposed in the December management exemptions outside of the ii. Pre-Enactment and Transition Period 2013 Position Limits Proposal. spot month), and provided such Swaps Exemption—§ 150.3(d) exemptions are granted prior to the iii. Previously Granted Exemptions— Proposed Rule: In the December 2013 compliance date of the final rule, and § 150.3(f) Position Limits Proposal, the apply only to pre-existing financial Commission proposed to provide an Proposed Rule: The Commission instruments as of the effective date of exemption from federal position limits proposed in the December 2013 Position the final rule. These two changes are for (1) pre-enactment swaps, defined as Limits Proposal that exemptions intended to reduce the potential for swaps entered into prior to July 21, 2010 previously granted by the Commission market disruption by forced (the date of the enactment of the Dodd- under § 1.47 for swap risk management liquidations, since a market Frank Act of 2010), so long as the terms would not apply to new swap positions intermediary would continue to be able of which have not expired as of that entered into after the effective date of to offset risks of pre-effective-date date, and (2) transition period swaps, the final rule. The Commission noted financial instruments, pursuant to defined as swaps entered into during that the proposed rules revoke the previously-granted federal or exchange the period commencing July 22, 2010 previously granted exemptions for risk risk management exemptions. and ending 60 days after the publication management positions for such new of the final position limit rules in the swaps. Therefore, risk management iv. Non-Enumerated Hedging Federal Register, the terms of which positions that offset such new swaps Positions—§ 150.3(e) have not expired as of that date. The would be subject to federal position Proposed Rule: In the December 2013 Commission also proposed to allow limits, unless another exemption Position Limits Proposal, the both pre-enactment and transition applied. The Commission explained Commission noted that it previously period swaps to be netted with that these risk management positions permitted a person to file an application commodity derivative contracts are inconsistent with the revised seeking approval for a non-enumerated acquired more than 60 days after definition of bona fide hedging position to be recognized as a bona fide publication of the final rules in the contained in the December 2013 hedging position under § 1.47. The Federal Register for purposes of Position Limits Proposal and the Commission proposed to delete § 1.47 complying with non-spot-month purposes of the Dodd-Frank Act for several reasons described in the position limits.628 amendments to the CEA.630 December 2013 Position Limits Comments Received: One commenter Comments Received: A number of Proposal.633 suggested that ‘‘grandfathering’’ relief commenters urged the Commission not Proposed § 150.3 provided that a should be extended to pre-existing to deny risk-management exemptions person that engages in risk-reducing positions, and should also permit the for financial intermediaries who utilize practices commonly used in the market, pre-existing positions to be increased referenced contracts to offset the risks that the person believes may not be after the effective date of the limit. The arising from the provision of diversified included in the list of enumerated bona commenter also suggested that the commodity-based returns to the fide hedging positions, may apply to the Commission should permit the risk intermediaries’ clients.631 Commission for an exemption from associated with a pre-existing position In contrast, other commenters noted position limits. As previously proposed, to be offset through roll of a position that the proposed rules ‘‘properly market participants would be guided in from a prompt month into a deferred refrain’’ from providing a general § 150.3(e) first to consult proposed contract month.629 exemption to financial firms seeking to Appendix C to part 150 to see whether Commission Reproposal: The hedge their financial risks from the sale their practices fell within a non- Commission declines to accept the of commodity-related instruments such exhaustive list of examples of bona fide commenter’s recommendation regarding as index swaps, ETFs, and ETNs hedging positions as defined under increasing positions, because allowing because such instruments are proposed § 150.1. pre-existing positions to be increased ‘‘inherently speculative’’ and may A person engaged in risk-reducing after the effective date of the limits overwhelm the price discovery function practices that are not enumerated in the 632 effectively would create a loophole for of the derivative market. revised definition of bona fide hedging exceeding position limits. Further, the Commission Reproposal: As position in previously proposed § 150.1 discussed above in the clarifications to Commission declines the commenter’s may use two different avenues to apply the bona fide hedging position recommendation to permit a roll of a to the Commission for relief from definition, the Commission now pre-existing position, because that federal position limits: The person may proposes to expand the relief in would permit a market participant to request an interpretative letter from § 150.3(f) by: (1) Clarifying that such extend indefinitely the holding of a Commission staff pursuant to previously granted exemptions may 634 speculative economic exposure in § 140.99 concerning the applicability apply to pre-existing financial commodity derivative contracts exempt instruments that are within the scope of 633 December 2013 Position Limits Proposal, 78 from position limits, frustrating the existing § 1.47 exemptions, rather than FR at 75738–9. intent of speculative position limits. 634 only to pre-existing swaps; and (2) 17 CFR 140.99 defines three types of staff The Commission notes, however, that letters—exemptive letters, no-action letters, and reproposed § 150.3(d), like the previous interpretative letters—that differ in scope and 630 December 2013 Position Limits Proposal, 78 proposal, allows for netting of pre- and effect. An interpretative letter is written advice or FR at 75740. guidance by the staff of a division of the 631 CL–FIA–59595 at 5, 34–35; CL–AMG–59709 at Commission or its Office of the General Counsel. It 628 December 2013 Position Limits Proposal, 78 2, 12–15; CL–CME–59718 at 67–69. binds only the staff of the division that issued it (or FR at 75738. 632 CL–Sen. Levin–59637 at 8; CL–Better the Office of the General Counsel, as the case may 629 CL–AMG–59709 at 2, 18–19. Markets–60325 at 2. Continued

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of the bona fide hedging position submitted such an exemption as part of expiration. Further, ICE stated that, due exemption, or the person may seek its certification of compliance with core to the size of some positions in the cash- exemptive relief from the Commission principles required of exempt settled ICE NG LD1 contract, the impact under CEA section 4a(a)(7).635 commercial markets (‘‘ECMs’’) on which to the market of an equivalent limit In the 2016 Supplemental Position significant price discovery contracts could impair the ability for market Limits Proposal, the Commission (‘‘SPDCs’’) were traded.639 participants to adjust their positions in proposed §§ 150.9, 150.10, and 150.11 As ICE developed its rules in order to an orderly fashion to come into which provided alternative processes comply with the ECM SPDC compliance. For these reasons, ICE that would permit eligible DCMs and requirements,640 ICE expressed requested that the Commission consider SEFs to provide relief for non- concerns regarding the impact of an alternative to the Commission’s enumerated bona fide hedging position limits on the open interest in acceptable practice that spot month positions, certain spread positions, and its LD1 contract. ICE demonstrated that position limits for the NG LD1 contract anticipatory bona fide hedging as the open interest declines in the should be equivalent to the spot month positions, respectively.636 However, the physical-delivery New York Mercantile position limits in the NYMEX NG Commission did not propose to alter or Exchange Inc. (‘‘NYMEX’’) Henry Hub contract.641 delete § 150.3 because the Commission Natural Gas Futures (‘‘NYMEX NG’’) After discussion with both the determined to provide multiple avenues contract approaching expiration, open Commission’s Division of Market for persons seeking exemptive relief. interest increases rapidly in the cash- Oversight and NYMEX, ICE submitted Comments Received: One commenter settled ICE NG LD1 contract, and and certified rule amendments requested that the Commission provide suggested that the ICE NG LD1 contract implementing position limits and a spread exemption from federal served an important function for position accountability rules for the ICE position limits for certain soft hedgers and speculators who wished to NG LD1 contract. Specifically, ICE commodities, reasoning that there was a recreate or hedge the NYMEX NG imposed a spot-month position limit ‘‘lack of fungibility of certain soft contract price without being required to and non-spot-month position commodities . . . [because] inventories make or take delivery. ICE stated that it accountability levels equal to those of of various categories vary widely in believed there are ‘‘significant and the economically equivalent NYMEX terms of marketability over time.’’ The material distinctions between the design NG contract. ICE also adopted a rule for commenter also stated that such a and use of’’ the NYMEX NG contract a larger conditional position limit for spread exemption would allow for and the ICE NG LD1 contract, and those traders who: (1) Agreed not to maintain effective competition for the ownership distinctions were most pronounced at a position in the NYMEX NG futures of certified inventories that in turn contract during the last three trading helps to maintain a close relationship 639 CFTC Reauthorization Act of 2008 (‘‘Farm days, and (2) agreed to show ICE their between the cash and futures Bill’’, incorporated as Title XIII of the Food, complete book of Henry Hub related Conservation and Energy Act of 2008, Public Law 637 642 markets. Another commenter 110–246, 112 Stat. 1624 (June 18, 2008)) expanded positions. recommended the Commission the Commission’s authority with respect to ECMs In June 2009, the Commission also recognize calendar spread netting, and by creating a new regulatory category: ECMs on received self-certified rule amendments which significant price discovery contracts from CME Group, Inc. (‘‘CME’’) not place any limits on the same, (‘‘SPDCs’’) were traded. The Farm Bill authorized because speculators provide liquidity in the Commission to designate an ECM contract as a regarding position limits and position deferred months to hedgers and offset, SPDC if the Commission determined, under criteria accountability levels for the cash-settled in part, that exposure with shorter dated established in the Act, that the contract performed NYMEX Henry Hub Financial Last Day contracts.638 a significant price discovery function. When the Futures (HH) contract and related cash- Commission made such a determination, the ECM 643 Commission Reproposal: Both of on which the SPDC was traded would be required settled contracts. The rules, as these comments were submitted in to assume, with respect to that contract, all the amended, established spot month response to the December 2013 Position responsibilities and obligations of a registered position limits for the NYMEX HH entity under the Commission’s regulations and the contract as well as certain related cash- Limits Proposal, well in advance of the Act. This process was invalidated and deleted by 2016 Supplemental Position Limits changes to the Act made under the Dodd-Frank Act settled contracts so as to be consistent Proposal. Spread exemptions such as of 2010. with the requirements for the SPDC those described by the commenters are 640 On March 16, 2009, the Commission adopted contract on ICE. In the rule certification addressed in § 150.10, discussed below. final rules implementing the provisions of the Farm documents, CME stated that it was Bill. 74 FR 12179 (March 23, 2009). These The Commission is reproposing regulations became effective on April 22, 2009. amending its position limits rules for § 150.3(e) as previously proposed in the Among other things, the rules established the HH contract in anticipation of ICE’s December 2013 Position Limits procedures by which the Commission would make new rules. In February 2010, the and announce its determination as to whether a conditional spot month limit Proposal. particular contract served a significant price exemptions on NYMEX and ICE went d. Proposed Conditional Spot Month discovery function. On July 24, 2009, the Commission issued an order finding that ICE’s into effect. Limit Exemption—§ 150.3(c) Henry Financial LD1 Fixed Price contract (‘‘NG LD1 Proposed Rules: In the December 2013 Conditional spot month limit contract’’) performed a significant price discovery Position Limits Proposal, the function and, thus, that ICE was a registered entity exemptions to exchange-set spot-month with respect to the NG LD1 contract, subject to all position limits for natural gas contracts provisions of the Act applicable to registered 641 See 17 CFR part 36, App. B, Core Principle were adopted in 2009, after the ICE entities, including compliance with certain core IV(c)(3) (2010). 74 FR 12177 (April 22, 2009). principles. 74 FR 37988 (July 30, 2009). 642 ICE also imposed related aggregation, bona As required after the designation of the NG LD1 fide hedging, and other exemption rules for the ICE be), and third-parties may rely upon it as the contract as a SPDC, ICE submitted a demonstration NG LD1 contract. interpretation of that staff. See description of CFTC of their compliance with the required core 643 New York Mercantile Exchange, Inc. Staff Letters, available at http://www.cftc.gov/ principles. One of the core principles with which Submission #09.103 (June 2, 2009): Notification of lawregulation/cftcstaffletters/index.htm. ICE was required to comply under the Farm Bill Amendments to NYMEX Rules 9A.27 and 9A.27A 635 See supra discussion of CEA section 4a(a)(7). ECM SPDC rules concerned position limits and to Establish Hard Expiration Position Limits for 636 See infra discussion of these alternative position accountability rules for the contract(s) Certain Natural Gas Financially Settled Contracts. processes in § 150.9, § 150.10, and § 150.11. designated as SPDC(s). See Section 13201(C)(ii)(IV) Previously, NYMEX did not have spot-month limits 637 CL–CMC–59718 at 15. of the Farm Bill (implemented in Section 2(h)(7) of on its HH contract and related cash-settled 638 CL–Citadel–59717 at 8–9. the Act). contracts.

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Commission proposed a conditional commercials from taking advantage of Some commenters supported the spot month limit exemption for all the higher limit given their need to have continuation of the practice of DCMs commodities subject to federal limits some exposure in a physical delivery separately establishing and maintaining under proposed § 150.2. That proposed referenced contract during the spot their own conditional spot month limits rule was identical to the rule proposed month.648 and not aggregating cash-settled limits in the Part 151 Proposal, with the One commenter said that the across exchanges and the OTC market, exception that the December 2013 conditional spot month position limit arguing that the resultant aggregated Position Limits Proposal did not include exemption for gold is not supported by limit will be unnecessarily restrictive any restriction on trading in the cash sufficient research, could decouple the and result in lower liquidity and market.644 In proposing the conditional cash-settled contract from the physical- increased volatility.653 spot month limit exemption in proposed delivery contract, and could lead to Some commenters expressed the view § 150.3(c), the Commission stated its lower liquidity in the physical-delivery that the filing of daily Form 504 reports preliminary belief that the current contract and higher price volatility.649 to satisfy the conditional spot month exemption in natural gas markets has Several commenters opposed a spot- limit exemption was burdensome, and served ‘‘to further the purposes month position limit for cash-settled recommended less frequent reporting Congress articulated for position limits’’ contracts that is higher than the limit for such as monthly reports 654 or no and that the exemption ‘‘would not physical-delivery contracts for various reporting at all.655 encourage price discovery to migrate to reasons including: The higher limit does Two exchanges which currently the cash-settled contracts in a way that not address the problem of excessive permit a conditional spot month limit would make the physical-delivery speculation; the higher limit would exemption, CME and ICE, have each contract more susceptible to sudden reduce liquidity in the physical-delivery submitted several comments regarding price movements near expiration.’’ 645 In contract; and the conditional limit is not the exemption, some in direct response addition, the Commission noted that it restrictive enough and should include a to the other exchange’s comments. This has observed repeatedly that open restriction on holdings of the physical back-and-forth nature of the interest levels in physical-delivery commodity as had been proposed in disagreement surrounding the contracts ‘‘naturally decline leading up vacated part 151.650 conditional spot month limit exemption to and during the spot month, as the Several commenters expressed the has been significant and, on many contract approaches expiration’’ because view that a market participant holding aspects of the previously proposed ‘‘both hedgers and speculators exit the a trade option position, which exemption, the comments have been in physical-delivery contract in order to, presumably would be considered a direct opposition to each other. CME for example, roll their positions to the physical delivery referenced contract, submitted a comment letter in response next contract month or avoid delivery should not be precluded from using the to the 2016 Supplemental Position Limits Proposal that reiterated its belief obligations.’’ 646 The Commission also conditional spot-month limit exemption that the conditional limit would drain stated its preliminary belief that ‘‘it is because trade options are functionally liquidity from the physical-delivery unlikely that the factors keeping traders equivalent to a forward contract and the contract; 656 ICE responded that nothing in the spot month physical-delivery conditional exemption does not restrict in the natural gas market has suggested contract will change due solely to the holding forwards.651 that the physical-delivery contract has introduction of a higher cash-settled One commenter supported the been harmed.657 ICE noted that CME’s limit,’’ as traders participating in the conditional spot month limit exemption current conditional limit benefits CME’s physical-delivery contract in the spot provided that the Commission modifies own cash-settled natural gas month are ‘‘understood to have a its proposal to allow independently- contracts; 658 CME responded that it commercial reason or need to stay in the operated subsidiaries to hold positions opposes any conditional limit spot month.’’ 647 in physical-delivery contracts if the framework even though such opposition Comments Received: The Commission subsidiary engages in separate and could work ‘‘to the detriment of CME received many comments regarding the independent trading activities, shares Group’s commercial interests in certain conditional spot month limit no employees, and is not jointly of its cash-settled markets.’’ 659 CME exemption. These comments revealed directed in its trading activity with stated its belief that the CEA little to no consensus among market other subsidiaries by the parent necessitates ‘‘one-to-one limit treatment participants, exchanges, and industry company.652 groups regarding spot-month position and similar exemptions’’ for both physical-delivery and cash-settled limits in cash-settled contracts. 648 E.g., CL–FIA–59595 at 3 and 11; CL–EEI– Several commenters supported the EPSA–59602 at 9–10; CL–MFA–59606 at 5 and 19– contracts within a particular higher spot-month limit (or no limit at 20; CL–AIMA–59618 at 2; CL–ISDA/SIFMA–59611 commodity; 660 ICE suggested that all) for cash-settled contracts, but at 31; CL–BG Group–59656 at 7; CL–BG Group– removing or reducing the conditional 59937 at 5–6; CL–COPE–59662 at 23; CL–NGSA– opposed the restriction on holding a limit would ‘‘disrupt present market 59673 at 38–39; CL–NGSA–59941 at 3–4; CL– 661 position in the physical-delivery IECAssn–59957 at 9. practice.’’ referenced contract to obtain the higher 649 CL–WGC–59558 at 4. ICE also submitted a series of charts, limit for various reasons, including: The 650 E.g., CL–Sen. Levin–59637 at 7; CL–AFR– using CFTC Commitment of Traders view that there is no discernible reason 59711 at 2; CL–A4A–59714 at 3; CL–Working Group–59693 at 59–60; CL–IECA–59713 at 3–4; CL– 653 for the restriction in the first place; the E.g., CL–IECAssn–59713 at 30–31; CL–ICE– Better Markets–60401 at 17–18; CL–CME–59971 at 59966 at 4–5; CL–ICE–59962 at 4–7. belief that it provides a negative impact 3; CL–CME–60307 at 4–5; CL–CME–60406 at 2; CL– 654 CL–EEI–EPSA–59602 at 10; CL–ICE–59669 at on liquidity in the physical delivery CMOC–59720 at 3–6; CL–APGA–59722 at 8; CL– 7. OSEC–59972 at 7; CL–RF–60372 at 3; CL–IATP– contract; and the view that it prevents 655 CL–COPE–59662 at 24. 59701 at 5; CL–IATP–59704 at 6; CL–IATP–60394 656 at 2; CL–NGFA–59681 at 6. CL–CME–60926 at 4. 657 644 See December 2013 Position Limits Proposal, 651 E.g., CL–FIA–59595 at 20; CL–COPE–59662 at CL–ICE–61009 at 1. 78 FR at 75736–38. 23; CL–EEI–EPSA–60926 at 7, CL–EEI–Sup–60386 658 Id. 645 Id. at 75737. at 3–4; CL–Working Group–59693 at 59–60. 659 CL–CME–61008 at 2. 646 Id. at 75770. 652 CL–SEMP–59926 at 4–6; CL–SEMP–60384 at 660 Id. at 3. 647 Id. at 75770, n. 782. 5–6. 661 CL–ICE–61009 at 2.

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Report data, illustrating the opposite: conditional spot-month limit exemption to avoid confusion in the event NYMEX That spot-month open interest and indicates the importance of careful and were to set its spot-month limit in the volume in the physical-delivery contract thoughtful analysis prior to finalizing physical-delivery NYMEX NG contract (the NYMEX NG) have actually policy with respect to conditional spot- at a level below 2,000 contracts. increased since the introduction of the month limit exemptions in other cash- The Commission provides, for conditional spot month limit.662 settled referenced contracts. In informational purposes, summary CME stated its opposition to the particular, the considerations may vary, statistical information that it considered conditional limits ‘‘as a matter of and should be considered in relation to in declining to extend the conditional statutory law,’’ opining that CEA section the particular commodity at issue. As spot-month limit exemption beyond the 4(b) does not allow the imposition of the such, the Commission believes it is natural gas referenced contract. The four conditional limit.663 CME believes that prudent to proceed cautiously in tables below present the number of the conditional limit contained in the expanding the conditional spot-month unique persons that held positions in December 2013 Position Limits Proposal limit exemption beyond the natural gas commodity derivative contracts greater ‘‘contravenes Congress’s intent behind markets where it is currently employed. than or equal to the specified levels, as the statutory ‘comparability’ The Commission encourages exchanges reported to the Commission under the requirement’’ in multiple ways, and that and/or market participants who believe large trader reporting systems for futures neither ICE nor the Commission has that the Commission should extend the and swaps, for the period July 1, 2014 ‘‘addressed these aspects of [CEA conditional spot-month limit exemption to June 30, 2016. The table also presents section 4(b)].’’ 664 to additional commodities to petition counts of unique reportable persons, ICE replied that the Commission ‘‘has the Commission to issue a rule pursuant whether reportable under part 17 no basis to modify the current to § 13.2 of the Commission’s 668 (futures and future option contracts) or conditional limit level’’ because the regulations. under part 20 (swap contracts). The With respect to natural gas cash- markets ‘‘have functioned efficiently method the Commission used to analyze settled referenced contracts, the and effectively’’ and the Commission this large trader data is discussed above, 665 reproposed rules allow market should not ‘‘change the status quo.’’ under § 150.2. ICE continued that the conditional limit participants to exceed the position limit of five times the physical-delivery provided that such positions do not The four tables group commodities contract’s spot-month limit ‘‘appears to exceed 10,000 contracts and the person only for convenience of presentation. In be arbitrary and likely insufficient’’ and holding or controlling such positions each table, the term ‘‘25% DS’’ means opined that the Commission has not does not hold or control positions in the 25 percent of the deliverable supply as indicated how it arrived at that figure or spot-month natural gas physical- estimated by the exchange listing the how such a level ‘‘strikes the right delivery referenced contract (NYMEX core referenced futures contract and balance between supporting liquidity NG). Persons relying upon this verified as reasonable by the and diminishing undue burdens.’’ 666 exemption must file Form 504 during Commission. Similarly, ‘‘15% DS’’ ICE concluded that the conditional the spot month.669 means 15 percent of estimated exemption ‘‘must be maintained at no The Commission observes that the deliverable supply. An asterisk (‘‘*’’) less than the current levels.’’ 667 conditional exemption level of 10,000 means that fewer than four unique Commission Reproposal: After taking contracts is equal to five times the persons were reported. ‘‘CME proposal’’ into consideration all the comments it federal natural gas spot-month position means the level recommended by the received regarding the conditional spot- limit level of 2,000 contracts. The CME Group for the spot-month limit. month limit exemption, the Commission conditional exemption level is also MGEX submitted a recommended spot- is reproposing the conditional spot- equal to the sum of the current month limit level that is slightly less month limit exemption in natural gas conditional exemption levels for each of than 25 percent of estimated deliverable markets only. The Commission believes the NYMEX HH contract and the ICE supply but did not affect the reported the volume of comments regarding the NG LD1 contract. The Commission number of unique persons; no other believes the level of 10,000 contracts exchange recommended a spot-month 662 Id. at 3–6. provides relief for market participants level of less than 25 percent of 663 CL–CME–61008 at 2–3. CEA section who currently may hold or control 5,000 estimated deliverable supply. 4(b)(1)(B)(ii)(1) imposes requirements on a foreign contracts in each of these two cash- For the first group of commodities, board of trade (‘‘FBOT’’) as a condition of providing settled natural gas futures contracts and there was no unique person in the cash- U.S. persons direct access to the electronic trading an unlimited number of cash-settled and order-matching systems of the FBOT with settled referenced contracts whose respect to a contract that settles against any price swaps, while still furthering the position would have exceeded 25 of one or more contracts listed for trading on a purposes of the Dodd-Frank Act’s percent of the exchange’s estimated registered entity. Such FBOT must adopt position amendments to CEA section 4a. limits for contract(s) that are ‘‘comparable’’ to the deliverable supply. Moreover, no The Commission is proposing the unique person held a position in the position limits adopted by the registered entity for fixed figure of 10,000 contracts, rather the contract(s) against which the FBOT contract cash-settled referenced contracts that settles. 7 U.S.C. 6(b)(1)(B)(ii)(1), codified in 17 CFR than the variable figure of five times the would have exceeded the reproposed 48.8(c)(1)(ii)(A). spot-month position limit level, in order spot-month limits discussed under 664 CL–CME–61008 at 3. § 150.2, above, that are lower than 25 665 CL–ICE–61022 at 2. 668 17 CFR 13.2. 666 Id. 669 See infra discussion of part 19 and Form 504, percent of the exchange’s estimated 667 Id. below. deliverable supply.

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TABLE III–B–21—CME GROUP AND MGEX AGRICULTURAL CONTRACTS

Number of unique Number of reportable persons >= level persons in market Core-referenced futures Position contract Basis of spot-month level limit level Spot month Spot month physical Spot month All months cash settled delivery only

Corn ...... CME proposal ...... 600 0 36 1,050 2,606 (CBOT current limit 600) ..... 25% DS ...... 900 0 20 ...... Oats ...... CME proposal ...... 600 0 0 33 173 (CBOT current limit 600) ..... 25% DS ...... 900 0 0 ...... Soybeans ...... CME proposal ...... 600 0 22 929 2,503 (CBOT current limit 600) ..... 25% DS ...... 1,200 0 14 ...... Soybean Meal ...... CME proposal ...... 720 0 14 381 978 (CBOT current limit 720) ..... 25% DS ...... 2,000 0 (*) ...... Soybean Oil ...... CME proposal ...... 540 0 21 397 1,034 (CBOT current limit 540) ..... 25% DS ...... 3,400 0 0 ...... Wheat (CBOT) ...... CME proposal ...... 600 0 11 444 1,867 (CBOT current limit 600) ..... 25% DS ...... 1,000 0 6 ...... Wheat (MGEX) ...... Parity w/CME proposal ...... 600 0 (*) 102 342 (MGEX current limit 600) .... Approx. 25% DS ...... 1,000 0 (*) ...... Wheat (KCBT) ...... CME proposal ...... 600 0 4 250 718 (KCBT current limit 600) ..... 25% CBOT DS ...... 1,000 0 (*) ...... 25% DS ...... 3,000 0 (*) ...... Rough Rice ...... CME proposal ...... 600 0 0 91 281 (CBOT current limit 600) ..... 25% DS ...... 2,300 0 0 ......

For the second group of commodities, of 450 contracts. Moreover, other than table also shows for Live Cattle that no there was no unique person in the cash- in the Sugar No. 11 contract, no unique unique person held a position in the settled referenced contracts whose person held a position in the cash- cash-settled referenced contracts that position would have exceeded 25 settled referenced contracts that would would have exceeded 60 percent of the percent of the exchange’s estimated have exceeded 15 percent of the exchange’s current spot-month limit of deliverable supply or, in the case of Live exchange’s estimated deliverable 450 contracts.670 Cattle, the current exchange limit level supply. For informational purposes, the

TABLE III–B–22—OTHER AGRICULTURAL CONTRACTS AND ICE FUTURES U.S. SOFTS

Number of unique Number of unique persons >= level persons in market Core-referenced futures Position contract Basis of spot-month level limit level Spot month Spot month physical Spot month All months cash settled delivery only

Cotton No. 2 ...... 15% DS ...... 960 0 (*) 122 1,000 (ICE current limit 300) ...... 25% DS ...... 1,600 0 0 ...... Cocoa ...... 15% DS ...... 3,300 0 0 164 682 (ICE current limit 1,000) ...... 25% DS ...... 5,500 0 0 ...... Coffee ...... 15% DS ...... 1,440 0 (*) 336 1,175 (ICE current limit 500) ...... 25% DS ...... 2,400 0 (*) ...... Orange Juice ...... 15% DS ...... 1,680 0 0 38 242 (ICE current limit 300) ...... 25% DS ...... 2,800 0 0 ...... Live Cattle ...... 60% Current Limit ...... 225 0 33 616 1,436 (CME current limit 450) ...... Current limit * ...... 450 0 0 ...... Sugar No. 11 ...... 15% DS ...... 13,980 (*) 10 443 874 (ICE current limit 5,000) ...... 25% DS ...... 23,300 0 (*) ...... Sugar No. 16 ...... 15% DS ...... 4,200 0 0 12 22 (ICE current limit 1,000) ...... 25% DS ...... 7,000 0 0 ......

For the third group of energy than natural gas, there were fewer than contracts, 131 unique persons had cash- commodities, there were a number of 20 unique persons that had cash-settled settled positions in excess of the unique persons in the cash-settled positions in excess of the reproposed reproposed spot-month limit level of referenced contracts whose position spot-month limit levels, each based on 2,000 contracts. As can be observed in would have exceeded 25 percent of the 25 percent of deliverable supply, as the table below, only 20 unique persons exchange’s estimated deliverable discussed above under § 150.2. had cash-settled referenced contract supply. For energy commodities other However, for natural gas referenced positions that would have exceeded the

670 The Commission notes that 60 percent of the counts presented for 15 percent of estimated deliverable supply. That is, 60 percent of 25 percent 450 contract spot-month limit is analogous to the equals 15 percent.

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reproposed natural gas conditional spot- contracts potentially would provide in relation to other traders’ positions in month limit level of 10,000 contracts. relief to a substantial number of market cash-settled referenced contracts. Thus, a conditional spot-month limit participants, each of whom did not have exemption in natural gas referenced a position that was extraordinarily large

TABLE III–B–23—ENERGY CONTRACTS

Nunber of unique Number of unique persons >= level persons in market Core-referenced futures Position contract Basis of spot-month level limit level Spot month Spot month physical Spot month All months cash settled delivery only

Crude Oil, Light Sweet CME proposal * ...... 6,000 19 8 1,773 2,673 (WTI). (NYMEX current limit ...... 25% DS ...... 10,400 16 (*) ...... 3,000 contracts) ...... 50% DS ...... 20,800 (*) 0 ...... Gasoline Blendstock CME proposal ...... 2,000 23 14 463 837 (RBOB). (NYMEX current limit ...... 25% DS ...... 6,800 (*) 0 ...... 1,000 contracts) ...... 50% DS ...... 13,600 0 0 ...... Natural Gas ...... 25% DS ...... 2,000 131 16 1,400 1,846 (NYMEX current limit ...... 50% DS ...... 4,000 77 (*) ...... 1,000 contracts) ...... Current single exchange 5,000 65 (*) ...... conditional spot-month limit exemption. Conditional spot-month limit 10,000 20 0 ...... exemption. ULSD (HO) ...... CME proposal ...... 2,000 24 11 470 760 (NYMEX current limit ...... 25% DS ...... 2,900 15 5 ...... 1,000 contracts) ...... 50% DS ...... 5,800 5 0 ...... * For WTI, CME Group recommended a step-down spot-month limit of 6,000/5,000/4,000 contracts in the last three days of trading.

For the fourth group of metal positions in excess of the reproposed across the 24 calendar months of its commodities, there were a few unique spot-month limit levels for metal analysis, particularly in platinum,671 is persons in the cash-settled referenced commodities; this is in marked contrast of the view that the spot-month limit contracts whose position would have to the 131 unique persons who had level, as discussed above under § 150.2, exceeded the reproposed levels of the cash-settled positions in excess of the and without a conditional spot-month spot-month limits, based on the CME reproposed spot-month limit for natural limit exemption, is within the range of Group’s recommended levels, as gas contracts. The Commission, in acceptable limit levels that, to the discussed above under § 150.2. consideration of the distribution of maximum extent practicable, may However, there were fewer than 20 unique persons holding positions in achieve the statutory policy objectives unique persons that had cash-settled cash-settled metal commodity contracts in CEA section 4a(a)(3)(B).

TABLE III–B–24—METAL CONTRACTS (COMEX DIVISION OF NYMEX)

Number of unique Number of unique persons >= level persons in market Core-referenced futures Position contract Basis of spot-month level limit level Spot month Spot month physical Spot month All months cash settled delivery only

Copper ...... CME proposal ...... 1,000 0 (*) 493 1,457 (current limit 1,000) ...... 25% DS ...... 1,100 0 (*) ...... Gold ...... CME proposal ...... 6,000 (*) (*) 518 1,557 (current limit 3,000) ...... 25% DS ...... 11,200 0 0 ...... Palladium ...... CME proposal ...... 100 6 14 164 580 (current limit 100) ...... 25% DS ...... 900 0 0 ...... Platinum ...... CME proposal ...... 500 13 (*) 235 842 (current limit 500) ...... 25% DS ...... 900 10 (*) ...... 50% DS ...... 1,800 (*) 0 ...... Silver ...... CME proposal ...... 3,000 0 0 311 1,023 (current limit 1,500) ...... 25% DS ...... 5,600 0 0 ......

671 As can be observed in the open interest table notes that open interest in cash-settled platinum month review period (year 2), than in the first 12- discussed under § 150.2, above, the Commission contracts was markedly lower in the second 12- month review period (year 1).

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e. Proposed Recordkeeping and Special Commission Reproposal: The any contract that is subject to a position Call Requirements—§ 150.3(g) and Commission believes the previously limitation established by the § 150.3(h) proposed recordkeeping and ‘‘special Commission pursuant to CEA section Proposed Rules: As proposed in the call’’ provisions in § 150.3(g) and 4a(a), the DCM ‘‘shall set the position December 2013 Position Limits § 150.3(h), respectively, are sufficient to limitation of the board of trade at a level Proposal, § 150.3(g) specifies limit abuse of exemptions without not higher than the position limitation 679 recordkeeping requirements for persons causing undue burdens on market established by the Commission.’’ who claim any exemption set forth in participants. The Commission is Moreover, the Dodd-Frank Act added § 150.3. Persons claiming exemptions reproposing these sections generally as CEA section 5h to provide a regulatory under previously proposed § 150.3 must proposed in the December 2013 Position framework for Commission oversight of 680 maintain complete books and records Limits Proposal. The Commission is SEFs. Under SEF core principle 6, concerning all details of their related clarifying, in reproposed § 150.3(g)(2), which parallels DCM core principle 5, cash, forward, futures, options and swap that the bona fides of the pass-through Congress required that SEFs that are positions and transactions. Furthermore, swap counterparty may be determined trading facilities adopt for each swap, as such persons must make such books and at the time of the transaction or, is necessary and appropriate, position 681 records available to the Commission alternatively, at such later time that the limits or position accountability. upon request under previously counterparty can show the swap Furthermore, Congress required that, for proposed § 150.3(h), which would position to be a bona fide hedging any contract that is subject to a Federal preserve the ‘‘special call’’ rule set forth position. As previously proposed, such position limit under CEA section 4a(a), in current § 150.3(b). This ‘‘special call’’ bona fides could only be determined at the SEF shall set its position limits at a rule would have required that any the time of the transaction, as opposed level no higher than the position person claiming an exemption under to at a later time. limitation established by the Commission.682 § 150.3 must, upon request, provide to D. § 150.5—Exchange-Set Speculative the Commission such information as Position Limits and Parts 37 and 38 2. Summary specified in the call relating to the As explained in the December 2013 positions owned or controlled by that 1. Background Position Limits Proposal,683 to person; trading done pursuant to the As discussed above, the Commission implement the authority provided by claimed exemption; the commodity currently sets and enforces position section 735 of the Dodd-Frank Act derivative contracts or cash market limits pursuant to its broad authority amendments to CEA sections 5(d)(1) positions which support the claim of under CEA section 4a,674 and does so and 5h(f)(1), the Commission evaluated exemption; and the relevant business only with respect to certain enumerated its pre-Dodd-Frank Act regulations and relationships supporting a claim of agricultural products.675 As the approach to oversight of DCMs, which exemption. Commission explained above and in the had consisted largely of published The Commission noted that the December 2013 Position Limits guidance and acceptable practices, with previously proposed rules concerning Proposal,676 section 735 of the Dodd- the aim of updating them to conform to detailed recordkeeping and special calls Frank Act amended section 5(d)(1) of the new Dodd-Frank Act regulatory are designed to help ensure that any the CEA to explicitly provide that the framework. Based on that review, and person who claims any exemption set Commission may mandate the manner pursuant to the authority given to the forth in § 150.3 can demonstrate a in which DCMs must comply with the Commission in amended sections legitimate purpose for doing so.672 core principles.677 However, Congress 5(d)(1) and 5h(f)(1) of the CEA, which Comments Received: The Commission limited the exercise of reasonable permit the Commission to determine, by did not receive any comments on the discretion by DCMs only where the rule or regulation, the manner in which recordkeeping provisions in § 150.3(g) Commission has acted by regulation.678 as proposed in the December 2013 The Dodd-Frank Act also amended boards of trade and SEFs, respectively, must comply with the core Position Limits Proposal. With respect DCM core principle 5. As amended, principles,684 the Commission in its to previously proposed § 150.3(h), one DCM core principle 5 requires that, for commenter opposed the ‘‘special call’’ December 2013 Position Limit Proposal, proposed several updates to § 150.5 to provision because, in the commenter’s 674 CEA section 4a, as amended by the Dodd- opinion, it is ‘‘too passive.’’ The Frank Act, provides the Commission with broad promote compliance with DCM core commenter advocated, instead, a authority to set position limits, including an principle 5 and SEF core principle 6 revision requiring persons claiming an extension of its position limits authority to swaps governing position limitations or positions. 7 U.S.C. 6a. See supra discussion of CEA 685 exemption to maintain books and accountability. section 4a. First, the Commission proposed records on an ongoing basis and provide 675 The position limits on these agricultural information to the Commission on a contracts are referred to as ‘‘legacy’’ limits, and the amendments to the provisions of § 150.5 periodic and automatic basis, because listed commodities are referred to as the to include SEFs and swaps. Second, the ‘‘enumerated’’ agricultural commodities. This list of even if the Commission lacked staff and Commission proposed to codify rules enumerated agricultural contracts includes Corn and revise acceptable practices for resources to review the submitted (and Mini-Corn), Oats, Soybeans (and Mini- Soybeans), Wheat (and Mini-wheat), Soybean Oil, material in real-time, Commission staff 679 would have detailed historical data for Soybean Meal, Hard Red Spring Wheat, Hard See CEA section 5(d)(5)(B) (amended 2010), 7 Winter Wheat, and Cotton No. 2. See 17 CFR 150.2. U.S.C. 7(d)(5)(B). use in compliance audits. This 676 See December 2013 Position Limits Proposal, 680 See CEA section 5h, 7 U.S.C. 7b–3. commenter stated that since required 78 FR at 75748. 681 CEA section 5h(f)(6), 7 U.S.C. 7b–3(f)(6); see records are likely to be kept in an 677 Specifically, the Dodd-Frank Act amended also December 2013 Position Limits Proposal, 78 FR electronic format, the more frequent DCM core principle 1 to include the condition that at 75748. ‘‘[u]nless otherwise determined by the Commission 682 Id. reporting requirement would not be 683 673 by rule or regulation,’’ boards of trade shall have December 2013 Position Limits Proposal, 78 considered burdensome. reasonable discretion in establishing the manner in FR at 75754. which they comply with the core principles. See 684 See CEA sections 5(d)(1)(B) and 5h(f)(1)(B); 7 672 December 2013 Position Limits Proposal, 78 CEA section 5(d)(1)(B); 7 U.S.C. 7(d)(1)(B). U.S.C. 7(d)(1)(B) and 7b–3(f)(1)(B). FR at 75741. 678 See December 2013 Position Limits Proposal, 685 December 2013 Position Limits Proposal, 78 673 CL–O SEC–59972 at 5. 78 FR at 75748. FR at 75754.

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compliance with DCM core principle 5 part 150 of the Commission’s amend § 37.601 to delete the reference and SEF core principle 6 within regulations—the current position limit to vacated part 151. The amendment amended § 150.5(a) for contracts subject regulations—until such time that would have instead required that SEFs to the federal position limits set forth in compliance would be required under that are trading facilities meet the § 150.2. Third, the Commission part 151.690 At that time, the requirements of part 150, which would proposed to codify rules and revise Commission explained that this be comparable to the DCM requirement, guidance and acceptable practices for clarification would ensure that DCMs since, as proposed in the December compliance with DCM core principle 5 were in compliance with the 2013 Position Limits Proposal, § 150.5 and SEF core principle 6 within Commission’s regulations under part would apply to commodity derivative amended § 150.5(b) for contracts not 150 during the interim period until the contracts, whether listed on a DCM or subject to the federal position limits set compliance date for the new position on a SEF that is a trading facility. At the forth in § 150.2. Fourth, the Commission limits regulations of part 151 would take same time, the Commission would have 691 proposed to amend § 150.5 to effect. The Commission further amended Appendix B to part 37, which implement uniform requirements for explained that its new regulation, provides guidance on complying with DCMs and SEFs that are trading § 38.301, was based on the Dodd-Frank core principles, both initially and on an facilities relating to hedging exemptions amendments to the DCM core principles ongoing basis, to maintain SEF across all types of contracts, including regime, which collectively would registration.696 Since the December 2013 those that are subject to federal limits. provide that DCM discretion in setting Position Limits Proposal required that Fifth, the Commission proposed to position limits or position SEFs that are trading facilities meet the require DCMs and SEFs that are trading accountability levels was limited by facilities to have aggregation policies Commission regulations setting position requirements of part 150, the proposed that mirror the federal aggregation limits.692 amendments to the guidance regarding provisions.686 Similarly, as the Commission noted in SEF core principle 6 reiterated that In addition to the changes to the the December 2013 Position Limits requirement. The Commission noted provisions of § 150.5 proposed in the Proposal,693 when in 2010 the that for SEFs that are not trading December 2013 Position Limits Commission proposed to adopt a facilities, to whom core principle 6 Proposal, the Commission also noted regulatory scheme applicable to SEFs, it would not be applicable under the that it had, in response to the Dodd- proposed to require that SEFs establish statutory language, part 150 should have Frank Act, previously published several position limits in accordance with the been considered as guidance.697 earlier rulemakings that pertained to requirements set forth in part 151 of the More recently, the Commission issued position limits, including in a notice of Commission’s regulations under the 2016 Supplemental Position Limits proposed rulemaking to amend part 38 proposed § 37.601.694 The Commission Proposal to revise and amend certain to establish regulatory obligations that pointed out that it had revised § 37.601 parts of the December 2013 Position each DCM must meet in order to comply in the SEF final rulemaking, to state that Limits Proposal based on comments with section 5 of the CEA, as amended until such time that compliance was received on the December 2013 Position 687 by the Dodd-Frank Act. In addition, required under part 151, a SEF may Limits Proposal,698 viewpoints as noted above, the Commission had refer to the guidance and/or acceptable expressed during a Roundtable on published a proposal to replace part 150 practices in Appendix B of part 37 to Position Limits,699 several Commission with a proposed part 151, which was demonstrate to the Commission advisory committee meetings that each later finalized before being vacated.688 compliance with the requirements of provided a focused forum for In the December 2013 Position Limits SEF core principle 6.695 participants to discuss some aspects of Proposal, the Commission pointed out In the December 2013 Position Limits the December 2013 Position Limits that as it was originally proposed, Proposal, the Commission noted that in Proposal,700 and information obtained § 38.301 would require each DCM to light of the District Court vacatur of part comply with the requirements of part 151, the Commission proposed to in the course of ongoing Commission 151 as a condition of its compliance with DCM core principle 5.689 When the 690 Core Principles and Other Requirements for 696 Appendix B to Part 37—Guidance on, and Designated Contract Markets, 77 FR 36611, 36639 Acceptable Practices in, Compliance with Core Commission finalized Dodd-Frank (Jun. 19, 2012) (‘‘Final Part 38 Rule’’). The Principles. updates to part 38 in 2012, it adopted Commission mandated in final § 38.301 that, in 697 December 2013 Position Limits Proposal, 78 a revised version of § 38.301 with an order to comply with DCM core principle 5, a DCM FR at 75753. additional clause that requires DCMs to must ‘‘meet the requirements of parts 150 and 151 698 Comments on the December 2013 Position continue to meet the requirements of of this chapter, as applicable.’’ See also 17 CFR Limits Proposal are accessible on the Commission’s 38.301. Web site at http://comments.cftc.gov/ 691 Final Part 38 Rule at 36639. PublicComments/CommentList.aspx?id=1436. 686 Id. Aggregation exemptions can be used, in 692 Id. (discussing the Dodd-Frank amendments to 699 A transcript of the June 19, 2014 Roundtable effect, as a way for a trader to acquire a larger the DCM core principles); see also CEA sections on Position Limits is available on the Commission’s speculative position. As noted in the December 5(d)(1) and 5(d)(5), as amended by the Dodd-Frank Web site at http://www.cftc.gov/idc/groups/public/ 2013 Position Limits Proposal, the Commission Act. @swaps/documents/dfsubmission/dfsubmission_ believes that it is important that the aggregation 693 December 2013 Position Limits Proposal, 78 061914-trans.pdf. rules set out, to the extent feasible, ‘‘bright line’’ FR at 75753. 700 Information regarding the December 9, 2014 standards that are capable of easy application by a 694 Core Principles and Other Requirements for and September 22, 2015 meetings of the wide variety of market participants while not being Swap Execution Facilities, 76 FR 1214 (Jan. 7, 2011) Agricultural Advisory Committee, sponsored by susceptible to circumvention. December 2013 (‘‘SEF final rulemaking’’). Current § 37.601 provides Chairman Massad, is accessible on the Position Limits Proposal, 78 FR at 75754, n. 660. requirements for SEFs that are trading facilities to Commission’s Web site at http://www.cftc.gov/ 687 See December 2013 Position Limits Proposal, comply with SEF core principle 6 (Position Limits About/CFTCCommittees/AgriculturalAdvisory/aac_ 78 FR at 75753; see also Core Principles and Other or Accountability), while the guidance to SEF core meetings. Information regarding February 26, 2015 Requirements for Designated Contract Markets, 75 principle 6 (Position Limits or Accountability) in and the July 29, 2015 meetings of the Energy & FR 80572 (Dec. 22, 2010) (‘‘2010 Part 38 Proposed Appendix B to part 37, cites to part 151. Environmental Markets Advisory Committee Rule’’). 695 Core Principles and Other Requirements for (‘‘EEMAC’’), sponsored by Commission Giancarlo, 688 See supra discussion under Part I.B Swap Execution Facilities, 78 FR 33476 (June 4, is accessible on the Commission’s Web site at (discussing the Commission’s adoption of part 2013). Current § 37.601 provides requirements for http://www.cftc.gov/About/CFTCCommittees/ 151,subsequently vacated). SEFs that are trading facilities to comply with SEF EnergyEnvironmentalMarketsAdvisory/emac_ 689 2010 Part 38 Proposed Rule at 80585. core principle 6 (Position Limits or Accountability). meetings.

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review of SEF registration 3. Discussion no higher than that of the federal applications.701 As discussed in greater detail below, position limit; and (ii) monitor positions In the 2016 Supplemental Position the Commission has determined to established on or through the SEF for Limits Proposal, the Commission repropose § 150.5 largely as proposed in compliance with the federal position limit and any exchange-set limit.709 proposed to delay for exchanges that the December 2013 Position Limit Similarly, for all contracts subject to a lack access to sufficient swap position Proposal and as revised in the 2016 Supplemental Position Limits Proposal. federal position limit, including swaps, information the requirement to establish DCMs, under DCM Core Principle 5, and monitor position limits on swaps at In addition, the Commission has determined to repropose the previously must set a position limit no higher than this time by: (i) Adding Appendix E to 710 proposed amendments to § 37.601 and the federal limit. part 150 to provide guidance regarding 706 The December 2013 Position Limits § 150.5; and (ii) revising guidance on § 38.301. Some changes were made to § 150.5 in Proposal specified that federal position DCM Core Principle 5 and SEF Core response to concerns raised by limits would apply to referenced 711 Principle 6 that corresponds to that commenters; other changes to the contracts, whether futures or swaps, 702 proposed guidance regarding § 150.5. reproposed regulation are to conform to regardless of where the futures or swaps 712 In addition, the Commission in the 2016 changes made in other sections. For positions are established. Consistent Supplemental Position Limits Proposal example, in reproposing § 150.5(b)(1) with DCM Core Principle 5 and SEF proposed new alternative processes for and (2), the Commission has determined Core Principle 6, the Commission at DCMs and SEFs to recognize certain to make certain changes to the § 150.5(a)(1) previously proposed that positions in commodity derivative acceptable practices for establishing the for any commodity derivative contract contracts as non-enumerated bona fide levels of individual non-spot or all- that is subject to a speculative position hedges or enumerated anticipatory bona months combined position limits for limit under § 150.2, a DCM or SEF that fide hedges, as well as to exempt from futures and future option contracts that is a trading facility shall set a federal position limits certain spread are not subject to federal limits. The speculative position limit no higher 713 positions, in each case subject to changes to reproposed § 150.5(b)(1) and than the level specified in § 150.2.’’ Commission review.703 Moreover, the (2) correspond to changes to reproposed ii. Comments Received to December Commission proposed that DCMs and § 150.2(e)(4)(iv) discussed above, for 2013 Position Limits Proposal SEFs could recognize and exempt from establishing the levels of individual non-spot or all-months combined Several comment letters on previously exchange position limits certain non- proposed § 150.5 recommended that the enumerated bona fide hedging positions limits for futures and future option contracts that are subject to Commission not require SEFs to positions, enumerated anticipatory bona 714 federal limits. Moreover, several non- establish position limits. Two noted fide hedges, and certain spread that because SEF participants may use 704 substantive changes were made in positions. To effectuate the latter response to commenter requests to more than one derivatives clearing proposals, the Commission proposed provide greater clarity.707 organization (‘‘DCO’’), a SEF may not amendments to § 150.3 and new § 150.9, The essential features of the changes know when a position has been 150.10, and 150.11, as well as to reproposed § 150.5 are discussed offset.715 Further, during the ongoing corresponding amendments to below. SEF registration process,716 a number of § 150.5(a)(2) and 150.5(b)(5).705 a. Treatment of Swaps on SEFs and 709 CEA section 5h(f)(6)(B), 7 U.S.C. 7b–3(f)(6) (SEF Core Principle 6B). The Commission codified 701 DCMs Added by the Dodd-Frank Act, section 5h(a) SEF Core Principle 6, added by the Dodd-Frank Act, of the CEA, 7 U.S.C. 7b–3, requires SEFs to register i. December 2013 Position Limits in § 37.600 of its regulations, 17 CFR 37.600. See with the Commission. See generally ‘‘Core Proposal. As explained above, CEA generally Core Principles and Other Requirements Principles and Other Requirements for Swap section 4a(a)(5), as amended by the for Swap Execution Facilities, 78 FR 33476, 33533– Execution Facilities,’’ 78 FR 33476 (Aug. 5, 2013). Dodd-Frank Act, requires federal 34 (June 4, 2013). Information regarding the SEF application process 710 position limits for swaps that are CEA section 5(d)(5), 7 U.S.C. 7(d)(5) (DCM is available on the Commission’s Web site at http:// Core Principle 5). The Commission codified DCM www.cftc.gov/IndustryOversight/ ‘‘economically equivalent’’ to futures Core Principle 5, as amended by the Dodd-Frank TradingOrganizations/SEF2/sefhowto. and options that are subject to Act, in § 38.300 of its regulations, 17 CFR 38.300. 702 See 2016 Supplemental Position Limits mandatory position limits under CEA See Core Principles and Other Requirements for Proposal, 81 FR at 38459–62. See also DCM Core section 4a(a)(2).708 The CEA also Designated Contract Markets, 77 FR 36612, 36639 Principle 5, Position Limitations or Accountability (June 19, 2012). (contained in CEA section 5(d)(5), 7 U.S.C. 7(d)(5)) requires in SEF Core Principle 6 that a 711 Under the December 2013 Position Limits and SEF Core Principle 6, Position Limits or SEF that is a trading facility: (i) Set its Proposal, ‘‘referenced contracts’’ are defined as Accountability (contained in CEA section 5h(f)(6), exchange-set limit on swaps at a level futures, options, economically equivalent swaps, 7 U.S.C. 7b–3(f)(6)). and certain foreign board of trade contracts, in 703 physical commodities, and are subject to the See 2016 Supplemental Position Limits 706 The Commission did not receive any Proposal, 81 FR at 38467–76 (providing for comments regarding the proposed changes to proposed federal position limits. See December recognition of certain positions in commodity § 37.601 and § 38.301. 2013 Position Limits Proposal, 78 FR at 75825. 712 derivative contracts as non-enumerated bona fide 707 See the removal of the provisions regarding See December 2013 Position Limits Proposal, hedges), at 38480–81 (providing for recognition of excluded commodities from § 150.5(b) and their 78 FR at 75826 (previously proposed § 150.2). certain positions in commodity derivatives placement in a new section (c), which addresses 713 See December 2013 Position Limits Proposal, contracts as enumerated anticipatory bona fide only excluded commodities. In addition to the 78 FR at 75754–8. hedges); and at 38476–80 (providing for exemptions reorganization of the excluded commodity 714 CL–CMC–59634 at 14–15, CL–FIA–60392 at from federal position limits for certain spread provisions, changes were made to those provisions 10. One comment letter stated that SEFs should be positions). to track changes made in other sections or exempt from the requirement to set positions limits 704 See 2016 Supplemental Position Limits paragraphs and to address concerns raised by because SEFs are in the early stages of development Proposal, 81 FR at 38482. commenters and confusion that became apparent in and could be harmed by limits that restrict 705 See 2016 Supplemental Position Limits the comment letters. liquidity. CL–ISDA/SIFMA–59611 at 35. Proposal, 81 FR at 38504–13. The 2016 708 See December 2013 Position Limits Proposal, 715 CL–CMC–59634 at 14–15, CL–FIA–60392 at Supplemental Position Limits Proposal did not 78 FR at 75681–5 (the Commission interpret the 10. address the changes to §§ 37.601 or 38.301 statute to mandate that the Commission impose 716 Under CEA section 5h(a)(1), no person may proposed in the December 2013 Position Limits limits on futures, options, and swaps, in operate a facility for trading swaps unless the Proposal. agricultural and exempt commodities). Continued

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persons applying to become registered effectively monitor swap position indication would alert the exchange to as SEFs told the Commission that they limits.720 contact the market participant to inquire lack access to information that would In this regard, the Commission about that participant’s total open swap enable them to knowledgeably establish expressed its belief that an exchange position. 717 position limits or monitor positions. would have or could have access to The Commission expressed its belief sufficient swap position information to As the Commission observed in the that although this indication would not effectively monitor swap position limits 2016 Supplemental Position Limits include the market participant’s activity Proposal, this information gap would if, for example: (1) It had access to daily information about its market transacted away from that particular also be a concern for DCMs in respect exchange, such monitoring would of swaps.718 participants’ open swap positions; or (2) it knows that its market participants comply with CEA section 5h(f)(6)(B)(ii). iii. 2016 Supplemental Position Limits regularly engage in large volumes of However, the Commission observed that Proposal speculative trading activity, including exchanges generally do not currently through knowledge gained in have access to a data source that As explained above, in the 2016 surveillance of heavy trading activity, identifies a market participant’s Supplemental Position Limits Proposal, that would cause reasonable reported open swap positions from the the Commission proposed to surveillance personnel at an exchange to prior trading day. With only the temporarily delay for DCMs and SEFs inquire further about a market transaction data from a particular that are trading facilities, which lack participant’s intentions 721 or total open exchange, it would be impracticable, if access to sufficient swap position swap positions.722 not impossible, for that exchange to information, the requirement to The Commission noted that it is monitor and enforce position limits for establish and monitor position limits on possible that an exchange could obtain swaps.724 swaps by: (i) Adding Appendix E to part an indication of whether a swap 150 to provide guidance regarding The Commission also acknowledged position established on or through a in the 2016 Supplemental Position § 150.5; and (ii) revising guidance on particular exchange is increasing a Limits Proposal that it has neither DCM Core Principle 5 and SEF Core market participant’s swap position Principle 6 that corresponds to that beyond a federal or exchange-set limit, guidance regarding § 150.5.719 At that if that exchange has data about some or time, the Commission acknowledged all of a market participant’s open swap that, if an exchange does not have position from the prior day and access to sufficient data regarding combines it with the transaction data individual market participants’ open from the current day, to obtain an swap positions, then it cannot indication of the market participant’s market participant may have conducted other swap effectively monitor swap position limits, current open swap position.723 The transactions in the same commodity, away from a and expressed its belief that most particular exchange, that reduced its swap position. Id. exchanges do not have access to 720 Id. at 38460. The Commission acknowledged 724 Id. The Commission also noted that an sufficient swap position information to that one SEF that may have access to sufficient swap position information by virtue of systems exchange could theoretically obtain swap position integration with affiliates that are CFTC registrants data directly from market participants, for example, facility is registered as a SEF or DCM. 7 U.S.C. 7b– and shared personnel. This SEF requires that all of by requiring a market participant to report its swap 3(a)(1). A SEF must comply with core principles, its listed swaps be cleared on an affiliated DCO, positions, as a condition of trading on the exchange. including Core Principle 6 regarding position which reports to an affiliated SDR. 2016 The Commission observed, however, that it is limits, as a condition of registration. CEA section Supplemental Position Limits Proposal, 81 FR at unlikely that a single exchange would unilaterally 5h(f)(1), 7 U.S.C. 7b–3(f)(1). 38459; see also 38460, n. 32. impose a swaps reporting regime on market 717 721 For example, in a submission to the Id. at 38460–61. For instance, heavy trading participants. Id. at 38461, n. 36. The Commission Commission under part 40 of the Commission’s activity might cause an exchange to ask whether a abandoned the approach of requiring market regulations, BGC Derivative Markets, L.P. states that market participant is building a large speculative participants to report futures positions directly to ‘‘[t]he information to administer limits or position or whether the heavy trading activity is accountability levels cannot be readily ascertained. merely the result of a market participant making a the Commission many years ago. Id.; see also Position limits or accountability levels apply market across several exchanges. Reporting Requirements for Contract Markets, market-wide to a trader’s overall position in a given 722 Id. at 38461. See 17 CFR 45.3, 45.4, and 45.10. Futures Commission Merchants, Members of swap. To monitor this position, a SEF must have See generally CEA sections 4r (reporting and Exchanges and Large Traders, 46 FR 59960 (Dec. 8, access to information about a trader’s overall recordkeeping for uncleared swaps) and 21 (swap 1981). Instead, the Commission and DCMs rely on position. However, a SEF only has information data repositories), 7 U.S.C. 6r and 24a, respectively. a large trader reporting system where futures about swap transactions that take place on its own The Commission also observed that, unlike futures positions are reported by futures commission Facility and has no way of knowing whether a contracts, which are proprietary to a particular merchants, clearing members and foreign brokers. particular trade on its facility adds to or reduces a DCM and typically clear at a single DCO affiliated See generally part 19 of the Commission’s trader’s position. And because swaps may trade on with the DCM, swaps in a particular commodity are regulations, 17 CFR part 19. See also, for example, a number of facilities or, in many cases, over-the- not proprietary to any particular trading facility or the discussion of an exchange’s large trader counter, a SEF does not know the size of the platform. Market participants may execute swaps trader’s overall swap position and thus cannot involving a particular commodity on or subject to reporting system in the Division of Market ascertain whether the trader’s position relative to the rules of multiple exchanges or, in some Oversight Rule Enforcement Review of the Chicago any position limit. Such information would be circumstances, OTC. Further, under the Mercantile Exchange and the Chicago Board of required to be supplied to a SEF from a variety of Commission regulations, data with respect to a Trade, July 26, 2013, at 24–7, available at http:// independent sources, including SDRs, DCOs, and particular swap transaction may be reported to any www.cftc.gov/idc/groups/public/@iodcms/ market participants themselves. Unless coordinated swap data repository (‘‘SDR’’). documents/file/rercmecbot072613.pdf. by the Commission operating a centralized 723 2016 Supplemental Position Limits Proposal, Further, as noted above, exchanges do not have reporting system, such a data collection 81 FR at 38461. The Commission observed, authority to demand swap position data from requirement would be duplicative as each separate moreover, by way of example, that part 20 swaps derivative clearing organizations or swap data SEF required reporting by each information data is a source that identifies a market participant’s repositories; nor do exchanges have general source.’’ BGC Derivative Markets, L.P., Rule reported open swap positions from the prior trading Submission 2015–09 (Oct. 6, 2015). day. So an exchange with access to part 20 swaps authority to demand market participants’ swap 718 2016 Supplemental Position Limits Proposal, date could use it to add to any swap positions position data from clearing members of DCOs or 81 FR at 38460. established on or through that exchange during the swap dealers (as the Commission does under part 719 See 2016 Supplemental Position Limits current trading day to get an indication of a 20). 2016 Supplemental Position Limits Proposal, Proposal, 81 FR at 38459–62. potential position limit violation. Nonetheless, that 81 FR at 38461, n. 36.

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required any DCO 725 or SDR 726 to The Commission stated that in light of that nothing in the 2016 Supplemental provide such swap data to exchanges,727 the foregoing, it was proposing a delay Position Limits Proposal would prevent nor provided any exchange with access in implementation of exchange-set an exchange from nevertheless to swaps data collected under part 20 of limits for swaps only, and only for establishing position limits on swaps, the Commission’s regulations.728 exchanges without sufficient swap while stating that it does seem unlikely position information.729 After that an exchange would implement 725 Core principle M for DCOs addresses consideration of the circumstances position limits before acquiring information sharing for risk management purposes, described above, and in an effort to sufficient swap position information but does not address information sharing with exchanges for other purposes. CEA section accomplish the policy objectives of the because of the ensuing difficulty of 5b(c)(2)(M), 7 U.S.C. 7a–1(c)(2)(M), and § 39.22, 17 Dodd-Frank Act regulatory regime, enforcing such a limit. The Commission CFR 39.22. The Commission has access to DCO including to facilitate trade processing expressed its belief that providing delay information relating to trade and clearing details of any swap and to promote the trading for those exchanges that need it both under § 39.19, 17 CFR 39.19, as is necessary to 730 conduct its oversight of a DCO. However, the of swaps on SEFs, the 2016 preserved flexibility for subsequent Commission has not used its general rulemaking Supplemental Position Limits Proposal Commission rulemaking and allowed authority under CEA section 8a(5), 7 U.S.C. 12a(5), amended the guidance in the for phased implementation of to require DCOs to provide registered entities access appendices to parts 37 and 38 of the limitations on swaps by exchanges, as to swap information, although the Commission 732 could impose such a requirement by rule. CEA Commission’s regulations regarding SEF practicable. section 5b(c)(2)(A)(i), 7 U.S.C. 7a–1(c)(2)(A)(i). core principle 6 and DCM core principle Additionally, the Commission 726 An SDR has a duty to provide direct electronic 5, respectively. According to the 2016 observed that courts have authorized access to the Commission, or a designee of the Supplemental Position Limits Proposal, relieving regulated entities of their Commission who may be a registered entity (such the revised guidance clarified that an as an exchange). CEA section 21(c)(4), 7 U.S.C. statutory obligations where compliance 733 24a(c)(4). See 76 FR 54538 at 54551, n. 141 (Sept. exchange need not demonstrate is impossible or impracticable, and 1, 2011). However, the Commission has not compliance with SEF core principle 6 or noted its view that it would be designated any exchange as a designee of the DCM core principle 5 as applicable to impracticable, if not impossible, for an Commission for that purpose. Further, the swaps until it has access to sufficient Commission has not used its general rulemaking exchange to monitor and enforce authority under CEA section 8a(5), 7 U.S.C. 12a(5), swap position information, after which position limits for swaps with only the to require SDRs to provide registered entities (such the guidance would no longer be transaction data from that particular as exchanges) access to swap information, although applicable.731 For clarity, the 2016 exchange.734 The Commission the Commission could impose such a requirement by rule. CEA section 21(a)(3)(A)(ii), 7 U.S.C. Supplemental Position Limits Proposal expressed its belief that, accordingly, it 24a(a)(3)(A)(ii). For purposes of comparison, the included the same guidance in a new was reasonable to delay implementation Securities and Exchange Commission (‘‘SEC’’) Appendix E to proposed part 150 in the of this discrete aspect of position limits, noted with regard to security-based swaps when it context of the Commission’s proposed only with respect to swaps position finalized its rules implementing its similar provision (which it described as a ‘‘statutory regulations regarding exchange-set limits, and only for exchanges that requirement that security-based SDRs conditionally position limits. lacked access to sufficient swap position provide data to certain regulators and other Although the Commission proposed information. This approach, the authorities’’), ‘‘that one or more self-regulatory to temporarily relieve exchanges that do organizations potentially may seek such access Commission believed, would further the under this provision.’’ Access to Data Obtained by not now have access to sufficient swap policy objectives of the Dodd-Frank Act Security-Based Swap Data Repositories, 81 FR position information from having to set regulatory regime, including the 60585, 50588 (Sept. 2, 2016). The SEC estimated position limits on swaps, it also noted facilitation of trade processing of swaps that ‘‘up to 30 domestic entities potentially might enter into such MOUs or other arrangements, However, as the Commission noted in the 2016 732 reflecting the nine entities specifically identified by As the Commission noted above, although the Supplemental Position Limits Proposal, the quality statute or the final rules, and up to 21 additional 2016 Supplemental Position Limits Proposal of part 20 swaps data does appear to have improved domestic governmental entities or self-regulatory proposed position limits relief to SEFs and to DCMs somewhat since the December 2013 Position Limits organizations that may seek access to such data.’’ in regards to swaps, it did not propose any Id. at 60593. Proposal, although some reports continue to have alteration to the definition of referenced contract significant errors. The Commission stated that it is 727 As the Commission noted in the 2016 (including economically equivalent swaps) that was possible that it will be able to rely on swap open Supplemental Position Limits Proposal, even if proposed in December 2013. See also December positions data, given adjustments for obvious errors such information were to be made available to 2013 Position Limits Proposal, 78 FR at 75825. (e.g., data reported based on a unit of measure, such exchanges, the swaps positions would need to be 733 2016 Supplemental Position Limits Proposal, as an ounce, rather than a futures equivalent converted to futures-equivalent positions for 81 FR at 38462. See also id. at n. 44 (See, e.g., Ass’n number of contracts), to establish higher initial purposes of monitoring position limits on a futures- of Irritated Residents v. EPA, 494 F.3d 1027, 1031 levels of non-spot month limits in a final rule. 2016 equivalent basis. 2016 Supplemental Position (D.C. Cir. 2007) (allowing regulated entities to enter Supplemental Position Limits Proposal, 81 FR at Limits Proposal, 81 FR at 38461. See also December into consent agreements with EPA—without notice 38461. 2013 Positions Limits Proposal, 78 FR at 78 and comment—that deferred prosecution of FR75825 (describing the proposed definition of Moreover, the quality of the data regarding statutory violation until such time as compliance futures-equivalent); 2016 Supplemental Position reportable positions in swaps may have improved would be practicable); Catron v. County Bd. Of Limits Proposal at 38461 (describing amendments enough for the Commission to be able to rely on it Commissioners v. New Mexico Fish & Wildlife to that proposed definition). when monitoring market participants’ compliance Serv., 75 F.3d 1429, 1435 (10th Cir.1966) (stating 728 2016 Supplemental Position Limits Proposal, with the proposed federal position limits. that ‘Compliance with [the National Environmental 81 FR at 38461. The part 20 swaps data is reported 729 Id. Protection Act] is excused when there is a statutory in futures equivalents, but does not include data 730 See, e.g., CEA sections 5h(b)(1)(B) and 5h(e), conflict with the agency’s authorizing legislation specifying where reportable positions in swaps 7 U.S.C. 7b–3(b)(1)(B) and 7b–3(e), respectively. that prohibits or renders compliance were established. 731 2016 Supplemental Position Limits Proposal, impossible.’ ’’)). The Commission noted, moreover, The Commission stated in the December 2013 81 FR at 38461. The Commission stated that once that ‘‘it is axiomatic that courts will avoid reading Position Limits Proposal that it preliminarily had the guidance was no longer applicable, a DCM or statutes to reach absurd or unreasonable decided not to use the swaps data then reported a SEF would be required to file rules with the consequences’’ (citing, as an example, Griffin v. under part 20 for purposes of setting the initial Commission to implement the relevant position Oceanic Contractors, Inc., 458 U.S. 564 (1982)), and levels of the proposed single and all-months- limits and demonstrate compliance with Core pointed out that to require an exchange to monitor combined positions limits due to concerns about Principle 5 or 6, as appropriate. The Commission position limits on swaps, when it currently has the reliability of such data. December 2013 Position also noted that, for the same reasons regarding swap extremely limited visibility into a market Limits Proposal, 78 FR at 75533. The Commission position data discussed above in respect of CEA participant’s swap position, was, arguably, absurd also stated that it might use part 20 swaps data section 5h(f)(6)(B), the guidance proposed in the and certainly appeared unreasonable. 2016 should it determine such data to be reliable, in 2016 Supplemental Position Limits Proposal would Supplemental Position Limits Proposal, 81 FR at order to establish higher initial levels in a final rule. temporarily relieve SEFs of their statutory 38462, n. 44. Id. at 75734. obligation under CEA section 5h(f)(6)(A). Id. 734 Id. at 38462.

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and the promotion of trading swaps on Regarding the comments under § 150.2 a swap position acquired SEFs. Finally, the Commission noted recommending that the Commission in good faith in any pre-enactment and that while this approach would delay identify a plan to address the transition period swaps, in either case the requirement for certain exchanges to insufficient data issues that goes beyond as defined in § 150.1.745 However, establish and monitor exchange-set ‘‘simply exempting affected exchanges,’’ previously proposed § 150.5(a)(3) would limits on swaps, under the December the Commission may consider granting allow a person to net such a pre-existing 2013 Position Limits Proposal, federal DCMs and SEFs, as self-regulatory swap with post-effective date position limits would apply to swaps organizations, access to part 20 data or commodity derivative contracts for the that are economically equivalent to SDR data at a later time. purpose of complying with any non- futures contracts subject to federal In addition, regarding the comment spot-month speculative position limit. position limits.735 that the Commission already has access Under previously proposed to sufficient swap data in order to § 150.5(a)(4)(i), a DCM or SEF that is a iv. Comments Received to 2016 implement position limits, the trading facility must require compliance Supplemental Position Limits Proposal Commission points out that it proposes with spot month speculative position Several commenters addressed the to adopt a phased approach to updating limits for pre-existing positions in Commission’s proposed guidance on its position limits regime.742 In commodity derivatives contracts other exchange-set limits on swaps.736 conjunction with this phased approach, than pre-enactment or transition period Regarding insufficient swap data, four the Commission believes that at this swaps, while previously proposed commenters agreed that SEFs and DCMs time it should limit its implementation § 150.5(a)(4)(ii) provides that a non- lack access to sufficient swap position of position limits for swaps to those that spot-month speculative position limit data to set exchange limits on swaps, are referenced contracts. established under § 150.2 would not and as such, the commenters support apply to any commodity derivative the Commission’s decision to delay the b. § 150.5(a)—Requirements and contract acquired in good faith prior to position limit monitoring requirements Acceptable Practices for Commodity the effective date of such limit.746 As for SEFs that are trading facilities and Derivative Contracts That Are Subject to proposed in the December 2013 Position DCMs.737 In addition, one commenter Federal Position Limits Limits Proposal, however, such a pre- recommended that the Commission i. December 2013 Position Limits existing commodity derivative contract provide notice for public comments Proposal position must be attributed to the prior to implementing any person if the person’s position is determination that a DCM or SEF has Several requirements were added to § 150.5(a) in the December 2013 increased after the effective date of such access to sufficient swap position data 747 Position Limits Proposal to which a limit. to set exchange limits on swaps.738 Under the December 2013 Position DCM or SEF that is a trading facility Further, two commenters recommended Limits Proposal, the Commission had must adhere when setting position that the Commission identify a plan, to proposed to require DCMs and SEFs that limits for contracts that are subject to address the insufficient data issues, that are trading facilities to have aggregation goes beyond ‘‘simply exempting affected the federal position limits listed in 743 polices that mirror the federal exchanges.’’ 739 § 150.2. Previously proposed aggregation provisions.748 Therefore, On the other hand, one commenter § 150.5(a)(1) specified that a DCM or asserted that there should be no delay SEF that lists a contract on a commodity 745 The Commission previously proposed to in implementing position limits for that is subject to federal position limits exercise its authority under CEA section 4a(a)(7) to swaps because, according to the must adopt position limits for that exempt pre-Dodd-Frank and transition period commenter, the Commission has access contract at a level that is no higher than swaps from speculative position limits (unless the 744 trader elected to include such a position to net with to sufficient swap data it needs to the federal position limit. Exchanges post-effective date commodity derivative contracts). implement position limits.740 with cash-settled contracts price-linked Such a pre-existing swap position would be exempt to contracts subject to federal limits from initial spot month speculative position limits. v. Commission Determination would also be required to adopt those December 2013 Position Limits Proposal, 78 FR at The Commission has determined to 75756, n. 674. limit levels. 746 See previously proposed 150.5(a)(4)(ii). See repropose the treatment of swaps and Previously proposed § 150.5(a)(3) also CEA section 22(a)(5)(B), added by section 739 SEFs as previously proposed in the 2016 would have required a DCM or SEF that of the Dodd-Frank Act. Supplemental Position Limits Proposal is a trading facility to exempt from 747 See previously proposed 150.5(a)(4)(ii). for the reasons given above.741 speculative position limits established Notwithstanding any pre-existing exemption adopted by a DCM or SEF that applied to speculative position limits in non-spot months, 735 Id. 742 As the Commission noted in the December under the December 2013 Position Limits Proposal, 736 E.g., CL–FIA–60937 at 1,6; CL–WMBA–60945 2013 Position Limits Proposal, ‘‘a phased approach a person holding pre-existing commodity derivative at 1–2; CL–AFR–60953 at 2; CL–RER2–60962 at 1; will (i) reduce the potential administrative burden contracts (except for pre-existing swaps as CL–Better Markets–60928 at 6. by not immediately imposing position limits on all described above) would be required to comply with 737 CL–FIA–60937 at 2, 5–6; CL–WMBA–60945 at commodity derivative contracts in physical spot month speculative position limits. However, 1–2; CL–AFR–60953 at 2; CL–RER2–60962 at 1. commodities at once, and (ii) facilitate adoption of nothing in previously proposed § 150.5(a)(4) would 738 CL–FIA–60937 at 2, 5–6. monitoring policies, procedures and systems by override the exclusion of pre-Dodd-Frank and 739 CL–AFR–60953 at 2; CL–RER2–60962 at 1. persons not currently subject to positions limits transition period swaps from speculative position 740 CL–Better Markets–60928 at 6. (such as traders in swaps that are not significant limits. December 2013 Position Limits Proposal, 78 price discovery contracts).’’ 78 FR 75680. 741 For purposes of clarity, the Commission is FR at 75756, n. 675. 743 reproposing the guidance to provide for a As discussed above, 17 CFR 150.2 provides 748 December 2013 Position Limits Proposal, 78 temporarily delay for DCMs and SEFs that are limits for specified agricultural contracts in the spot FR at 75754, 75756. As noted above, aggregation trading facilities that lack access to sufficient swap month, individual non-spot months, and all- exemptions can be used, in effect, as a way for a position information the requirement to establish months-combined. trader to acquire a larger speculative position, and and monitor position limits on swaps by 744 As previously proposed, § 150.5(a)(1) is in the Commission believes that it is important that reproposing as proposed in the 2016 Supplemental keeping with the mandate in core principle 5 as the aggregation rules set out, to the extent feasible, Position Limits Proposal: (i) Appendix E to Part 150 amended by the Dodd-Frank Act. See CEA section ‘‘bright line’’ standards that are capable of easy to provide guidance regarding reproposed § 150.5; 5(d)(1)(B), 7 U.S.C. 7(d)(1)(B). SEF core principle 6 application by a wide variety of market participants and (ii) guidance on DCM Core Principle 5 and SEF parallels DCM core principle 5. Compare CEA while not being susceptible to circumvention. The Core Principle 6 that corresponds to that section 5h(f)(5), 7 U.S.C. 7b–3(f)(5) with CEA December 2013 Position Limits Proposal also noted reproposed guidance regarding § 150.5. section 5(d)(5), 7 U.S.C. 7(d)(5). that ‘‘. . . position aggregation exemptions, if not

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previously proposed § 150.5(a)(5) stopped positions, and deliveries taken the Commission proposed required DCMs and SEFs that are in the current spot month.752 corresponding changes to § 150.3 and § 150.5(a)(2). trading facilities to have aggregation ii. Comments Received to December For example, § 150.5(a)(2)(i), as rules that conformed to the uniform 2013 Position Limits Proposal Regarding 749 proposed in the December 2013 Position standards listed in § 150.4. As noted Proposed § 150.5(a) in the December 2013 Position Limits Limits Proposal, required that any One commenter recommended that Proposal, aggregation policies that vary exchange rules providing for hedge exchanges be required to withdraw their from exchange to exchange would exemptions for commodity derivatives position accountability and position contracts subject to federal position increase the administrative burden on a limit regimes in deference to any federal trader active on multiple exchanges, as limits conform to the definition of bona limits and to conform their position fide hedging position as defined in the well as increase the administrative limits to the federal limits so that a burden on the Commission in amendments to § 150.1 contained in the single regime will apply across December 2013 Position Limits monitoring and enforcing exchange-set 753 exchanges. Proposal. But because the 2016 position limits.750 Two commenters recommended that Supplemental Position Limits Proposal A DCM or SEF that is a trading facility the Commission clarify that basis incorporated the bona fide hedging would have continued to be free to contracts would be excluded from position definition and provided for enforce position limits that are more exchange-set limits in order to provide spread exemptions in 150.3(a)(1)(i), the stringent that the federal limits. The consistency since such contracts are 2016 Supplemental Position Limits Commission clarified in the December excluded from the Commission’s Proposal proposed instead to cite to definition of referenced contract and 2013 Position Limits Proposal that § 150.3 in § 150.5(a)(2).757 Similarly, the thus are not subject to Federal limits.754 application process provided for in federal spot month position limits do One commenter recommended that § 150.5(a)(2) was amended to conform to not to apply to physical-delivery DCMs and SEFs that are trading the requirement in proposed § 150.10 contracts after delivery obligations are facilities be given more discretion, established.751 Exchanges generally particularly with respect to non- and § 150.11 that exchange rules prohibit transfer or offset of positions referenced contracts, over aggregation providing for exemptions for once long and short position holders requirements.755 commodity derivatives contracts subject have been assigned delivery obligations. to federal position limits require that iii. 2016 Supplemental Position Limits Previously proposed § 150.5(a)(6) traders reapply on at least an annual Proposal clarified acceptable practices for a DCM basis. In addition, the changes to or SEF that is a trading facility to In the 2016 Supplemental Position § 150.5(a)(2) clarified that exchanges may deny an application, or limit, enforce spot month limits against the Limits Proposal, the Commission condition, or revoke any exemption combination of, for example, long proposed to amend § 150.5(a)(2) as it granted at any time. positions that have not been stopped, was proposed in the December 2013 Position Limits Proposal.756 The Similarly, the 2016 Supplemental amendments would permit exchanges to Position Limits Proposal amended uniform with the Commission’s requirements, may previously proposed § 150.5(b) to serve to permit a person to obtain a larger position recognize non-enumerated bona fide on a particular DCM or SEF than would be hedging positions under § 150.9, to require that exchange rules provide for permitted under the federal limits. For example, if grant spread exemptions from federal recognition of a non-enumerated bona an exchange were to grant an aggregation position limits under § 150.10, and to recognize fide hedge ‘‘in a manner consistent with to a corporate person with aggregate positions above the process described in § 150.9(a).’’ federal limits, that exchange may permit such certain enumerated anticipatory bona person to be treated as two or more persons. The fide hedging positions under § 150.11, Addressing the granting of spread person would avoid violating exchange limits, but each as contained in the 2016 exemptions for contracts not subject to may be in violation of the federal limits. The Supplemental Position Limits Proposal. federal position limits, the 2016 Commission believes that a DCM or SEF, consistent In conjunction with those amendments, Supplemental Position Limits Proposal with its responsibilities under applicable core principles, may serve an important role in ensuring integrates in the standards of CEA compliance with federal positions limits and 752 Id. at 75756. The December 2013 Position section 4a(a)(3), providing that thereby protect the price discovery function of its Limits Proposal noted, for example, that an exchanges should take into account market and guard against excessive speculation or exchange might restrict a speculative long position those standards when considering manipulation. In the absence of uniform . . . holder that otherwise would obtain a large long position aggregation exemptions, DCMs or SEFs position, take delivery, and seek to re-establish a whether to grant spread exemptions. may not serve that role. December 2013 Position large long position in an attempt to corner a Finally, the 2016 Supplemental Position Limits Proposal, 78 FR at 75754. See also 2016 significant portion of the deliverable supply or to Limits Proposal clarified that for Final Aggregation Rule (regarding amendments to squeeze shorts. Previously proposed § 150.5(b)(9) excluded commodities, the exchange 150.4, which were approved by the Commission in set forth the same acceptable practices for contracts a separate release concurrently with this reproposed not subject to federal limits. Id. at 75756, n. 679. can grant certain exemptions provided rulemaking). 753 CL–DBCS–59569 at 4. under paragraphs § 150.5(b)(5)(i) and 749 Under the December 2013 Position Limits 754 CL–FIA–59595 at 41; CL–Nodal-59695 at 3. (b)(5)(ii) in addition to the risk Proposal, 17 CFR 150.5(g) would be replaced with 755 CL–AMG–59709 at 2, 10–11. management exemption previously previously proposed § 150.5(a)(5) which referenced 756 As noted above, the changes to § 150.3 as 17 CFR 150.4 as the regulation governing proposed in the December 2013 Position proposed in the December 2013 Position Limits 758 aggregation for contracts subject to federal position Proposal would have provided for recognition of Limits Proposal. limits. enumerated bona fide hedge positions, but would 750 December 2013 Position Limits Proposal, 78 not have exempted any spread positions from 757 As proposed in the 2016 Supplemental FR at 75755. federal limits. For any commodity derivative Position Limits Proposal, § 150.5(a)(2)(i) provides 751 December 2013 Position Limits Proposal, 78 contracts subject to federal position limits, that a DCM or SEF that is a trading facility ‘‘may FR at 75756. The Commission stated that, therefore, § 150.5(a)(2) as proposed in the December 2013 grant exemptions from any speculative position federal spot month position limits do not apply to Position Limits Proposal would have established limits it sets under paragraph (a)(1) of this section, positions in physical-delivery contracts on which requirements under which exchanges could provided that such exemptions conform to the notices of intention to deliver have been issued, recognize exemptions from exchange-set position requirements specified in § 150.3.’’ stopped long positions, delivery obligations limits, including hedge exemptions and spread 758 See § 150.5(b)(5)(D) (stating that for excluded established by the clearing organization, or exemptions. See also 2016 Supplemental Position commodities, a DCM or SEF may grant, pursuant to deliveries taken. Id. at 75756, n. 678. Limits Proposal, 81 FR at 38482. Continued

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iv. Comments Received on the 2016 addressed the five-day rule in the one commenter requested the insertion Supplemental Position Limits Proposal context of § 150.5 as proposed in the of a provision permitting exchanges to Regarding § 150.5(a) 2016 Supplemental Position Limits recognize exemptions retroactively due 763 While comments were submitted on Proposal. According to the to ‘‘unforeseen hedging needs’’; this the 2016 Supplemental Position Limits commenters, the decision of whether to commenter also stated that certain Proposal that addressed the proposed apply the five-day rule to a particular exchanges currently utilize a similar changes to the definitions under § 150.1, contract should be delegated to the rule and it is ‘‘critical in reflecting as well as to the proposed exchange exchanges because the exchanges are in commercial hedging needs that cannot processes for recognition of non- the best position to evaluate facts and always be predicted in advance.’’ 770 enumerated bona fide hedges and circumstances, and different markets Another commenter requested that the 764 anticipatory hedges, and for granting have different dynamics and needs. Commission allow exchanges to spreads exemptions under proposed In addition, one commenter requested recognize a bona fide hedge exemption §§ 150.9, 150.11, and 150.10, that the Commission specifically for up to a five-day retroactive period in respectively, all of which indirectly authorize exchanges to grant bona fide circumstances where market affect § 150.5(a), very few comments hedging position and spread exemptions participants need to exceed limits to during the last five days of trading or address a sudden and unforeseen specifically addressed § 150.5(a). 765 Comments received on the 2016 less. Two commenters suggested, as hedging need.771 That commenter stated Supplemental Position Limits Proposal an alternative approach if the five-day that CME and ICE currently provide regarding the other sections are rule remains, that the Commission mechanisms for such recognition, which addressed in the discussions of those instead rely on tools available to are used infrequently but are exchanges to address concerns, such as sections.759 nonetheless important. According to One commenter urged the exchanges requiring gradual reduction that commenter, ‘‘[t]o ensure that such Commission to allow exchanges to of the position (‘‘step down’’ allowances will not diminish the overall maintain their current authority to set requirements) or revoking exemptions to integrity of the process, two effective speculative limits for both spot month protect the price discovery process in safeguards under the current exchange- core referenced futures contracts administered processes could continue and all-months combined limits below 766 federal limits to ensure that convergence approaching expiration. Another to be required. First, the exchange rules commenter argued that in spite of any continues to occur.760 could continue to require market While the Commission’s retention of five-day rule that is adopted, exchanges participants making use of the what is often referred to as the five-day should be allowed to recognize non- retroactive application to demonstrate rule 761 was included only in the revised enumerated bona fide hedging that the applied-for hedge was required definition of bona fide hedging position exemptions during the last five trading to address a sudden and unforeseen under § 150.1,762 several commenters days for enumerated strategies that are hedging need.... Second, if the otherwise subject to the five-day rule emergency hedge recognition is not rules submitted to the Commission, ‘‘the and the discretion to grant exemptions granted, the exchange rules could exemptions under paragraphs (b)(5)(i) and for hedging strategies that would continue to require the applicant to (b)(5)(ii)(A) through (C)’’). While the December 2013 otherwise be subject to the five-day immediately unwind its position and Position Limits Proposal numbered the provisions rule.767 applicable to excluded commodities as also deem the applicant to have been in § 150.5(b)(5)(ii)(E), the 2016 Supplemental Position One issue raised by several 768 violation for any period in which its Limits Proposal renumbered the provision as commenters that did not directly position exceeded the applicable § 150.5(b)(5)(ii)(D). address § 150.5 concerns the application limits.772 While these comments 759 One example of an issue raised by several procedures in §§ 150.9(a)(4), address other sections, the Commission commenters concerns the application procedures in 150.10(a)(4), and 150.11(a)(3), which §§ 150.9(a)(4), 150.10(a)(4), and 150.11(a)(3), which will respond to these comments in requires market participants to apply for require market participants to apply for explaining its reproposal of § 150.5. recognition or an exemption in advance of recognition or an exemption in advance exceeding the limit. See, e.g., CL–FIA–60937 at 4, of exceeding the limit.769 For example, v. Commission Determination Regarding 13; CL–CME–60926 at 12; CL–ICE–60929 at 11, 20– § 150.5(a) 21; CL–NCGA–NGSA–60919 at 10–11; CL–EEI– and was grounded for physical commodities in the EPSA–60925 at 4; CL–ISDA–60931 at 13; and CL– new requirements of CEA section 4a(c)(2) as The Commission has determined to CMC–60950 at 3. For example, ICE requested the amended by the Dodd-Frank Act. December 2013 repropose § 150.5(a) as proposed in the insertion of a provision for exchanges to recognize Position Limits Proposal, 78 FR at 75706. exemptions retroactively due to ‘‘unforeseen 2016 Supplemental Position Limits 763 hedging needs,’’ and also stated that certain E.g., CL–NCGA–ASA–60917 at 1–2; CL–CME– Proposal for the reasons provided above exchanges currently utilize a similar rule and it is 60926 at 14–15; CL–ICE–60929 at 7–8; CL–ISDA– with some changes, as detailed 60931 at 11; CL–CCI–60935 at 3; CL–MGEX–60936 ‘‘critical in reflecting commercial hedging needs below.773 that cannot always be predicted in advance.’’ CL– at 4; CL–Working Group–60947 at 5, 7–9; CL– ICE–60929 at 11. IECAssn–60949 at 7–9; CL–CMC–60950 at 9–14; CL–NCC–ACSA–60972 at 2. No comments on the 760 CL–NGFA–60941 at 2. things, ‘‘receive notice of recognition from the December 2013 Position Limits Proposal 761 The Commission’s current definition of ‘‘bona designated contract market or swap execution specifically addressed the ‘‘five-day rule’’ in the facility of a position as a non-enumerated bona fide fide hedging transactions and positions,’’ under context of § 150.5. § 1.3(z), applies the ‘‘five-day rule’’ in § 1.3(z)(2) hedge in advance of the date that such position 764 See, e.g, CL–ISDA–60931 at 10; CL–CCI–60935 subsections (i)(B), (ii)(C), (iii), and (iv). Under those would be in excess of the limits then in effect at 3; CL–MGEX–60936 at 11; CL–Working Group– sections of the ‘‘five-day rule,’’ no such positions pursuant to section 4a of the Act.’’) 60947 at 7–9. 770 and transactions were maintained in the five last CL–ICE–60929 at 11. 765 days of trading. See § 1.3(z). CL–CMC–60950 at 11–12. 771 CL–NCGA–NGSA–60919 at 10–11. 766 762 As noted in the December 2013 Position CL–Working Group–60947 at 8; CL–IECAssn– 772 Id. at 11 (footnote omitted). Limits Proposal (which did not change in the 2016 60949 at 7–9. 773 For example, the Commission is reproposing Supplemental Position Limits Proposal), the 767 CL–CME–60926 at 6, 8. the following sections as previously proposed Commission previously proposed to delete § 1.3(z) 768 CL–FIA–60937 at 4, 13; CL–CME–60926 at 12; without change for the reasons provided above: and replace it with a new definition in § 150.1 of CL–ICE–60929 at 11, 20–21; CL–NCGA–NGSA– § 150.5(a)(1); § 150.5(a)(3) (Pre-enactment and ‘‘bona fide hedging position.’’ And, as noted above, 60919 at 10–11; CL–EEI–EPSA–60925 at 4; CL– transition period swap positions), § 150.5(a)(4) (Pre- the December 2013 Position Limits Proposal ISDA–60931 at 13; and CL–CMC–60950 at 3. existing positions), and § 150.5(a)(6) (Additional retained the five-day rule. The previously proposed 769 See 150.9(a)(4) (requiring each person acceptable practices); no substantive comments definition was built on the Commission’s history intending to exceed position limits to, among other were received regarding those sections.

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Although the Commission is exchange-set limits not conforming to would allow exchanges to waive the reproposing § 150.5(a)(1), in response to § 150.3 are capped at the level of the five-day rule on a case-by-case basis. the comment that the exchanges should applicable federal limit in § 150.2. In addition, the Commission proposes The Commission notes that under the conform their position limits to the to amend § 150.5(a)(2)(ii) (Application 2013 Position Limits Proposal, federal limits so that a single position for exemption). The reproposed rule limit and accountability regime apply exchanges could adopt position would permit exchanges to adopt rules across exchanges,774 the Commission accountability at a level lower than the that allow a trader to file an application believes that exchanges may find it federal limit (along with a position limit prudent in the course of monitoring at the same level as the federal limit); in for an enumerated bona fide hedging position limits to impose lower (that is, such cases, the exchange would not exemption within five business days more restrictive) limit levels. The need to grant exemptions for positions after the trader assumed the position 780 flexibility for exchanges to set more no greater than the level of the federal that exceeded a position limit. The restrictive limits is granted in CEA limit. Under the Reproposal, exchanges Commission expects that exchanges will section 4a(e), which provides that if an could choose, instead, to adopt a limit carefully consider whether allowing exchange establishes limits on a lower than the federal limit; in such a such retroactive recognition of an contract, those limits shall be set at a case, the Commission would permit the enumerated bona fide hedging level no higher than the level of any exchange to grant an exemption to the exemption would, as noted by one limits set by the Commission. This exchange’s lower limit, where such commenter, diminish the overall expressly permits an exchange to set exemption does not conform to § 150.3, integrity of the process.781 In addition, lower limit levels than federal limit provided that such exemption to an the Commission cautions exchanges to levels. The reproposed rules track this exchange-set limit is capped at the level carefully consider whether to adopt in statutory provision. of the federal limit. Such a capped those rules the two safeguards For purposes of clarification in exemption would basically have the recommended by that commenter: (i) same effect as if the exchange set its response to comments on the treatment Requiring market participants making speculative position limit at the level of of basis contracts, the reproposed rules use of the retroactive application to provide a singular definition of the federal limit, as required under DCM core principle 5(B) and SEF core demonstrate that the applied-for hedge ‘‘referenced contract’’ which, as stated was required to address a sudden and by the commenters, excludes ‘‘basis principle 6(B)(1).777 In regards to the five-day rule, the unforeseen hedging need; and (ii) contracts.’’ For commodities subject to providing that if the emergency hedge federal limits under reproposed § 150.2, Commission notes that the reproposed recognition was not granted, exchange the definition of referenced contract rule does not apply the prudential rules would continue to require the remains the same for federal and condition of the five-day rule to non- exchange-set limits and may not be enumerated hedging positions. The applicant to unwind its position in an amended by exchanges. An exchange Commission considered the orderly manner and also would deem could, but is not required to, impose recommendations that the Commission: the applicant to have been in violation limits on any basis contract Allow exchanges to recognize a bona for any period in which its position independently of the federal limit for fide hedge exemption for up to a five- exceeded the applicable limits.782 day retroactive period in circumstances the commodity in question, but a Concerning the comment where market participants need to position in a basis contract with an recommending greater discretion be independent, exchange-set limit would exceed limits to address a sudden and unforeseen hedging need; specifically given DCMs and SEFs that are trading not count for the purposes of the federal authorize exchanges to grant bona fide facilities with respect to aggregation limit.775 requirements, the Commission reiterates After consideration of comments hedge and spread exemptions during the last five days of trading or less, and/ its belief in the benefits of requiring regarding § 150.5(a)(2)(i) (Grant of exchanges to conform to the federal exemption),776 as proposed in the 2016 or delegate to the exchanges for their consideration the decision of whether to standards on aggregation, including Supplemental Position Limits Proposal, lower burden and less confusion for the Commission is reproposing it with apply the five-day rule to a particular contract after their evaluation of the traders active on multiple exchanges,783 modifications. Reproposed particular facts and circumstances. As efficiencies in administration for both § 150.5(a)(2)(i) provides that any reproposed, and as discussed in exchange may grant exemptions from exchanges and the Commission, and the connection with the definition of bona any speculative position limits it sets prevention of a ‘‘race-to-the-bottom’’ fide hedging position,778 the five-day under paragraph § 150.5(a)(1), provided wherein exchanges compete over lower rule would only apply to certain that such exemptions conform to the standards. The Commission notes that positions (pass-through swap offsets, requirements specified in § 150.3, and the provision regarding aggregation in anticipatory and cross-commodity reproposed § 150.5(a)(5) incorporates by provided further that any exemptions to 779 hedges). However, in regards to reference § 150.4 and thus would, on a exchange processes under § 150.9, 774 But see CL–NGFA–60941 at 2 (urging the continuing basis, reflect any changes Commission to allow exchanges to maintain their § 150.10, and § 150.11, the Commission made to the aggregation standard current authority to set speculative limits for both provided in the section. spot month and all-months combined limits below 777 7 U.S.C. 7(d)(5) and 7 U.S.C. 7b–3(f)(6). federal limits). 778 See the discussion regarding the five-day rule 775 The Commission notes that its singular in connection with the definition of bona fide definition of ‘‘referenced contract’’ that excludes hedging position in the discussion of § 150.9 ‘‘basis contracts’’ applies not only to § 150.5(a), but (Process for recognition of positions as non- 780 The Reproposal includes a similar also to § 150.5(b). Separately, the Commission notes enumerated bona fide hedges). modification to § 150.5(b)(5)(i). that in the future, it may determine to subject basis 779 See § 150.1, definition of bona fide hedging 781 CL–NCGA–NGSA–60919 at 10–11. contracts to a separate class limit in order to position sections (2)(ii)(A), (3)(iii), (4), and (5) 782 discourage potential manipulation of the outright (Other enumerated hedging position). To provide Id. price legs of the basis contract. greater clarity as to which bona fide hedge positions 783 The Commission’s belief is supported by 776 See, e.g., CL–ICE–60929 at 2–4, 7–8; CL– the five-day rule applies, the reproposed rules requests from multiple traders for industry-wide, Working Group–60947 at 14. reorganize the definition. standard aggregation requirements.

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c. § 150.5(b)—Requirements and acceptable practice in current agricultural commodity derivative Acceptable Practices for Commodity § 150.5(b)(1) whereby spot month contracts that are not subject to the Derivative Contracts That Are Not position limits should be set at a level federal limits should be no greater than Subject to Federal Position Limits no greater than one-quarter of the 1,000 contracts at initial listing. As then i. December 2013 Position Limits estimated deliverable supply of the proposed, the rule would also codify as 787 Proposal underlying commodity. Previously guidance that the 1,000 contract limit proposed § 150.5(b)(1)(i)(A) clarified should be taken into account when the The Commission set forth in that this acceptable practice for setting notional quantity per contract is no § 150.5(b), as proposed in the December spot month position limits would apply larger than a typical cash market 2013 Position Limits Proposal, to any commodity derivative contract, transaction in the underlying requirements and acceptable practices whether physical-delivery or cash- commodity, or reduced if the notional that would generally update and settled, that has a measurable quantity per contract is larger than a reorganize the set of acceptable deliverable supply.788 typical cash market transaction. practices listed in current § 150.5 as For a derivative contract that was Additionally, the December 2013 they relate to contracts that are not based on a commodity without a Position Limits Proposal proposed in subject to the federal position limits, measurable deliverable supply, the § 150.5(b)(1)(ii)(A), to codify for including physical and excluded December 2013 Position Limits Proposal individual non-spot or all-months- 784 commodities. As discussed above, proposed for spot months, in combined, that if the commodity the Commission also proposed to revise § 150.5(b)(1)(i)(B), to codify as guidance derivative contract was substantially the § 150.5 to implement uniform that the spot month limit level should same as a pre-existing DCM or SEF requirements for DCMs and SEFs that be no greater than necessary and commodity derivative contract, then it are trading facilities relating to hedging appropriate to reduce the potential would be an acceptable practice for the exemptions across all types of threat of market manipulation or price DCM or SEF that is a trading facility to commodity derivative contracts, distortion of the contract’s or the adopt the same limit as applies to that including those that are not subject to underlying commodity’s price.789 pre-existing commodity derivative federal position limits. The Commission Under previously proposed contract.790 further proposed to require DCMs and § 150.5(b)(1)(ii)(A), the December 2013 In § 150.5(b)(1)(ii)(B), the December SEFs that are trading facilities to have Position Limits Proposal preserved the 2013 Position Limits Proposal preserved uniform aggregation polices that existing acceptable practice in current the existing acceptable practice for mirrored the federal aggregation § 150.5(b)(2) whereby individual non- individual non-spot or all-months- provisions for all types of commodity spot or all-months-combined levels for combined in exempt and excluded derivative contracts, including for commodity derivative contracts, set contracts that were not subject to federal 787 As proposed in the December 2013 Position forth in current § 150.5(b)(3), for DCMs position limits.785 Limits Proposal, § 150.5(b)(1)(i)(A) was consistent to set individual non-spot or all-months- The previously proposed revisions to with the Commission’s longstanding policy combined limits at levels no greater DCM and SEF acceptable practices regarding the appropriate level of spot-month limits than 5,000 contracts at initial listing.791 for physical delivery contracts. These position generally concerned how to: (1) Set limits would be set at a level no greater than 25 Previously proposed § 150.5(b)(1)(ii)(B) spot-month position limits; (2) set percent of estimated deliverable supply. The spot- would codify as guidance for exempt individual non-spot month and all- month limits would be reviewed at least every 24 and excluded commodity derivative months-combined position limits; (3) set months thereafter. The 25 percent formula narrowly contracts that the 5,000 contract limit targeted the trading that may be most susceptible to, position limits for cash-settled contracts or likely to facilitate, price disruptions. The goal for should be applicable when the notional that use a referenced contract as a price the formula, as noted in the December 2013 quantity per contract was no larger than source; (4) adjust position limit levels Position Limits Proposal release, was to minimize a typical cash market transaction in the after a contract has been listed for the potential for corners and squeezes by facilitating underlying commodity, or should be the orderly liquidation of positions as the market trading; and (5) adopt position approaches the end of trading and by restricting reduced if the notional quantity per accountability in lieu of speculative swap positions that may be used to influence the contract was larger than a typical cash position limits.786 price of referenced contracts that are executed market transaction. Additionally, For spot months under the December centrally. December 2013 Position Limits Proposal, previously proposed § 150.5(b)(1)(ii)(B) 2013 Position Limits Proposal, for a 78 FR at 75756, n. 686. 788 The Commission noted in the December 2013 would codify a new acceptable practice derivative contract that was based on a Position Limits Proposal that, in general, the term for a DCM or SEF that is a trading commodity with a measurable ‘‘deliverable supply’’ means the quantity of the facility to adopt the same limit as deliverable supply, previously proposed commodity meeting a derivative contract’s delivery applied to the pre-existing contract if § 150.5(b)(1)(i)(A) updated the specifications that can reasonably be expected to be readily available to short traders and saleable to the new commodity contract was long traders at its market value in normal cash substantially the same as an existing 784 For position limits purposes, § 150.1(k), as marketing channels at the derivative contract’s contract.792 proposed in the December 2013 Position Limits delivery points during the specified delivery The December 2013 Position Limits Proposal, would define ‘‘physical commodity’’ to period, barring abnormal movement in interstate Proposal provided in § 150.5(b)(1)(iii) mean any agricultural commodity, as defined in 17 commerce. Previously proposed § 150.1 would CFR 1.3, or any exempt commodity, as defined in define commodity derivative contract to mean any section 1a(20) of the Act. Excluded commodity is futures, option, or swap contract in a commodity 790 The Commission noted that ‘‘in this context, defined in section 1a(19) of the Act. (other than a security futures product as defined in ‘substantially the same’ means a close economic 785 As Commission noted at that time, hedging CEA section 1a(45)). December 2013 Position Limits substitute. For example, a position in Eurodollar exemptions and aggregation policies that vary from Proposal, 78 FR at 75756, n. 687. futures can be a close economic substitute for a exchange to exchange would increase the 789 December 2013 Position Limits Proposal, 78 fixed-for-floating interest rate swap.’’ December administrative burden on a trader active on FR at 75757. The Commission noted that this 2013 Position Limits Proposal, 78 FR at 75757. multiple exchanges, as well as increase the descriptive standard is largely based on the 791 In contrast, 17 CFR 150.5(b)(3) lists this as an administrative burden on the Commission in language of DCM core principle 5 and SEF core acceptable practice for contracts for ‘‘energy monitoring and enforcing exchange-set position principle 6. The Commission does not suggest that products and non-tangible commodities.’’ Excluded limits. December 2013 Position Limits Proposal, 78 an excluded commodity derivative contract that is commodity is defined in CEA section 1a(19), and FR at 75756. based on a commodity without a measurable supply exempt commodity is defined CEA section 1a(20). 786 See December 2013 Position Limits Proposal, should adhere to a numeric formula in setting spot 792 December 2013 Position Limits Proposal, 78 78 FR at 75757. month position limits. Id. at 75757, n. 688. FR at 75757.

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that if a commodity derivative contract forth in current § 150.5(c)(2) for The December 2013 Position Limits was cash-settled by referencing a daily adjusting non-spot-month limits at Proposal would maintain in settlement price of an existing contract levels of no more than 10% of the § 150.5(b)(3)(ii)(A) the acceptable listed on a DCM or SEF, then it would average combined futures and delta- practice for a DCM or SEF to adopt be an acceptable practice for a DCM or adjusted option month-end open position accountability rules in the spot SEF to adopt the same position limits as interest for the most recent calendar month in lieu of position limits for an the original referenced contract, year up to 25,000 contracts, with a excluded commodity derivative contract assuming the contract sizes are the marginal increase of 2.5% of the that had a highly liquid cash market and same. Based on its enforcement remaining open interest thereafter.796 no legal impediment to delivery.801 For experience, the Commission expressed Previously proposed § 150.5(b)(2)(ii) an excluded commodity derivative the belief that limiting a trader’s would also maintain as an alternative contract without a measurable position in cash-settled contracts in this acceptable practice the adjustment of deliverable supply, previously proposed way would diminish the incentive to non-spot-month limits to levels based § 150.5(b)(3)(ii)(A) would codify an exert market power to manipulate the on position sizes customarily held by acceptable practice for a DCM or SEF to cash-settlement price or index to speculative traders in the contract.797 adopt position accountability rules in advantage a trader’s position in the Previously proposed § 150.5(b)(3) the spot month in lieu of position limits cash-settled contract.793 generally updated and reorganized the because there was not a deliverable In previously proposed existing acceptable practices in current § 150.5(b)(2)(i)(A), the Commission was § 150.5(e) for a DCM or SEF that is a supply that was subject to updating the acceptable practices in trading facility to adopt position manipulation. However, for an excluded current § 150.5(c) for adjusting limit accountability rules in lieu of position commodity derivative contract that had levels for the spot month.794 For a limits, under certain circumstances, for a measurable deliverable supply, but derivative contract that was based on a contracts that are not subject to federal that may not be highly liquid and/or commodity with a measurable position limits. As noted in the was subject to some legal impediment to deliverable supply, previously proposed December 2013 Position Limits delivery, previously proposed § 150.5(b)(2)(i)(A) maintained the Proposal, this section would reiterate § 150.5(b)(3)(ii)(A) set forth an acceptable practice in current § 150.5(c) the DCM’s authority, with conforming acceptable practice for a DCM or SEF to to adjust spot month position limits to changes for SEFs, to require traders to adopt a spot-month position limit equal a level no greater than one-quarter of the provide information regarding their to no more than one-quarter of the estimated deliverable supply of the position when requested by the estimated deliverable supply for that underlying commodity, but would exchange.798 In addition, previously commodity, because the estimated apply this acceptable practice to any proposed § 150.5(b)(3) would codify a deliverable supply may be susceptible commodity derivative contract, whether new acceptable practice for a DCM or to manipulation.802 Furthermore, the physical-delivery or cash-settled, that SEF to require traders to consent to not December 2013 Position Limits Proposal has a measurable deliverable supply. increase their position in a contract if so in § 150.5(b)(3)(ii) would remove the For a derivative contract that was based ordered, as well as a new acceptable ‘‘minimum open interest and volume’’ on a commodity without a measurable practice for a DCM or SEF to require test for excluded commodity derivative deliverable supply, previously proposed traders to reduce their position in an contracts generally.803 Finally, the § 150.5(b)(2)(i)(B) would codify as orderly manner.799 December 2013 Position Limits Proposal guidance that the spot month limit level The December 2013 Position Limits would codify in § 150.5(b)(3)(ii)(B) an should not be adjusted to levels greater Proposal would maintain under acceptable practice for a DCM or SEF to than necessary and appropriate to § 150.5(b)(3)(i) the acceptable practice adopt position accountability levels for reduce the potential threat of market for a DCM or SEF to adopt position an excluded commodity derivative manipulation or price distortion of the accountability rules outside the spot contract in lieu of position limits in the contract’s or the underlying month, in lieu of position limits, for an individual non-spot month or all- commodity’s price. In addition, the agricultural or exempt commodity months-combined. December 2013 Position Limit Proposal derivative contract that: (1) Had an The December 2013 Position Limits would have codified in average month-end open interest of Proposal added in § 150.5(b)(3)(iii) a § 150.5(b)(2)(i)(A) a new acceptable 50,000 or more contracts and an average practice that spot month limit levels be daily volume of 5,000 or more contracts new acceptable practice for an exchange reviewed no less than once every two during the most recent calendar year; (2) to list a new contract with position years.795 had a liquid cash market; and (3) was accountability levels in lieu of position The December 2013 Position Limits not subject to federal limits in § 150.2— limits if that new contract was Proposal explained that then proposed provided, however, that such DCM or substantially the same as an existing § 150.5(b)(2)(ii) maintained as an SEF that is a trading facility should contract that was currently listed for acceptable practice the basic formula set adopt a spot month speculative position trading on an exchange that had already limit with a level no greater than one- 793 December 2013 Position Limits Proposal, 78 quarter of the estimated spot month products.’’ Id. at 75758. It also cited to the FR at 75757. As the Commission noted with respect deliverable supply.800 comparison of the ‘‘minimum open interest and to cash-settled contracts where the underlying volume test’’ in proposed § 150.5(b)(3)(A) to that in product is a physical commodity with limited current § 150.5(e)(3). Id. supplies, thus enabling a trader to exert market 796 Id. at 75758. 801 Id. power (including agricultural and exempt 797 Id. 802 Id. commodities), the Commission has viewed the 798 Id. Cf. 17 CFR 150.5(e)(2)–(3). 803 Id. The December 2013 Position Limits specification of speculative position limits to be an 799 December 2013 Position Limits Proposal, 78 Proposal pointed out that the ‘‘minimum open essential term and condition of such contracts in FR at 75758. interest and volume’’ test, as presented in 17 CFR order to ensure that they are not readily susceptible 800 The December 2013 Position Limits Proposal 150.5(e)(1)–(2), need not be used to determine to manipulation, which is the DCM core principle noted that 17 CFR 150.5(e)(3) applies this whether an excluded commodity derivative 3 requirement. Id. at 75757, n. 692. acceptable practice to a ‘‘tangible commodity, contract should be eligible for position 794 Id. at 75757. including, but not limited to metals, energy accountability rules in lieu of position limits in the 795 Id. at 75757–58. products, or international soft agricultural spot month. Id.

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adopted position accountability levels practices were suggested based on the enforcing exchange-set position limits. in lieu of position limits.804 same logic that underpinned those The requirement generally mirrored the As previously proposed, § 150.5(b)(4) exemptions.809 The acceptable practices requirement in § 150.5(a)(5) for would maintain the acceptable practice contemplated that a DCM or SEF might contracts that are subject to federal that for contracts not subject to federal grant exemptions under certain position limits by requiring the DCM or position limits, DCMs and SEFs should circumstances for financial distress, SEF that is a trading facility to have calculate trading volume and open intramarket and intermarket spread aggregation rules that conform to interest in the manner established in positions (discussed above), and previously proposed § 150.4.815 current § 150.5(e)(4).805 The qualifying cash-settled contract Commission stated in the December positions in the spot month.810 ii. Comments Received to December 2013 Position Limits Proposal that then Previously proposed § 150.5(b)(5)(ii)(E) 2013 Position Limits Proposal Regarding proposed § 150.5(b)(4) would build also set forth an acceptable practice for § 150.5(b) upon these standards by accounting for a DCM or SEF to grant for contracts on swaps in referenced contracts on a excluded commodities, a limited risk Three commenters on previously futures-equivalent basis.806 management exemption pursuant to proposed regulation § 150.5 As noted above, under the December rules submitted to the Commission, and recommended that the Commission not 2013 Position Limits proposal, the consistent with the guidance in new require SEFs to establish position Commission proposed to require DCMs Appendix A to part 150.811 limits.816 Two noted that because SEF and SEFs to have uniform hedging The December 2013 Position Limits participants may use more than one exemptions and aggregation polices that Proposal provided in § 150.5(b)(6)–(7) derivatives clearing organization mirror the federal aggregation acceptable practices relating to pre- (‘‘DCO’’), a SEF may not know when a provisions for all types of commodity enactment and transition period swap position has been offset.817 Further, derivative contracts, including for positions (as those terms were defined during the ongoing SEF registration contracts that are not subject to federal in previously proposed § 150.1),812 as process,818 a number of entities position limits. The Commission well as to commodity derivative applying to become registered as SEFs explained that hedging exemptions and contract positions acquired in good faith told the Commission that they lacked aggregation policies that vary from prior to the effective date of mandatory access to information that would enable exchange to exchange would increase federal speculative position limits.813 the administrative burden on a trader them to knowledgeably establish Additionally, for any contract that is 819 active on multiple exchanges, as well as position limits or monitor positions. not subject to federal position limits, The Commission observes that this increase the administrative burden on previously proposed § 150.5(b)(8) the Commission in monitoring and required the DCM or SEF that is a enforcing exchange-set position 815 Id. at 75756. trading facility to conform to the limits.807 Therefore, the December 2013 816 CL–CMC–59634 at 14–15; CL–FIA–60392 at uniform federal aggregation Position Limits Proposal in 10; and CL–ISDA/SIFMA–59611 at 35. One provisions.814 As noted above, commenter stated that SEFs should be exempt from § 150.5(b)(5)(i) would require any hedge aggregation policies that vary from the requirement to set positions limits because SEFs exemption rules adopted by a are in the early stages of development and could be exchange to exchange would increase designated contract market or a swap harmed by limits that restrict liquidity. CL–ISDA/ the administrative burden on a trader execution facility that is a trading SIFMA–59611 at 35. active on multiple exchanges, as well as 817 facility to conform to the definition of CL–CMC–59634 at 14–15; and CL–FIA–60392 increase the administrative burden on at 10. bona fide hedging position in previously 818 Under CEA section 5h(a)(1), no person may 808 the Commission in monitoring and proposed § 150.1. operate a facility for trading swaps unless the facility is registered as a SEF or DCM. 7 U.S.C. 7b– The December 2013 Position Limits 809 See December 2013 Position Limits Proposal, 3(a)(1). A SEF must comply with core principles, Proposal also set forth in § 150.5(b)(5)(ii) 78 FR at 75735–41, 75827–28. See also supra acceptable practices for DCMs and SEFs including Core Principle 6 regarding position discussion of the § 150.3 exemptions. limits, as a condition of registration. CEA section 810 to grant exemptions from position limits See id. 5h(f)(1), 7 U.S.C. 7b–3(f)(1). 811 for positions, other than bona fide As the Commission noted, previously 819 For example, in a submission to the hedging positions, in contracts not proposed Appendix A to part 150 ‘‘is intended to Commission under part 40 of the Commission’s capture the essence of the Commission’s 1987 regulations, BGC Derivative Markets, L.P. states that subject to federal limits. The interpretation of its definition of bona fide hedge exemptions in § 150.5(b)(5)(ii) under the ‘‘[t]he information to administer limits or transactions to permit exchanges to grant hedge accountability levels cannot be readily ascertained. December 2013 Position Limits Proposal exemptions for various risk management Position limits or accountability levels apply generally tracked the exemptions then transactions. See Risk Management Exemptions market-wide to a trader’s overall position in a given proposed in § 150.3; acceptable From Speculative Position Limits Approved Under swap. To monitor this position, a SEF must have Commission Regulation 1.61, 52 FR 34633, Sep. 14, access to information about a trader’s overall 1987.’’ The Commission also specified that such position. However, a SEF only has information 804 See supra discussion of what is meant by exemptions be granted on a case-by-case basis, about swap transactions that take place on its own ‘‘substantially the same’’ in this context. See also subject to a demonstrated need for the exemption, Facility and has no way of knowing whether a December 2013 Position Limits Proposal, 78 FR at required that applicants for these exemptions be particular trade on its facility adds to or reduces a 75757, n. 690. typically engaged in the buying, selling, or holding trader’s position. And because swaps may trade on 805 As noted in the December 2013 Position of cash market instruments, and required the a number of facilities or, in many cases, over-the- Limits Proposal, for SEFs, trading volume and open exchanges to monitor the exemptions they granted counter, a SEF does not know the size of the interest for swaptions should be calculated on a to ensure that any positions held under the trader’s overall swap position and thus cannot delta-adjusted basis. See id. at 75758, n. 697. exemption did not result in any large positions that ascertain whether the trader’s position relative to 806 See id. at 75698–99 (defining ‘‘Futures- could disrupt the market. Id. See also December any position limit. Such information would be equivalent’’ in § 150.1 to account for swaps in 2013 Position Limits Proposal, 78 FR at 75756, n. required to be supplied to a SEF from a variety of referenced contracts). 683. independent sources, including SDRs, DCOs, and 807 See December 2013 Position Limits Proposal, 812 See supra discussion of pre-enactment and market participants themselves. Unless coordinated 78 FR at 75756. See also supra regarding transition period swap positions. by the Commission operating a centralized § 150.5(a)(5). 813 December 2013 Position Limits Proposal, 78 reporting system, such a data collection 808 The requirement proposed in § 150.5(b)(8) that FR at 75756, 75831. requirement would be duplicative as each separate DCMs and SEFs have uniform aggregation polices 814 Proposed § 150.5(b)(7) would replace 17 CFR SEF required reporting by each information that mirror the federal aggregation provisions is 150.5(g) as it relates to contracts that are not subject sources.’’ BGC Derivative Markets, L.P., Rule addressed below. to federal position limits. Submission 2015–09 (Oct. 6, 2015).

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information gap would also be a during the spot month.826 Instead, as the proposed CFTC Regulation 150.5(b)(5)(i) concern for DCMs in respect of swaps. Commission noted in the 2016 in any final rule issued in this One commenter expressed the view Supplemental Position Limits Proposal, proceeding or (ii) clarify that the phrase that deliverable supply calculations what it was proposing would, in part, ‘in a manner consistent with the process used to establish spot month limits maintain the status quo: Exchanges that described in [proposed CFTC should be based on commodity specific currently recognize spreads in the spot Regulation] 150.5(b)(5)(i)’ does not actual physical transport/transmission, month under current § 150.5(a) would mean that the Exchanges must apply the generation and production.820 be able to continue to do so. Rather than virtually identical process for a prohibition, the exchanges would be recognizing non-enumerated bona fide One commenter urged the responsible for determining whether hedging positions under proposed CFTC Commission to allow the listing recognizing spreads, including spreads Regulation 150.9(a) to their exemption exchange to set non-spot month limits at in the spot month, would further the process for exchange-set speculative least as high as the spot-month position policy objectives in section 4a(a)(3) of position limits.’’ 830 limit, rather than base the non-spot the Act.827 Another commenter stated that the month limit strictly on the open interest Commission should remove the formula.821 Another commenter iv. Comments Received to 2016 requirements of § 150.5(b) that apply the recommended that the Commission Supplemental Position Limits Proposal exemption procedures of § 150.9 to remove from § 150.5(b)(1)(ii)(B) the Regarding § 150.5(b) exemptions granted for contracts in provision setting a 5,000 contract limit Exchange-Administered Exemptions excluded commodities and physical for non-spot-month or all-months- Under § 150.5(b) commodities that are not subject to combined accountability levels for Several commenters requested federal position limits. In support of this exempt commodities, because that level clarification as to the application of request, the commenter maintained that may not be appropriate for all markets; exchange-administered exemption exchange exemption programs have instead, the Commission should rely on requests to non-referenced contracts been operating successfully without the the exchanges to set accountability generally under § 150.5(b).828 In need for such rules, and exchanges do levels for exempt commodity not require additional guidance from the 822 addition, several commenters raised markets. concerns with the requirement in Commission on how to assess One commenter recommended that § 150.5(b)(5)(i) that the exchanges recognitions under the 2016 DCMs be permitted to establish position provide exemptions ‘‘in a manner Supplemental Position Limits Proposal accountability levels in lieu of position consistent with the process described in and that rule enforcement reviews are 831 limits outside of the spot month.823 The § 150.9(a).’’ 829 Similarly, according to adequate. commenter recommended that the one commenter, the exchanges should Treatment of Spread and Anticipatory administration of position not be bound to the same exemption Hedge Exemptions Under § 150.5(b) accountability should be coordinated process provided under proposed CFTC Several commenters requested that with the Commission and other DCMs Regulation 150.9 when administering the Commission clarify that spread and to the extent that a market participant exemptions from exchange-set limits. anticipatory hedge exemptions are holds positions on more than one Rather, the commenter recommended unnecessary for excluded commodities DCM.824 that the Commission: ‘‘(i) not adopt and other products not subject to federal iii. 2016 Supplemental Position Limits limits. For example, one commenter 826 Id. at 38482, 38506–7. Compare December Proposal 2013 Position Limits Proposal, 78 FR at 75830. seeks clarity regarding the application of 827 § 150.5(b) to spread exemption and In the 2016 Supplemental Position 2016 Supplemental Position Limits Proposal, 81 FR at 38482, 38506–07. anticipatory hedge exemption requests, Limits Proposal, the Commission 828 CMC, for example, requested that the stating that ‘‘[p]roposed section 150.5(b) proposed to revise § 150.5(b)(5) from Commission clarify that exchange-granted hedge is silent with respect to anticipatory exemption procedures would be ‘‘applicable if, and what was proposed in the December hedges contemplated under the process 2013 Position Limits Proposal; proposed to the extent that, the exchange granted exemption exceeds federally established speculative position in proposed section 150.11, and makes § 150.5(b) establishes requirements and limits and not otherwise.’’ CL–CMC–60950 at 14. no reference in proposed section acceptable practices that pertain to According to CME, on the other hand, proposed 150.5(b)(5)(ii)(C) to the process in section 150.5(b) was unclear and ambiguous and so commodity derivative contracts not proposed section 150.10 when subject to federal position limits.825 The should be reproposed. For example, CME stated that the proposal was ‘‘riddled with ambiguities describing spread exemptions an proposed revisions to § 150.5(b)(5) and potential oversights,’’ and, in connection with exchange may recognize. The would, under the 2016 Supplemental non-referenced contracts under section 150.5(b), Commission must clarify whether it CME also stated ‘‘the scope of exchange discretion Position Limits Proposal, permit intends that market participants and exchanges, in regards to commodity under proposed section 150.9(a) is unclear. Thus, exchanges could be bound by the five-day rule in exchanges may avail themselves of such derivative contracts not subject to recognizing as NEBFH positions certain enumerated processes in applying for and federal position limits, to recognize non- hedge strategies for non-referenced contracts, recognizing exemptions from exchange enumerated bona fide hedging despite the same five-day rule limitation not limits for non-referenced contracts.’’ 832 positions, as well as spreads. Moreover, applying in similar scenarios today.’’ CL–CME– 60926 at 14–15. On the other hand, in the associated the exchanges would no longer be 829 CL–CME–60926 at 14–15; CL–Working footnote, the same commenter observes prohibited from recognizing spreads Group–60947 at 14; and CL–ICE–60929 at 8. For ‘‘[h]owever, in its cost-benefit analysis, example, CME stated that requiring exchanges to the Commission notes that proposed 820 CL–EDF–60398 at 6–7. recognize non-enumerated bona fide hedge positions for non-referenced contracts ‘‘in a manner section 150.11 ‘works in concert with’ 821 CL–ICE–59962 at 7. consistent with the process described in § 150.9(a)’’ ‘proposed § 150.5(b)(5), with the effect 822 CL–Nodal–59695 at 3. appears to ‘‘break with historical practice in that recognized anticipatory enumerated 823 CL–FIA–59595 at 5, 39 and 41; see also CL– administering NEBFHs for non-referenced FIA–60303 at 3–4. contracts,’’ and ‘‘would appear to impose new 824 CL–FIA–60392 at 9. burdensome and unnecessary compliance 830 CL–Working Group–60947 at 14. 825 2016 Supplemental Position Limits Proposal, obligations on market participants that do not exist 831 CL–ICE–60929 at 8. 81 FR at 38482. today.’’ CL–CME–60926 at 14–15. 832 CL–CME–60926 at 15.

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bona fide hedging positions may exceed related procedures with respect to non- proposal: Both definitions capture cash- exchange-set position limits for referenced contracts.’’ settled contracts that are ‘linked’ to the contracts not subject to federal position price of a physically-delivered contract Five-Day Rule Under § 150.5(b) limits.’ ’’ 833 traded on a DCM (referred to as a ‘core Another commenter urges the As noted above, several referenced futures contract’ in the Commission to clarify that spread and commenters 838 addressed the five-day proposal).’’ 843 That commenter stated anticipatory hedge exemptions are rule, suggesting that the decision that the only place in the CEA which unnecessary for excluded commodities whether to apply the five-day rule to a addresses how to treat a cash-settled and other products not subject to federal particular contract should be delegated contract and its physically-delivered limits. In this regard, the commenter to the exchanges as the exchanges are in benchmark contract for position limit seeks the removal of requirements found the best position to evaluate facts and purposes is in CEA section 4(b), in § 150.5(b).834 A third commenter circumstances, and different markets claiming that ‘‘Congress unmistakably states that extending the requirements have different dynamics and needs.839 wanted the two trading instruments to for exchange hedge exemption rules to And, specifically in connection with be treated ‘comparably.’ ’’ 844 contracts on excluded commodities is non-referenced contracts under In addition, according to the ‘‘clearly an error’’ that needs to be § 150.5(b), one commenter states that, as commenter, when the Commission, in rectified, stating that there was no it believes that the scope of exchange response to the Dodd-Frank Act discussion of this expansion in the discretion under proposed section provisions regarding FBOTs in amended preamble to the Supplemental. 150.9(a) is unclear, ‘‘exchanges could be CEA section 4(b), adopted final According to the commenter, ‘‘there is bound by the five-day rule in § 48.8(c)(1)(ii)(A), ‘‘it acknowledged that no basis in the Dodd-Frank amendments recognizing as non-enumerated bona a linked contract and its physically- to the CEA for this extension of the fide hedging positions certain delivered benchmark contract ‘create a Commission’s authority over exchange enumerated hedge strategies for non- single market’ capable of being affected position limits on excluded referenced contracts, despite the same through trading in either of the linked commodities. To the contrary, that five-day rule limitation not applying in or physically-delivered markets,’’ and authority is clearly limited to position similar scenarios today.’’ 840 further noted that the Commission limits on contracts on physical ‘‘observed that the price discovery 835 Comment Letter Received After the commodities.’’ Close of the Comment Period for the process would be protected by ‘ensuring that [ ] linked contracts have position Reporting Requirements Under 2016 Supplemental Position Limits limits and accountability provisions that § 150.5(b) Proposal Regarding Limit Levels Under § 150.5(b) are comparable to the corresponding According to one commenter, the [DCM] contracts [to which they are 2016 Supplemental Position Limits One commenter noted that when the linked].’ ’’ 845 Proposal does not provide any CEA addresses ‘‘linked contracts’’ in explanation regarding the Commission’s CEA section 4(b)(1)(B)(ii)(I), in relation iv. Commission Determination need to receive from the exchanges the to FBOTS, it provides that the Regarding § 150.5(b) same exemption reports for non- Commission may not permit an FBOT to The Commission has determined to referenced contracts that it would provide direct access to participants repropose § 150.5(b) generally as receive for referenced contracts. The located in the United States unless the proposed in the the 2016 Supplemental commenter states that the 2016 Commission determines that the FBOT Position Limits Proposal, for the reasons Supplemental Position Limits Proposal (or the foreign authority overseeing the stated above, with specific exceptions characterizes exchange submissions of FBOT) adopts position limits that are discussed below.846 An overall non- exemption recipient reports to the CFTC comparable to the position limits substantive change has been made in as ‘‘support[ing] the Commission’s adopted by the registered entity for the reproposing § 150.5 pertaining to surveillance program, by facilitating the contract(s) against which the FBOT excluded commodities. To provide tracking of non-enumerated bona fide contract settles.841 According to the hedging positions recognized by the commenter, CEA section 4(b), which 843 Id. at 3. CME claims that the underlying exchange, and helping the Commission was added by the Dodd-Frank Act, Congressional intent is clear, stating that whether to ensure that an applicant’s activities ‘‘contains an explicit Congressional a cash-settled contract is called a ‘‘linked contract’’ or a ‘‘referenced contract,’’ ‘‘the limit levels and conform to the terms of recognition that endorsement of ‘comparable’ ’’ limits for hedge exemptions for that contract and the related the exchange has established.’’ 836 While cash-settled contracts in relation to the physically-delivered contract must be acknowledging that the Commission has physically-delivered contracts to which ‘comparable.’’ Id. a surveillance obligation with respect to they are linked.842 The statutory 844 Id. federal limits, the commenter maintains definition of ‘‘linked contract,’’ the 845 Id. [footnotes omitted]. The Commission notes that CME incorrectly attributed preamble language that, ‘‘the same obligation has never commenter stated, ‘‘mirrors the as pertaining to § 48.8(c)(1)(ii)(A), which addresses before existed with respect to exchange- definition of ‘referenced contract’ in the statutory requirements, when it stated that the set limits for non-referenced contracts, Commission’s 2013 position limits Commission ‘‘acknowledged that a linked contract and does not exist today.’’ 837 The and its physically-delivered benchmark contract ‘create a single market’ capable of being affected 838 commenter also states that the E.g., CL–NCGA–ASA–60917 at 1–2; CL–CME– through trading in either of the linked or Commission has misinterpreted its 60926 at 14–15; CL–ICE–60929 at 7–8; CL–ISDA– physically-delivered markets’’ as this discussion mandate and therefore should drop this 60931 at 11; CL–CCI–60935 at 3; CL–MGEX–60936 actually addressed the Commission’s adoption of its at 4; CL–Working Group–60947 at 5, 7–9; CL– unnecessary reporting requirement and second set of conditions for linked contracts, found IECAssn–60949 at 7–9; CL–CMC–60950 at 9–14; in § 48.8(c)(2) (Other Conditions on Linked CL–NCC–ACSA–60972 at 2. Contracts). 833 839 Id. See, e.g, CL–ISDA–60931 at 10; CL–CCI–60935 846 The Commission is reproposing the following 834 CL–CMC–60950 at 14. at 3; CL–MGEX–60936 at 11; CL–Working Group– sections without further discussion, for the reasons 835 CL–ISDA–60931 at 11. 60947 at 7–9. provided above, since no substantive comments 836 CL–CME–60926 at 15, quoting the 2016 840 CL–CME–60926 at 14–15. were received: § 150.5(b)(6)(Pre-enactment and Supplemental Position Limits Proposal, 81 FR at 841 See CL–CME–61007 at 2–4; CL–CME–61008 at transition period swap positions), § 150.5(b)(7) (Pre- 38475. 2–3. existing positions), and § 150.5(b)(9) (Additional 837 Id. 842 See CL–CME–61007 at 2. acceptable practices).

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greater clarity regarding which Regarding the commenter who reproposing § 150.5(b)(1)(iii) with a provisions concern excluded expressed concern regarding modification: While the previously commodities, the Commission proposes requirements for accountability levels proposed guidance in § 150.5(b)(1)(iii) to move all provisions applying to for exempt commodities, the provided that the exchange should excluded commodities from § 150.5(b) Commission notes that the provisions adopt the ‘‘same’’ spot-month, into § 150.5(c). As the Commission set forth guidance and acceptable individual non-spot month, and all- observed in the December 2013 Position practices for exchanges in setting months combined limit levels as the Limits Proposal, ‘‘CEA section 4a(a) position limit levels and accountability original price referenced contract, the only mandates position limits with levels and, as guidance and acceptable Commission is reproposing respect to physical commodity practices, are not binding regulations. § 150.5(c)(1)(iii) to provide that the limit derivatives (i.e., agricultural Under the Commission’s guidance, an levels should, instead, be ‘‘comparable.’’ commodities and exempt commodities). initial non-spot month limit level of no As pointed out by one commenter,848 Additionally, the Commission more than 5,000 is viewed as suitable. the CEA establishes a comparability proposes to make some substantive Similarly, in response to the standard for linked FBOT contracts in revisions specific to excluded commenter who recommended that CEA section 4(b)(1)(B)(ii)(I), when it commodities in what was previously DCMs be permitted to establish position provides that the Commission may not § 150.5 (b), addressed in the discussion accountability levels in lieu of position permit an FBOT to provide direct access of § 150.5(c). limits outside the spot month and to participants located in the United coordinate the administration of such States unless the Commission Limit Levels for Commodity Derivative levels with the Commission and other determines that the FBOT (or the foreign Contracts in a Physical Commodity Not DCMs, the Commission agrees that authority overseeing the FBOT) adopts Subject to Federal Limits position accountability may be position limits that are ‘‘comparable to’’ In response to the comment regarding permitted for certain physical the position limits adopted by the the method for calculating deliverable commodity derivative contracts. registered entity for the contract(s) supply, the Commission notes that Reproposed § 150.5(b)(3), therefore, against which the FBOT contract guidance for calculating deliverable provides guidance and acceptable settles.849 In addition, as noted by the supply can be found in Appendix C to practices concerning exchange adoption commenter, the Commission, in part 38. Amendments to part 38 are of position accountability outside the adopting § 48.8(c)(2), recognized that spot month for contracts having an beyond the scope of this rulemaking. the comparability standard and its average month-end open interest of However, that guidance already associated requirements would protect 50,000 contracts and an average daily provides that deliverable supply the price discovery process by ensuring volume of 5,000 or more contracts calculations are estimates based on what that the linked contracts and the U.S. during the most recent calendar year ‘‘reasonably can be expected to be contracts to which they are linked ‘‘have and a liquid cash market. The readily available’’ on a monthly basis position limits and accountability Commission again notes that guidance based on a number of types of data from provisions that are comparable to the and acceptable practices do not the physical marketing channels, as corresponding [DCM] contracts [to establish mandatory means of suggested by the commenter, and these which they are linked].’ ’’ 850 The compliance. As such, in regards to calculations are done for each month Commission notes that this change will meeting the specified volume and open and each commodity separately. better align § 150.5(b)(1)(iii) with the interest thresholds in § 150.5(b)(3), the Furthermore, much of § 150.5(b) statute and with the standard provided Commission notes that the guidance in reiterates longstanding guidance and in § 48.8(c).851 Moreover, use of § 150.5(b)(3)(i) may not be the only acceptable practices for DCMs, rather circumstances under which sufficiently than proposing new concepts for commodities), the Commission has viewed the high liquidity may be shown to exist for administering limits on contracts that specification of speculative position limits to be an the establishment of position essential term and condition of such contracts in are not subject to federal limits under accountability levels in lieu of position order to ensure that they are not readily susceptible § 150.2. limits. to manipulation, which is the DCM core principle 3 requirement. Id. at 75757, n. 692. The Commission agrees with the The December 2013 Position Limits commenter urging the Commission to 848 See, e.g., CL–CME–61007 at 2–4; CL–CME– Proposal provided in § 150.5(b)(1)(iii) 61008 at 2–3. allow exchanges to set non-spot month that if a commodity derivative contract 849 CL–CME–61007 at 2. ‘‘Registered entities’’ are limits at least as high as the spot-month was cash-settled by referencing a daily defined in CEA section 1a(40) as DCMs, DCOs, position limit, in the event the open settlement price of an existing contract SEFs, SDRs, notice-registered DCMs under CEA interest formula would result in a limit section 5f, and any electronic trading facility upon listed on a DCM or SEF, then it would which a contract is executed or traded which the level lower than the spot month. be an acceptable practice for a DCM or Commission has determined is a significant price Accordingly, consistent with the SEF to adopt the same position limits as discovery contract. According to CME, CEA Section recommended revisions to the initial the original referenced contract, 4(b) ‘‘contains an explicit Congressional limit level listings for contracts subject endorsement of ‘comparable’ ’’ limits for cash- assuming the contract sizes are the settled contracts in relation to the physically- to federal limits found in same.847 However, the Commission is delivered contracts to which they are linked. See § 150.2(e)(4)(iv), the Commission CL–CME–61007 at 2. proposes to revise § 150.5(b)(2)(ii) to 847 The Commission expressed the belief that, 850 CL–CME–61007 at 3. See 76 FR 80674, 80685, allow exchanges to set non-spot month based on its enforcement experience, limiting a 80697 (Dec. 23, 2011). See also § 48.8(c)(1)(ii)(A). limit levels at the maximum of the spot trader’s position in cash-settled contracts in this 851 The comparability standard is also used in way would diminish the incentive to exert market determinations as to which foreign DCOs are month limit level, the level derived power to manipulate the cash-settlement price or subject to comparable, comprehensive supervision from the 10/2.5% formula, or 5,000 index to advantage a trader’s position in the cash- and regulation by the appropriate government contracts. To conform with those settled contract. See December 2013 Position Limits authority in the DCO’s home country. See CEA revisions, the Commission also proposes Proposal, 78 FR at 75757. As the Commission noted section 5b)(h). See also the Commission’s Notice of with respect to cash-settled contracts where the Comparability Determination for Certain to revise § 150.5(b)(1)(ii)(A)–(B) to underlying product is a physical commodity with Requirements Under the European Market remove the distinction between limited supplies, thus enabling a trader to exert Infrastructure Regulation, 81 FR 15260 (Mar. 22, agricultural and exempt commodities. market power (including agricultural and exempt 2016).

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‘‘comparable’’ rather than ‘‘same’’ limit an application for an enumerated bona recognizes that exchanges, under levels provides exchanges with a more fide hedging exemption, the application § 150.9, may need to adapt their current flexible standard based on statutory should be filed no later than five process to recognize non-enumerated language.852 This change also provides business days after the trader assumed bona fide hedging positions for a standard that is consistent with the position that exceeded a position commodity derivative contracts that are existing practice for domestic contracts limit.855 As noted above, the subject to a federal position limit under that are linked to the price of a physical- Commission expects that exchanges will § 150.2, or adopt a new one. In turn, delivery contract.853 carefully consider whether allowing market participants will need to seek The Commission proposes to revise retroactive recognition of an enumerated recognition of a non-enumerated bona § 150.5(b)(4)(B) regarding the bona fide hedging exemption would, as fide hedge from an exchange under that calculation of open interest for use in noted by one commenter, diminish the new process. In light of this setting exchange-set speculative overall integrity of the process, and implementation issue, the Commission position limits to provide that a DCM or should carefully consider whether to proposes to limit the mandatory scope SEF that is a trading facility would adopt in those rules the two safeguards of the new definition of bona fide include swaps in their open interest noted: (i) To continue to require market hedging position to contracts that are calculation only if such entities are participants making use of the subject to a federal position limit.858 required to administer position limits retroactive application to demonstrate This means that the Commission would on swap contracts of their facilities. that the applied-for hedge was required permit exchanges to maintain both their This revision clarifies and harmonizes to address a sudden and unforeseen current bona fide hedging position § 150.5(b)(4)(B) with the relief in hedging need; and (ii) providing that if definition and their existing processes Appendix E to part 150, as well as in the emergency hedge recognition was for recognizing non-enumerated bona appendices to parts 37 and 38, which not granted, exchange rules would fide hedging positions for physical delays for DCMs and SEFs that are continue to require the applicant to commodity contracts not subject to trading facilities and lack access to promptly unwind its position and also federal limits under § 150.2. The sufficient swap position information the would deem the applicant to have been Commission notes an exchange may, but requirement to establish and monitor in violation for any period in which its need not, adopt for physical position limits on swaps at this time. position exceeded the applicable limits. commodities not subject to federal This approach conforms § 150.5(b) with Additionally, the Commission is limits the new bona fide hedging other proposed changes regarding the reproposing § 150.5(b)(5)(i) with position definition and the new process 854 treatment of swaps. modifications to clarify, as requested by to recognize non-enumerated bona fide commenters,856 that the exchanges have Exchange—Administered Exemptions hedging positions. reasonable discretion as to whether they for Commodity Derivative Contracts in a In addition, the Commission is apply to their exemption process from Physical Commodity Not Subject to proposing that, for enumerated bona exchange-set speculative position limits, Federal Limits fide hedging positions, exchange rules a virtually identical process as provided may allow traders to file an application The Commission is reproposing for recognizing non-enumerated bona for an enumerated bona fide hedging § 150.5(b)(5)(i) with modifications to fide hedging positions under CFTC exemption within five business days clarify that it is guidance rather than a Regulation 150.9(a). As explained in the after the trader assumed the position regulatory requirement. In addition, as discussion regarding the changes to the that exceeded a position limit. modified, it provides that under bona fide hedging definition under Finally, as to § 150.5(b)(5)(ii) (Other exchange rules allowing a trader to file § 150.1, the Commission is proposes a exemptions), the Commission did not phased approach with respect to the receive any comments regarding 852 As the Commission explained in preamble to definition of a bona fide hedging final part 48 in connection with comparability § 150.5(b)(5)(ii)(A) (Financial distress), position applicable to physical and is reproposing this exemption determinations, ‘‘[t]he Commission’s determination 857 of the comparability of the foreign regulatory regime commodities. The Commission without change. to which the FBOT applying for registration is subject will not be a ‘‘line by line’’ examination of 855 The modification made to § 150.5(b)(5)(i) is Conditional Spot Month Limit the foreign regulator’s approach to supervision of similar manner to its the Commission’s Exemption for Commodity Derivative the FBOTs it regulates. Rather, it will be a modification of § 150.5(a)(2)(ii), but, as mentioned, Contracts in a Physical Commodity Not principles-based review conducted in a manner § 150.5(b)(5)(i) is guidance rather than a regulatory consistent with the part 48 regulations pursuant to requirement. Subject to Federal Limits which the Commission will look to determine if 856 See CL-Working Group-60947 at 14; see also While the conditional spot month that regime supports and enforces regulatory CL–ICE–60929 at 8, 32. As previously proposed, objectives in the oversight of the FBOT and the § 150.5(b)(5)(i) provides, ‘‘(i) Hedge exemption. Any limit exemption is addressed in more clearing organization that are substantially hedge exemption rules adopted by a designated detail under § 150.3, after consideration equivalent to the regulatory objectives supported contract market or swap execution facility that is a of comments, the Commission is and enforced by the Commission in its oversight of trading facility must conform to the definition of reproposing § 150.5(b)(5)(ii)(B) with a DCMs and DCOs.’’ 76 FR 80674, 80680 (Dec. 23, bona fide hedging position in § 150.1 or provide for 859 2011). See also § 48.5(d)(5). recognition as a non-enumerated bona fide hedge in modification. The December 2013 853 For example, both CME and ICE currently a manner consistent with the process described in have conditional spot-month limit exemptions for § 150.9(a).’’ contracts in physical commodities at once, and (ii) cash-settled natural gas contracts at a level up to 857 See also December 2013 Position Limits facilitate adoption of monitoring policies, five times the level of the spot-month limit level on Proposal, 78 FR at 75725 (stating ‘‘[t]he Commission procedures and systems by persons not currently CME’s economically-equivalent NYMEX Henry Hub is proposing a phased approach to implement the subject to positions limits (such as traders in swaps Natural Gas (physical-delivery) futures contract to statutory mandate. The Commission is proposing in that are not significant price discovery contracts.). which they settle. this release to establish speculative position limits . . . Thus, in the first phase, the Commission 854 As noted above, the relief was proposed in the on 28 core referenced futures contracts in physical generally is proposing limits on those contracts that 2016 Supplemental Position Limits Proposal, 81 FR commodities. The Commission anticipates that it it believes are likely to play a larger role in at 38459–62. See also DCM Core Principle 5, will, in subsequent releases, propose to expand the interstate commerce than that played by other Position Limitations or Accountability (contained list of core referenced futures contracts in physical physical commodity derivative contracts.’’). in CEA section 5(d)(5), 7 U.S.C. 7(d)(5)) and SEF commodities. The Commission believes that a 858 See also supra discussion under regarding the Core Principle 6, Position Limits or Accountability phased approach will (i) reduce the potential bona fide hedging position definition. (contained in CEA section 5h(f)(6), 7 U.S.C. 7b– administrative burden by not immediately imposing 859 Most comments concerning the conditional 3(f)(6)). position limits on all commodity derivative spot month limit were submitted by CME and ICE;

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Position Limits Proposal proposed from a particular exchange, such exchanges should take into account guidance that an exchange may adopt a exchange should require, for any whether granting a spread exemption in conditional spot month position limit conditional spot-month limit exemption a physical commodity derivative would, exemption for cash-settled contracts, it grants, that a trader report promptly to the maximum extent practicable, with one of two provisos being that such to such exchange the trader’s aggregate ensure sufficient market liquidity for positions should not exceed five times positions in cash-settled contracts, bona fide hedgers, and not unduly the level of the spot-month limit physical-delivery contracts, and cash reduce the effectiveness of position specified by the exchange that lists the market positions. limits to diminish, eliminate, or prevent physical-delivery contract to which the As noted above, under reproposed excessive speculation; deter and prevent cash-settled contracts were directly or § 150.5(b)(5)(ii)(B), an exchange has the market manipulation, squeezes, and indirectly linked.860 As reproposed, the choice of whether or not to adopt a corners; and ensure that the price guidance recommends that such conditional spot month position limit discovery function of the underlying conditional exemptions should not exemption for cash-settled contracts that market is not disrupted.863 exceed two times the level of the spot- are not subject to federal limits. As also month limit specified by the exchange discussed above regarding reproposed Five-Day Rule for Commodity that lists the applicable physical- § 150.3(c), the Commission is not Derivative Contracts in a Physical delivery contract. proposing a conditional spot-month Commodity Not Subject to Federal After review of comments and an limit for agricultural contracts subject to Limits impact analysis regarding the federal federal limits under reproposed § 150.2. limits, the Commission believes that a Further, the Commission notes that the While the Commission’s five-times conditional exemption is too current cash-settled natural gas spot determination regarding the five-day large, other than in natural gas because, month limit rules of two commenters, rule is addressed elsewhere,864 the in the markets that the Commission CME Group (which operates NYMEX) Commission points out that, as proposes to subject to federal limits, the and ICE, both include the same spot- discussed in connection with the Commission observed few or no market month limit level and the same definition of bona fide hedging position participants with positions in cash- conditional spot-month limit and in relation to exchange processes settled contracts in the aggregate that exemption. In each case the current under § 150.9, § 150.10, and § 150.11, exceed 25 percent of deliverable supply cash-settled conditional exemption is and as noted above in connection with in the spot month. This is so even five times the limit for the physical- § 150.5(a), the five-day rule would only though cash-settled contracts that are delivery contract. Such natural gas apply to certain enumerated positions swaps are not currently subject to contracts would be subject to federal (pass-through swap offsets, anticipatory, position limits. A five-times conditional limits under reproposed § 150.2, so the and cross-commodity hedges),865 rather exemption would not ensure liquidity guidance in reproposed § 150.5(b) than when determining whether to for bona fide hedgers in the spot month would not be applicable to those recognize as non-enumerated bona fide for cash-settled contracts because there contracts.862 hedging positions certain non- appear to be few or no positions that enumerated hedge strategies for non- large (other than in natural gas). Treatment of Spread and Anticipatory referenced contracts. As reproposed, Consequently, and in light of the other Hedge Exemptions for Commodity therefore, § 150.5(b) would apply the three policy objectives of CEA section Derivative Contracts in a Physical five-day rule only to pass-through swap Commodity Not Subject to Federal 4a(a)(3)(B), the Commission reproposes offsets, anticipatory, and cross- Limits a more cautious approach.861 commodity hedges. However, in regards Since transactions of large speculative In regards to the exemption for to exchange processes under § 150.9, traders may tend to cause unwarranted intramarket and intermarket spread § 150.10, and § 150.11, the Commission price changes, exchanges should positions under § 150.5(b)(5)(ii)(C), the exercise caution in determining whether comments received concerned the 863 As noted in the December 2013 Position such conditional exemptions are exchange process for providing spread Limits Proposal, the guidance is consistent with the warranted; for example, an exchange exemptions under § 150.10. The statutory policy objectives for position limits on may determine that a conditional Commission addresses those comments physical commodity derivatives in CEA section exemption is warranted because such a 4a(a)(3)(B). See December 2013 Position Limits below in its discussion of § 150.10, and Proposal, 78 FR at 38464. The Commission speculative trader is demonstrably is reproposing § 150.5(b)(5)(ii)(C) as interprets the CEA as providing it with the statutory providing liquidity for bona fide proposed in the 2016 Supplemental authority to exempt spreads that are consistent with hedgers. Where an exchange may not Position Limits Proposal. the other policy objectives for position limits, such have access to data regarding a market as those in CEA section 4a(a)(3)(B). Id. CEA section The Commission points out, however, 4a(a)(3)(B) provides that the Commission shall set participant’s cash-settled positions away that reproposed § 150.5(b)(5)(ii)(C) limits to the maximum extent practicable, in its would apply only to physical discretion—to diminish, eliminate, or prevent recent letters include: CL–CME–61007; CL–ICE– commodity derivative contracts, and excessive speculation as described under this 61009; CL–CME–61008; CL–ICE–60929; CL–CME– would not apply to any derivative section; to deter and prevent market manipulation, 60926. squeezes, and corners; to ensure sufficient market 860 The second proviso included in contract in an excluded commodity. liquidity for bona fide hedgers; and to ensure that § 150.5(b)(5)(ii)(B) was that the person holding or Furthermore, as noted above, the price discovery function of the underlying controlling the positions should not hold or control reproposed § 150.5(b)(5)(ii)(C) provides market is not disrupted. positions in such spot-month physical-delivery guidance rather than rigid requirements. 864 See the discussion regarding the five-day rule contract. in connection with the definition of bona fide 861 As noted above, it is the Commission’s Instead, under § 150.5(b)(5)(ii)(C), hedging position and the discussion of § 150.9 responsibility under CEA section 4a(a)(3)(B) to set (Process for recognition of positions as non- limits, to the maximum extent practicable, in its 862 The Commission notes that reproposed enumerated bona fide hedges). discretion, that, in addition to ensuring sufficient § 150.5(b)(5)(ii)(B) retains both of the recommended 865 See § 150.1 definition of bona fide hedging market liquidity for bona fide hedgers, diminish, provisos, although, as noted above, the guidance position, sections (2)(ii)(A), (3)(iii), (4), and (5) eliminate or prevent excessive speculation; deter recommends that such positions should not exceed (Other enumerated hedging position). To provide and prevent market manipulation, squeezes, and two times the level of the spot-month limit greater clarity as to which bona fide hedging corners; and ensure that the price discovery specified by the exchange that lists the applicable positions the five-day rule applies, the reproposed function of the underlying market is not disrupted. physical-delivery contract, rather than five times. rules reorganize the definition.

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proposes to allow exchanges to waive To address any confusion that might Commission further noted that the the five-day rule on a case-by-case basis. have led to such a comment, the ‘‘concurrent application of limits is As the Commission cautioned above, Commission reiterates, under CEA particularly consistent with an exchanges should carefully consider section 4a(e), its authority to enforce exchange’s close knowledge of trading whether to recognize a position as a violations of exchange-set speculative activity on that facility and the bona fide hedge or to exempt a spread position limits, whether certified or Commission’s greater capacity for position held during the last few days Commission-approved. As the monitoring trading and implementing of trading in physical-delivery contracts. Commission explained in the 2016 remedial measures across The Commission points to the tools that Supplemental Position Limits Proposal, interconnected commodity futures and exchanges currently use to address exchanges, as SROs, do not act only as option markets.’’ 873 concerns during the spot month; as two independent, private actors.869 In fact, The Commission retains the power to commenters observed, current tools to repeat the explanation provided by approve or disapprove the rules of include requiring gradual reduction of the Commission in 1981, when the Act exchanges, under standards set out the position (‘‘step down’’ requirements) is read as a whole, ‘‘it is apparent that pursuant to the CEA, and to review an or revoking exemptions to protect the Congress envisioned cooperative efforts exchange’s compliance with the price discovery process in core between the self-regulatory exchange’s rules, by way of additional referenced futures contracts organizations and the Commission. examples of the Commission’s approaching expiration. Consequently, Thus, the exchanges, as well as the continuing responsibility in this matter under the reproposed rule, exchanges Commission, have a continuing under the Act. may recognize positions, on a case-by- responsibility in this matter under the v. Commission Determination Regarding 870 case basis in physical-delivery contracts Act.’’ The 2016 Supplemental § 150.5(c) that would otherwise be subject to the Position Limits Proposal pointed out five-day rule, as non-enumerated bona that the ‘‘Commission’s approach to its As noted above, in an overall non- fide hedging positions, by applying the oversight of its SROs was subsequently substantive change made in reproposing exchanges experience and expertise in ratified by Congress in 1982, when it § 150.5, the Commission moved all protecting its own physical-delivery gave the CFTC authority to enforce provisions applying to excluded market. exchange set limits.’’ 871 In addition, as commodities from § 150.5(b) into the Commission observed in 2010, and reproposed § 150.5(c) to provide greater Reporting Requirements for Commodity reiterated in the 2016 Supplemental clarity regarding which provisions Derivative Contracts in a Physical Position Limits Proposal, ‘‘since 1982, concern excluded commodities. The Commodity Not Subject to Federal the Act’s framework explicitly Commission has determined to Limits anticipates the concurrent application of repropose the rule largely as proposed In response to the comment Commission and exchange-set for excluded commodities (previously questioning the proposed reporting speculative position limits.’’ 872 The under § 150.5(b)), for the reasons noted requirements by a claim that, ‘‘while the above, with certain changes discussed 874 Commission has a surveillance board of trade licensed, designated, or registered by below. obligation with respect to federal limits, the Commission or electronic trading facility with Limit Levels for Excluded Commodities the same obligation has never before respect to a significant price discovery contract fixing limits on the amount of trading which may The Commission is reproposing the existed with respect to exchange-set be done or positions which may be held by any provisions under § 150.5(c)(1) regarding limits for non-referenced contracts, and person under contracts of sale of any commodity for levels of limits for excluded does not exist today,’’ 866 the future delivery or under options on such contracts commodities as modified and Commission points out, as it did in the or commodities, if such bylaw, rule, regulation, or resolution has been approved by the Commission or reproposed under § 150.5(b)(1),875 to 2016 Supplemental Position Limits certified by a registered entity pursuant to section reference excluded commodities and to Proposal, that the Futures Trading Act 7a–2(c)(1) of this title: Provided, That the remove provisions that were solely of 1982 ‘‘gave the Commission, under provisions of section 13(a)(5) of this title shall apply addressed to agricultural section 4a(5) [since redesignated as only to those who knowingly violate such limits.’’). 869 commodities.876 These provisions section 4a(e)] of the Act, the authority 2016 Supplemental Position Limits Proposal, 81 FR at 38465–66. generally provide guidance rather than to directly enforce violations of 870 Establishment of Speculative Position Limits, rigid requirements; the guidance for exchange-set, Commission-approved 46 FR 50938, 50939 (Oct. 16, 1981). As the levels of limits remains the same for speculative position limits in addition Commission noted at that time that ‘‘[s]ince many to position limits established directly by exchanges have already implemented their own speculative position limits on certain contracts, the 873 See 2010 Position Limits for Referenced the Commission through orders or new rule merely effectuates completion of a Energy Contracts, 75 FR at 4145; see also 2016 regulations.’’ 867 And, since 2008, it has regulatory philosophy the industry and the Supplemental Position Limits Proposal, 81 FR at also been a violation of the Act for any Commission appear to share.’’ Id. at 50940. 38466. person to violate an exchange position 871 2016 Supplemental Position Limits Proposal, 874 The Commission is reproposing the following 868 81 FR at 38466. See also Futures Trading Act of sections without further discussion, for the reasons limit rule certified by the exchange. 1982, Public Law 97–444, 96 Stat. 2299–30 (1983). provided above, because it received no substantive In 2010, the Commission noted that the 1982 comments: § 150.5(c)(6) (Pre-enactment and 866 CL–CME–60926 at 15. legislation ‘‘also gave the Commission, under transition period swap positions), § 150.5(c)(7) (Pre- 867 2016 Supplemental Position Limits Proposal, section 4a(5) of the Act, the authority to directly existing positions), and § 150.5(b)(9) (Additional 81 FR at 38466, n. 85 (quoting the Federal enforce violations of exchange-set, Commission- acceptable practices). Speculative Position Limits for Referenced Energy approved speculative position limits in addition to 875 As reproposed, § 150.5(c)(1)(iii), like Contracts and Associated Regulations, 75 FR 4144, position limits established directly by the § 150.5(b)(1)(iii), provides that the spot-month, 4145 (Jan. 36, 2010)). Commission through orders or regulations.’’ Federal individual non-spot month, and all-months 868 See Futures Trading Act of 1982, Public Law Speculative Position Limits for Referenced Energy combined limit levels should be ‘‘comparable’’ 97–444, 96 Stat. 2299–30 (1983) (amending CEA Contracts and Associated Regulations, 75 FR 4144, rather than the ‘‘same.’’ section 4a by including, in what was then a new 4145 (Jan. 36, 2010) (‘‘2010 Position Limits Proposal 876 See supra for discussion of the modifications CEA section 4a(5), since been re-designated as CEA for Referenced Energy Contracts’’). Section 4a(5) has made to the reproposed provisions of § 150.5(b)(1) section 4a(e) ‘‘. . . It shall be a violation of this since been re-designated as section 4a(e) of the Act. as compared to the December 2103 Position Limits chapter for any person to violate any bylaw, rule, 872 2010 Position Limits for Referenced Energy Proposal; the explanation provided above also regulation, or resolution of any contract market, Contracts at 4145; see also 2016 Supplemental pertains to the inclusion of those modifications in derivatives transaction execution facility, or other Position Limits Proposal, 81 FR at 38466. reproposed § 150.5(c)(1).

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excluded commodities as for all other exemptions granted by exchanges for addition to granting exemptions under commodity derivative contracts that are contracts in excluded commodities.877 paragraphs (b)(5)(ii)(A), (b)(5)(ii)(B), and not subject to the limits set forth in As noted above, in reproposing the (b)(5)(ii)(C) of § 150.5, that exchanges reproposed § 150.2, including derivative definition of bona fide hedging position, may grant a ‘‘limited’’ risk management contracts in a physical commodity as the Commission is clarifying that an exemptions pursuant to rules consistent defined in reproposed § 150.1. exchange may otherwise recognize as with the guidance in Appendix A of bona fide any position in a commodity part 150. As reproposed, § 150.5(c)(5)(ii) Similarly, as to adjustment of limit derivative contract in an excluded levels for excluded commodity eliminates the modifier ‘‘limited’’ from commodity, so long as such recognition the risk management exemptions, and derivative contracts under § 150.5(c)(2), is pursuant to such exchange’s rules. provides merely that exchanges may the reproposed provisions are modified Although the Commission’s standards grant, in addition to the exemptions to reference only excluded commodities in the December 2013 Position Limits under paragraphs (b)(5)(ii)(A), and to remove provisions that were Proposal applied the incidental test and (b)(5)(ii)(B), and (b)(5)(ii)(C), risk solely addressed to agricultural the orderly trading requirements to all management exemptions pursuant to commodities. As reproposed, commodities, the Commission, as rules submitted to the Commission, § 150.5(c)(2)(i) provides guidance that previously described, proposed in the ‘‘including’’ for a position that is the spot month position limits for 2016 Supplemental Position Limits consistent with the guidance in excluded commodity derivative Proposal to remove both those standards Appendix A of part 150. contracts ‘‘should be maintained at a from the definition of bona fide hedging In regards to the provisions level that is necessary and appropriate position.878 Moreover, the reproposed addressing applications for exemptions to reduce the potential threat of market definition of bona fide hedging position for positions in excluded commodities, manipulation or price distortion of the would provide only that the position is the Commission is modifying what was contract’s or the underlying either: (i) Enumerated in the definition copied from § 150.5(b)(5)(iii) to provide, commodity’s price or index.’’ (in paragraphs (3), (4), or (5)) and meets under § 150.5(c)(5)(iii), simply that an The Commission did not receive the economically appropriate test; or (ii) exchange may allow a person to file an comments regarding § 150.5(c)(3). The recognized by an exchange under rules exemption application for excluded guidance in § 150.5(c)(3), on exchange previously submitted to the commodities after the person assumes 879 adoption of position accountability Commission. The Commission’s the position that exceeded a position levels in lieu of speculative position standards for recognizing a position as limit. limits, has been reproposed as was a bona fide hedge in an excluded Finally, in reproposing the previously proposed in § 150.5(b)(3), commodity, therefore, would not aggregation provision for excluded modified to remove provisions under include the additional requirements commodities under § 150.5(c)(8), the applicable to physical commodities § 150.5(b)(3)(i), which were solely Commission is not merely mirroring the subject to federal limits. Consequently, addressed to physical commodity aggregation provision as previously as reproposed, the exchanges would derivative contracts, and to reference proposed in § 150.5(b)(8). As noted have reasonable discretion to comply excluded commodities. above, the reproposed aggregation with core principles regarding position provisions for physical commodity As to the calculation of open interest limits on excluded commodities so long derivatives contracts, whether under for use in setting exchange-set as the exchange does so pursuant to § 150.5(a)(8) or § 150.5(b)(8), provide speculative position limits for excluded exchange rules previously submitted to that exchanges must have aggregation commodities, the Commission is the Commission under Part 40. provisions that conform to § 150.4. reproposing, in § 150.5(c)(4), the same In addition, in conjunction with the Reproposed § 150.5(c)(8), consistent amendments to the definition of bona guidance for excluded commodities that with the rest of reproposed § 150.5(c), fide hedging positions in regards to is being reproposed under § 150.5(b)(4) would instead provide guidance, that excluded commodities,880 the as for all other commodity derivative exchanges ‘‘should’’ have aggregation Commission is reproposing contracts that are not subject to the rules for excluded commodity § 150.5(c)(5)(ii), proposed as limits set forth in § 150.2, including the derivative contracts that conform to § 150.5(b)(5)(ii)(D) in the 2016 modification to provide that a DCM or § 150.4. SEF that is a trading facility would Supplemental Position Limits Proposal, include swaps in its open interest with no further modification, to afford E. Part 19—Reports by Persons Holding calculation only if such entity is greater flexibility for exchanges when Bona Fide Hedge Positions Pursuant to required to administer position limits granting exemptions for excluded § 150.1 of This Chapter and by on swap contracts of its facility. commodities. The 2016 Supplemental Merchants and Dealers in Cotton Position Limits Proposal provided, in Exchange—Administered Exemptions 1. Current Part 19 for Excluded Commodities 877 In addition, as noted above, the Commission The market and large trader reporting is reproposing § 150.5(b)(5)(i) with a modification rules are contained in parts 15 through In regards to hedge exemptions, the that clarifies that this provision is guidance in the 881 case of commodity derivatives contracts in a 21 of the Commission’s regulations. Commission is reproposing in new Collectively, these reporting rules § 150.5(c)(5)(i) for contracts in excluded physical commodity not subject to federal limits. 878 See 2016 Supplemental Position Limits effectuate the Commission’s market and commodities a modification of what was Proposal, definition of bona fide hedging position financial surveillance programs by previously proposed in § 150.5(b)(5)(i) (amending the definition previously proposed in enabling the Commission to gather the December 2013 Position Limits Proposal), 78 FR that eliminates the guidance that information concerning the size and exchanges ‘‘may provide for recognition at 38463–64, 38505–06. 879 The economically appropriate test has composition of the commodity futures, of a non-enumerated bona fide hedge in historically been interpreted primarily in the options, and swaps markets, thereby a manner consistent with the process context of physical commodities, rather than permitting the Commission to monitor applied to excluded commodities. described in § 150.9(a).’’ That provision and enforce the speculative position was intended to apply only to physical 880 In each case pursuant to rules submitted to the Commission, consistent with the guidance in commodity contracts and not to Appendix A of this part. 881 17 CFR parts 15–21.

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limits that have been established, among 2. Amendments to Part 19 Another commenter stated that the various forms required by the regime, other regulatory goals. The In the December 2013 Position Limits while not lengthy, represent significant Commission’s reporting rules are Proposal, the Commission proposed to data collection and categorization that implemented pursuant to the authority amend part 19 so that it would conform will require a non-trivial amount of of CEA sections 4g and 4i, among other to the Commission’s proposed changes work to accurately prepare and file. The CEA sections. Section 4g of the Act to part 150.888 First, the Commission commenter claimed that a imposes reporting and recordkeeping proposed to amend part 19 by adding comprehensive position limits regime obligations on registered entities, and new and modified cross-references to could be implemented with a ‘‘far less obligates FCMs, introducing brokers, proposed part 150, including the new burdensome’’ set of filings and floor brokers, and floor traders to file definition of bona fide hedging position requested that the Commission review such reports as the Commission may in proposed § 150.1. Second, the the proposed forms and ensure they are require on proprietary and customer Commission proposed to amend ‘‘as clear, limited, and workable’’ as positions executed on any board of § 19.00(a) by extending reporting possible to reduce burden. The 882 trade. Section 4i of the Act requires requirements to any person claiming commenter stated that it is not aware of the filing of such reports as the any exemption from federal position any software vendors that currently Commission may require when limits pursuant to proposed § 150.3. The provide solutions that can support a positions equal or exceed Commission- Commission proposed to add new series commercial firm’s ability to file the set levels.883 ’04 reporting forms to effectuate these proposed forms.891 additional reporting requirements. One commenter recommended that Current part 19 of the Commission’s Third, the Commission proposed to regulations sets forth reporting the Commission eliminate the series ’04 update the manner of part 19 reporting. reports in light of the application and requirements for persons holding or Lastly, the Commission proposed to controlling reportable futures and reporting requirements laid out in the update both the type of data that would 2016 Supplemental Position Limits option positions ‘‘which constitute bona be required in series ’04 reports as well Proposal. The commenter asserted that fide hedging positions as defined in [§ ] as the timeframe for filing such reports. the application requirements are in 1.3(z)’’ and for merchants and dealers in Comments Received: One commenter addition to the series ’04 forms, which cotton holding or controlling reportable acknowledges concerns presented by the commenter claims ‘‘only provide the positions for future delivery in Commission staff at the Staff Commission with a limited surveillance cotton.884 In the several markets with Roundtable that exemptions from benefit.’’ 892 Another commenter raised federal speculative position limits— position limits be limited to prevent concerns regarding forms filed under namely those for grains, the soy abuse, but does not believe that the part 19 and the data required to be filed complex, and cotton—hedgers that hold adoption of additional recordkeeping or with exchanges under §§ 150.9–11. The positions in excess of those limits must reporting rules or the development of commenter stated that the 2016 file a monthly report pursuant to part 19 costly infrastructure is required because Supplemental Position Limits Proposal on CFTC Form 204: Statement of Cash statutory and regulatory safeguards requires that ‘‘those exceeding the Positions in Grains,885 which includes already exist or are already proposed in federal limits file the proposed forms the soy complex, and CFTC Form 304 the December 2013 Position Limits including Form 204’’ but lacks Report: Statement of Cash Positions in Proposal, noting that: (i) The series ’04 ‘‘meaningful guidance’’ regarding the Cotton.886 These monthly reports, forms as well as DCM exemption data that must be maintained collectively referred to as the documents will be required of market ‘‘effectively in real-time’’ to populate 893 Commission’s ‘‘series ’04 reports,’’ must participants, who face significant the forms. show the trader’s positions in the cash penalties for false reporting, and the Several commenters requested that market and are used by the Commission Commission may request additional the Commission create user-friendly guidebooks for the forms so that all to determine whether a trader has information if the information provided entities can clearly understand any sufficient cash positions that justify is unsatisfactory; and (ii) market participants claiming a bona fide required forms and build the systems to futures and option positions above the hedging exemption are still subject to file such forms, including providing speculative limits.887 anti-disruptive trading prohibitions in workshops and/or hot lines to improve CEA section 4c(a)(5), anti-manipulation the forms.894 882 See CEA section 4g(a); 7 U.S.C. 6g(a). prohibitions in CEA sections 6(c) and One commenter expressed concern for 883 See CEA section 4i; 7 U.S.C. 6i. reporting requirements in conflict with 884 See 17 CFR part 19. Current part 19 cross- 9(c), the orderly trading requirement in references a provision of the definition of reportable proposed § 150.1, and DCM oversight. other regulatory requirements (such as 895 position in 17 CFR 15.00(p)(2). As discussed below, The commenter stated that these FASB ASC 815). that provision would be incorporated into proposed requirements comprise a ‘‘thorough and Finally, two commenters § 19.00(a). robust regulatory structure’’ that does recommended modifying or removing 885 Current CFTC Form 204: Statement of Cash the requirement to certify series ’04 Positions in Grains is available at http:// not need to be augmented with new www.cftc.gov/ucm/groups/public/@forms/ recordkeeping, reporting, or other reports as ‘‘true and correct’’. One documents/file/cftcform204.pdf. obligations to prevent misuse of hedging commenter suggested that the 886 Current CFTC Form 304 Report: Statement of exemptions.889 A second commenter requirement be removed due to the Cash Positions in Cotton is available at http:// difficulty of making such a certification www.cftc.gov/ucm/groups/public/@forms/ echoed that additional recordkeeping or documents/file/cftcform304.pdf. reporting obligations are unnecessary 891 CL–COPE–59662 at 24; CL–COPE–60932 at 10; 887 In addition, in the cotton market, merchants and would create unnecessary CL–EEI–EPSA–60925 at 9. and dealers file a weekly CFTC Form 304 Report of 890 regulatory burdens. 892 their unfixed-price cash positions, which is used to CL–FIA–60937 at 17. publish a weekly Cotton On-call report, a service to 893 CL–EEI–EPSA–60925 at 9. the cotton industry. The Cotton On-Call Report 888 See December 2013 Position Limits Proposal, 894 CL–COPE–59662 at 24; CL–COPE–60932 at 10; shows how many unfixed-price cash cotton 78 FR at 75741–75746. CL–ASR–60933 at 4; CL–Working Group–60947 at purchases and sales are outstanding against each 889 CL–Working Group–59959 at 3–4. 17–18; CL–EEI–EPSA–60925 at 3. cotton futures month. 890 CL–NFP–60393 at 15–16. 895 CL–U.S. Dairy–59597 at 6.

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and the fact that CEA section 6(c)(2) fulfilling their compliance obligations requirements, the policy objectives and already prohibits the submission of false under the new position limits regime. standards for hedging under financial or misleading information.896 Another The Commission notes that the accounting standards differ from the noted that the requirement to report reporting obligations proposed in the statutory policy objectives and very specific information relating to 2016 Supplemental Position Limits standards for hedging under the Act. hedges and cash market activity Proposal are intended to be Because of this, reporting requirements, involves data that may change over complimentary to, not duplicative of, and the associated burdens, would also time. The commenter suggested the the series ’04 reporting forms. In differ between the series ’04 reports and Commission adopt a good-faith standard particular, the Commission notes the accounting statements. regarding ‘‘best effort’’ estimates of the distinction between Form 204 Finally, the Commission is proposing data when verifying the accuracy of enumerated hedging reporting and to amend the certification language Form 204 submissions and, assuming exchange-based non-enumerated found at the end of each form to clarify the estimate of physical activity does hedging reporting. The 2016 that the certification requires nothing not otherwise impact the bona fide Supplemental Position Limits Proposal more than is already required of market hedge exemption (e.g. cause the firm to provides exchanges with the authority participants in section 6(c)(2) of the Act. lose the exemption), not penalize to require reporting from market In response to the commenters’ request entities for providing the closest participants. That is, regarding an for a ‘‘best effort’’ standard, the approximation of the position exchange’s process for non-enumerated Commission added the phrase ‘‘to the possible.897 bona fide hedging position recognition, best of my knowledge’’ preceding the Commission Reproposal: The the exchange has discretion to certification from the authorized Commission responds to specific implement any additional reporting that representative of the reporting trader comments regarding the content and it may require. The Commission that the information on the form is true timing of the series ’04 forms and other declines to eliminate series ’04 reporting and correct. The Commission has also concerns below. The Commission agrees in response to the commenters because, added instructions to each form with the commenters that the forms as noted throughout this section, the clarifying what is required on the should be clear and workable, and offers data provided on the forms is critical to signature/authorization page of each several clarifications and amendments the mission of the Commission’s form. The Commission notes that, in the below in response to comments about Surveillance program to detect and recent past, the Division of Market deter manipulation and abusive trading particular aspects of the series ’04 Oversight has issued advisories and practices in physical commodity reports. guidance on proper filing of series ’04 markets. The Commission notes that the reports, and the Division of Enforcement In response to the commenters that has settled several cases regarding lack information required on the series ’04 requested guidebooks for the series ’04 of accuracy and/or timeliness in filing reports represents a trader’s most basic reporting forms, the Commission series ’04 forms.898 The Commission position data, including the number of believes that it is less confusing to believes the certification language is an units of the cash commodity that the ensure that form instructions are clear important reminder to reporting traders firm has purchased or sold, or the size and detailed than it is to provide of their responsibilities to file accurate of a swap position that is being offset in generalized guidebooks that may not information under several sections of the futures market. The Commission respond to specific issues. The the Act, including but not limited to believes this information is readily Commission has clarified the sample CEA section 6(c)(2). available to traders, who routinely make series ‘04 forms found in Appendix A to trading decisions based on the same part 19, including instructions to such a. Amended cross references data that is required on the series ’04 forms, and invites comments in order to Proposed Rule: As discussed above, in reports. The Commission is proposing to avoid future confusion. Specifically, the the December 2013 Position Limits move to an entirely electronic filing Commission has added instructions Proposal, the Commission proposed to system, allowing for efficiencies in regarding how to fill out the trader replace the definition of bona fide populating and submitting forms that identification section of each form; hedging transaction found in § 1.3(z) require the same information every reorganized instructions relating to with a new proposed definition of bona month. Most traders who are required to individual fields on each form; edited fide hedging position in proposed file the series ’04 reports must do so for the examples of each form to reduce § 150.1. As a result, proposed part 19 only one day out of the month, further confusion and match changes to would replace cross-references to lowering the burden for filers. In short, information required as described in § 1.3(z) with cross-references to the new the Commission believes potential this section; and clarified the authority definition of bona fide hedging burdens under the Reproposal have for the certifications made on the positions in proposed § 150.1. been reduced wherever possible while signature/authorization page of each The Commission also proposed still providing adequate information for form. the Commission’s Surveillance program. The Commission’s longstanding expanding Part 19 to include reporting For market participants who may experience with collecting and requirements for positions in swaps, in require assistance in monitoring for reviewing Form 204 and Form 304 has addition to futures and options speculative position limits and shown that many questions about the positions, for any part of which a person gathering the information required for series ’04 reports are specific to the relies on an exemption. To accomplish the series ’04 reports, the Commission is circumstances and trading strategies of this, ‘‘positions in commodity derivative aware of several software companies an individual market participant, and contracts,’’ as defined in proposed who, prior to the vacation of the Part do not lend themselves to generalization § 150.1, would replace ‘‘futures and 151 Rulemaking, produced tools that that would be helpful to many market option positions’’ throughout amended could be useful to market participants in participants. 898 See, e.g., ‘‘Obligation of Reportable Market The Commission also notes, in Participants to File CFTC Form 204 Reports,’’ CFTC 896 See CL–CMC–59634 at 17. response to the commenter expressing Staff Advisory 13–42, July 8, 2013; and CFTC 897 CL–Working Group–59693 at 65. concerns about other regulatory Dockets Nos. 16–21, 15–41, 16–07, 16–20.

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part 19 as shorthand for any futures, listed in current § 15.02.901 The the December 2013 Position Limits option, or swap contract in a commodity Commission proposed to add three new Proposal, the Commission proposed in (other than a security futures product as series ’04 reporting forms to effectuate § 19.00(b)(1) that a source commodity defined in CEA section 1a(45)).899 This the expanded reporting requirements of itself can only be excluded from a amendment was intended to harmonize part 19.902 Proposed Form 504 would be calculation of a cash position if the the reporting requirements of part 19 added for use by persons claiming the amount is de minimis, impractical to with proposed amendments to part 150 conditional spot-month limit exemption account for, and/or on the opposite side that encompass swap transactions. pursuant to proposed § 150.3(c).903 of the market from the market Proposed § 19.00(a) would eliminate Proposed Form 604 would be added for participant’s hedging position.908 the cross-reference to the definition of use by persons claiming a bona fide The Commission explained in the reportable position in § 15.00(p)(2). The hedge exemption for either of two December 2013 Position Limits Proposal Commission noted that the current specific pass-through swap position that the original part 19 reporting reportable position definition types, as discussed further below.904 exclusion was intended to cover only essentially identifies futures and option Proposed Form 704 would be added for cash positions that were not capable of positions in excess of speculative use by persons claiming a bona fide being delivered under the terms of any position limits. Proposed § 19.00(a) hedge exemption for certain derivative contract, an intention that would simply make clear that the anticipatory bona fide hedging ultimately evolved to allow cross- reporting requirement applies to positions.905 commodity hedging of products and commodity derivative contract positions Comments Received: The Commission byproducts of a commodity that were (including swaps) that exceed received no comments on proposed not necessarily deliverable under the speculative position limits, as discussed § 19.00(a) regarding who must file series terms of any derivative contract. The below. ’04 reports. Commission also noted that the Comments Received: The Commission Commission Reproposal: The instructions on current Form 204 go received no comments on the proposed Commission is reproposing the further than current § 19.00(b)(1) by cross-referencing amendments. expansion of § 19.00(a), as originally allowing the exclusion of certain source Commission Reproposal: The proposed. commodities in addition to products Commission is repurposing the c. Manner of reporting—§ 19.00(b) and byproducts, when it is the firm’s amended cross-references in part 19, as normal business practice to do so. originally proposed. i. Excluding certain source Comments Received: One commenter commodities, products or byproducts of suggested the Commission expand the b. Persons required to report—§ 19.00(a) the cash commodity hedged— provision in proposed § 19.00(b)(1) that Proposed Rule: Because the reporting § 19.00(b)(1) allows a reporting person to exclude requirements of current part 19 apply Proposed Rule: For purposes of source commodities, products or only to persons holding bona fide hedge reporting cash market positions under byproducts in determining its cash positions and merchants and dealers in current part 19, the Commission position for bona fide hedging to allow cotton holding or controlling reportable historically has allowed a reporting a person to also exclude inventory and positions for future delivery in cotton, trader to ‘‘exclude certain products or contracts of the actual commodity in the the Commission proposed to extend the byproducts in determining his cash course of his or her regular business reach of part 19 by requiring all persons positions for bona fide hedging’’ if it is practice. The commenter also noted that who wish to avail themselves of any ‘‘the regular business practice of the proposed § 19.00(b)(1) only permits this exemption from federal position limits reporting trader’’ to do so.906 The exclusion if the amount is de minimis, under proposed § 150.3 to file Commission has proposed to clarify the despite there being ‘‘many applicable series ’04 reports.900 The meaning of ‘‘economically appropriate’’ circumstances’’ that make the inclusion Commission also proposed to require in light of this reporting exclusion of of such source commodities irrelevant that anyone exceeding a federal limit certain cash positions.907 Therefore, in for reporting purposes. The commenter who has received a special call related requested that the Commission only to part 150 must file a series ’04 form. 901 17 CFR 15.02. require a reporting person to calculate Collection of this information would 902 As noted in the December 2013 Position its cash positions in accordance with its Limits Proposal, the Commission is avoiding the regular business practice and report the facilitate the Commission’s surveillance use of any form numbers with ‘‘404’’ to avoid program with respect to detecting and confusion with the part 151 Rulemaking, which deterring trading activity that may tend required Forms 404, 404A, and 404S. See December bona fide hedging position. In order for a position to cause sudden or unreasonable 2013 Position Limits Proposal, 78 FR at 75742. to be economically appropriate to the reduction of 903 See supra discussion of proposed § 150.3(c). risks in the conduct and management of a fluctuations or unwarranted changes in 904 Proposed Form 604 would replace Form 404S commercial enterprise, the enterprise generally the prices of the referenced contracts (as contemplated in vacated part 151). should take into account all inventory or products and their underlying commodities. By 905 The updated definition of bona fide hedging that the enterprise owns or controls, or has broadening the scope of persons who in proposed § 150.1 incorporates several specific contracted for purchase or sale at a fixed price. For types of anticipatory transactions: Unfilled example, in line with its historical approach to the must file series ’04 reports, the anticipated requirements, unsold anticipated reporting exclusion, the Commission does not Commission seeks to ensure that any production, anticipated royalties, anticipated believe that it would be economically appropriate person who claims any exemption from services contract payments or receipts, and to exclude large quantities of a source commodity federal speculative position limits can anticipatory cross-commodity hedges. See held in inventory when an enterprise is calculating paragraphs (3)(iii), (4)(i), (4)(iii), (4)(iv) and (5), its value at risk to a source commodity and it demonstrate a legitimate purpose for respectively, of the Commission’s amended intends to establish a long derivatives position as doing so. definition of bona fide hedging transactions in a hedge of unfilled anticipated requirements. Series ’04 reports currently refers to proposed § 150.1 as discussed above. 908 Proposed § 19.00(b)(1) adds a caveat to the Form 204 and Form 304, which are 906 See 17 CFR 19.00(b)(1) (providing that ‘‘[i]f the alternative manner of reporting: When reporting for regular business practice of the reporting trader is the cash commodity of soybeans, soybean oil, or to exclude certain products or byproducts in soybean meal, the reporting person shall show the 899 See discussion above. determining his cash position for bona fide hedging cash positions of soybeans, soybean oil and soybean 900 See 17 CFR part 19. Current part 19 cross- . . . ., the same shall be excluded in the report’’). meal. This proposed provision for the soybean references the definition of reportable position in 17 907 See supra discussion of the ‘‘economically complex is included in the current instructions for CFR 15.00(p). appropriate test’’ as it relates to the definition of preparing Form 204.

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cash positions that it considered in Surveillance purposes to receive a §§ 19.00(b)(2)–(3), as originally making its bona fide hedging snapshot of a market participant’s cash proposed. determinations.909 market position, the series ’04 forms Commission Reproposal: The currently require a market participant to d. Information Required—§ 19.01(a) Commission is reproposing provide relevant inventories and fixed i. Bona Fide Hedgers Reporting on Form § 19.00(b)(1), as originally proposed, price contracts in the hedged (or cross- 204—§ 19.01(a)(3) because the Commission is concerned hedged) commodity. The Commission that adopting the commenter’s request believes it is necessary to maintain this Proposed Rule: Current § 19.01(a) sets could lead to ‘‘cherry-picking’’ a cash aggregate reporting in order for the forth the data that must be provided by market position in an attempt to justify Commission’s Surveillance program to bona fide hedgers (on Form 204) and by a speculative position as a hedge. As properly monitor for position limit merchants and dealers in cotton (on noted in the December 2013 Position violations and to prevent market Form 304). The Commission proposed Limits Proposal, the Commission’s manipulation. to continue using Forms 204 and 304, clarification of the § 19.00(b)(1) Further, the Commission believes that which will feature only minor changes reporting exclusion was proposed to firms may find reporting an aggregate to the types of data to be reported under prevent the definition of bona fide cash market position less burdensome § 19.01(a)(3).915 These changes include hedging positions in proposed § 150.1 than attempting to identify portions of removing the modifier ‘‘fixed price’’ from being swallowed by this reporting that position that most closely align from ‘‘fixed price cash position;’’ rule. The Commission stated ‘‘. . . it with individual hedge positions as, requiring cash market position would not be economically appropriate according to some commenters, many information to be submitted in both the behavior for a person who is, for firms hedge on a portfolio basis, making cash market unit of measurement (e.g. example, long derivative contracts to identifying the particular hedge being barrels or bushels) and futures exclude inventory when calculating used difficult.911 equivalents; and adding a specific unfilled anticipated requirements. Such ii. Cross-commodity Hedges, Standards request for data concerning open price behavior would call into question and Conversion Factors—§ 19.00(b)(2)– whether an offset to unfilled anticipated contracts to accommodate open price (3) requirements is, in fact, a bona fide pairs. In addition, the monthly reporting hedging position, since such inventory Proposed Rules: In the December 2013 requirements for cotton, including the would fill the requirement. As such, a Position Limits Proposal, the granularity of equity, certificated and trader can only underreport cash market Commission proposed under non-certificated cotton stocks, would be activities on the opposite side of the § 19.00(b)(2) instructions for reporting a moved to Form 204, while weekly market from her hedging position as a cash position in a commodity that is reporting for cotton would be retained regular business practice, unless the different from the commodity as a separate report made on Form 304 unreported inventory position is de underlying the futures contract used for in order to maintain the collection of minimis or impractical to account hedging.912 The Commission also data required by the Commission to for.’’ 910 If a person were only required proposed to maintain the requirement in publish its weekly public cotton ‘‘on to report cash positions that are offset by § 19.00(b)(3) that standards and call’’ report. particular derivative positions, then the conversion factors used in computing Comments Received: The Commission form would not provide an indication as cash positions for reporting purposes received several comments regarding must be made available to the to whether the derivative position is the proposed revisions to Form 204. Commission upon request.913 The economically appropriate to the These comments can be grouped loosely Commission clarified that such reduction of risk, making the inclusion into three categories: general comments information would include hedge ratios of source commodities very relevant for on bona fide hedge reporting; comments reporting purposes, contrary to the used to convert the actual cash commodity to the equivalent amount of regarding the general information commenter’s suggestion. required on Form 204; and comments Because of these and other concerns, the commodity underlying the market participants have historically commodity derivative contract used for regarding the more specific nature of the been required to report cash market hedging, and an explanation of the cash market information required to be information in aggregate form for the methodology used for determining the reported. The Commission responds to commodity as a whole, not the ‘‘line hedge ratio. Finally, the Commission each category separately below. item’’ style of hedge reporting requested provided examples of completed series Comments: One commenter stated by the commenter (where firms report ’04 forms in proposed Appendix A to that CFTC should reduce the complexity cash trades by category, tranche, or part 19 along with blank forms and and compliance burden of bona fide corresponding futures position). instructions.914 hedging record keeping and reporting by Further, since it is important for Comments Received: The Commission using a model similar to the current received no comments on proposed exchange-based exemption process.916 909 See CL–Working Group–60396 at 16–17; CL– §§ 19.00(b)(2)–(3). The commenter also stated that the Working Group–60947 at 15–17. Commission Reproposal: The requirement to keep records and file 910 See December 2013 Position Limits Proposal, Commission is reproposing 78 FR at 75743. The Commission provided an reports, in futures equivalents, regarding example: ‘‘By way of example, the alternative the commercial entity’s cash market 911 See CL-Working Group-59693 at 65. manner of reporting in proposed § 19.00(b)(1) contracts and derivative market would permit a person who has a cash inventory 912 See December 2013 Position Limits Proposal, of 5 million bushels of wheat, and is short 5 million 78 FR at 75743. The proposed § 19.00(b)(2) is positions on a real-time basis globally, bushels worth of commodity derivative contracts, to consistent with provisions in the current section, will be complex and impose a underreport additional cash inventories held in but would add the term commodity derivative significant compliance burden. The small silos in disparate locations that are contracts (as defined in proposed § 150.1). The administratively difficult to count.’’ This person proposed definition of cross-commodity hedge in could instead opt to calculate and report these hard- proposed § 150.1 is discussed above. 915 The list of data required for persons filing on to-count inventories and establish additional short 913 See December 2013 Position Limits Proposal, Forms 204 and 304 has been relocated from current positions in commodity derivative contracts as a 78 FR at 75743. § 19.01(a) to proposed § 19.01(a)(3). bona fide hedge against such additional inventories. 914 Id. 916 CL–ASR–59668 at 3.

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commenter noted such records are not Advisory Council Meeting in June 2014; One commenter also recommended needed for commercial purposes.917 the Commission notes in response to that the Commission either delete or One commenter requested that the that commenter that there is no federal make optional the identification of a Commission provide for a single hedge exemption application process for most particular enumerated position in exemption application and reporting enumerated hedges. For non- column two of Section A or provide a process, and should not require enumerated hedges and certain good-faith standard. The commenter applicants to file duplicative forms at enumerated anticipatory hedges, in claimed that many energy firms hedge the exchange and at the Commission. response to the EEMAC meeting and on a portfolio basis, and would not be The commenter noted its support for other comments from market able to identify a particular enumerated rules that would delegate, to the participants, the Commission proposed position that applies to the referenced exchanges, (1) the hedge exemption a single exchange based process for contract position needing bona fide application and approval process, and recognizing bona fide hedges for both hedging treatment.925 (2) hedge exemption reporting (if any is federal and exchange limits. Under this One commenter asked for clarification required). The commenter argued that process, proposed in the 2016 regarding whether Section C of Form the exchanges, rather than the Supplemental Position Limits Proposal, 204, which requires information Commission, have a long history with market participants would not be regarding cotton stocks, is required of enforcing position limits on all of their required to file with both the exchange market participants in all commodities contracts and are in a much better and the Commission.921 or just those in cotton markets.926 position than the Commission to judge Finally, in response to the One commenter recommended that the applicant’s hedging needs and set an commenter’s request that the the Commission remove the appropriate hedge level for the hedge Commission respond to pending requirement in Form 204 to submit being sought. Thus, the commenter requests for exemptions under CEA suggested, the exchanges should be the futures-equivalent derivative positions, section 4a(a)(7), the Commission notes stating that the Commission did not point of contact for market participants that it responded to the outstanding seeking hedge exemptions.918 explain why it needs to obtain data on section 4a(a)(7) requests in the a market participant’s futures-equivalent One commenter requested that the December 2013 Position Limits Commission address all pending position as part of proposed Form 204 Proposal. In particular, the Commission in light of the presumption that the requests for CEA 4a(a)(7) exemptions proposed to include some of the energy and respond to all requests for bona fide Commission already has a market industry’s requests in the definition of participant’s future-equivalent position hedging exemptions from the energy bona fide hedging position and declined industry.919 from large-trader reporting rules and to include other requests.922 927 Commission Reproposal: In response access to SDR data. Another Comments: One commenter to the first commenter, the Commission commenter noted that Form 204 mixes recommended that the Commission notes that, while the exchange referred units of measurement between futures clarify that column three of Form 204 to by the commenter does not have a and cash positions and requested the reporting process analogous to Form should permit a market participant to Commission require market participants 204, it does require an application prior identify the number of futures- to use either cash units or futures units. to the establishment of a position that equivalent referenced contracts that The commenter noted that it’s an easy exceeds a position limit. In contrast, hedge an identified amount of cash- conversion to make but that the ‘‘mix’’ advance notice is not required for most market positions, but without separately of both units is confusing.928 federal enumerated bona fide hedging identifying the positions in each Commission Reproposal: With respect positions.920 In the Commission’s referenced contract. The commenter to the comments regarding column three experience, the series ’04 reports have stated that separate identification would of Form 204, the Commission clarifies been useful and beneficial to the add to the financial burden, but that it that Form 204 allows filers to identify does not believe that it adds any benefit Commission’s Surveillance program and 923 multiple referenced contracts used for the Commission finds no compelling to the Commission. Two commenters hedging a particular commodity cash reason to change the forms to conform also recommended the Commission position in the same line of Form 204. to the exchange’s process. Further, the remove from Form 204 the requirement Because position limits under § 150.2 Commission notes that Form 204 is filed for reporting non-referenced contracts, are to be imposed on referenced once a month as of the close of business noting that the Commission did not contracts, cash positions hedged by of the last Friday of the month; it is not explain why a market participant such referenced contracts should be and has never been required to be filed should report commodity derivative reported on an aggregate basis, not contracts that are not referenced on a real-time basis globally. A market 924 separated out by individual contract. participant only has to file Form 204 if contracts. However, the Commission declines to it is over the limit at any point during adopt the commenters’ recommendation the month, and the form requires only 921 See supra the discussion of proposed §§ 150.9 to delete the phrase ‘‘Commodity and 150.11. cash market activity (not derivatives 922 The reasoning behind the Commission’s Derivative Contract’’ from the title of market positions). determinations with respect to previous requests for column three, because § 19.00(a)(3) The second commenter was exemption under CEA section 4a(a)(7) is allows the Commission to require filing responding to questions raised at the documented in the December 2013 Position Limits of a series ’04 form of anyone holding Energy and Environmental Markets Proposal, 78 FR at 75719–75722. See also the definition of bona fide hedging position discussed a reportable position under supra. § 15.00(p)(1), which may involve a 917 CL–ASR–59668 at 7; CL–ASR–60933 at 5. 923 CL–FIA–59595 at 38. commodity derivative contract that does 918 CL–AGA–59935 at 13. 924 The Commission notes that the commenters not fit the definition of referenced 919 CL–NFP–60393 at 15–16. are referring to titular language on column 3 of the 920 The Commission notes that advance notice is example Form 204 found in proposed Appendix A 925 required for recognition of anticipatory hedging to part 19, which states ‘‘Commodity Derivative CL–Working Group–59693 at 65. positions by the Commission. See below for more Contract or Referenced Contract’’ as the information 926 CL–ASR–60933 at 4. discussion of anticipatory hedging reporting required in that column. CL–FIA–59595 at 38; CL– 927 CL–FIA–59595 at 37. requirements. Working Group–59693 at 65. 928 CL–ASR–60933 at 4.

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contract.929 Further, the Commission producers, and/or agents in cotton. The report the aggregate quantity of cash can require a special call respondent to Commission has updated Section C of positions that underlie bona fide file their response using the relevant Form 204 and § 19.01(a)(3)(vi)(A) to hedging positions in equivalent core series ’04 form, and the Form 204 may reflect this change. The Commission referenced futures contract units, be filed in order to claim exemptions does not believe this distinction will excluding all or part of the commodity from §§ 150.3(b) or 150.3(d), exemptions create any significant extra burden on that it excludes in its regular business which may not involve a referenced cotton merchants, as the Commission practice. The commenter also suggested contract. In sum, because the understands that many entities in cotton that if the filer is cross hedging, the filer Commission may require the filing of markets will hold equity stocks in just must also report the aggregated quantity Form 204 for purposes other than bona one of the three capacities required on of bona fide hedge positions it is cross fide hedging, the form should include the form. hedging in terms of the actual both ‘‘Commodity Derivative Contract’’ The Commission notes in response to commodity as well as specify the and, separately, ‘‘Referenced Contract’’ the last commenter that Form 204 does futures market in which it is hedging.930 in the title of column three. To avoid not require the futures equivalent value Another commenter suggested that further confusion, the Commission has of derivative positions but rather the the information required on Form 204 is rephrased the wording of the column futures equivalent of the cash position ‘‘ambiguous’’ and asked the title and amended the instructions to underlying a hedged position (e.g., Commission to clarify what scope of, for the form. 20,000,000 barrels of crude oil is example, stocks or fixed price purchase With respect to column two of Form equivalent to 20,000 futures equivalents, and sales agreements must be reported 204, the Commission is proposing to given a 1,000 barrel unit of trading for as well as what level of data precision adopt the commenter’s recommendation the futures contract). The futures is required.931 to delete the requirement to identify equivalent of the cash position quantity A commenter requested that the which paragraphs of the bona fide is not available from any Commission Commission allow hedges to be reported hedging definition are represented by data source because cash positions are on a ‘‘macro’’ basis (e.g. futures the hedged position. The requirement not reported to the Commission under, positions vs. cash positions) as opposed seemed to be confusing to commenters for example, large trader reporting or to requiring the matching of individual who found it unclear whether the swap data repository regulations. The physical market transactions to column required the identification of all Commission is proposing to require enumerated bona fide hedges. The bona fide hedge definition paragraphs firms to report both the cash market unit commenter stated that performing used for the total cash market position of measurement and the futures specific linkage of individual physical or the identification of separate cash equivalent measurement for a position transactions to individual hedge positions for each paragraph used. in order to easily identify the size of the transactions is burdensome and does While the requirement was intended to position underlying a hedge position, not provide any ‘‘managerial or provide insight into which enumerated and has updated § 19.01(a)(3), economic benefit.’’ 932 provision of the bona fide hedging instructions to the sample Form 204 in In contrast, another commenter definition was being relied upon in Appendix A to part 19, and the field suggested that the Commission tailor the order to provide context to the cash names on the Form 204 itself to clarify series ’04 reports to require ‘‘only the position, the column was never this requirement. The Commission information that is required to justify intended to prevent multiple paragraphs agrees with the commenter that it is an the claimed hedge exemption.’’ The being cited at once. Given the easy conversion to make, and does not commenter stated that Form 204 confusion, the Commission is concerned anticipate that this requirement will appears to require a market participant that the information in column two may create any significant extra burden on to list all cash market exposures, even not provide the intended information market participants. Obtaining the if the exposures are not relevant to the while being burdensome to implement futures equivalent information directly bona fide hedge exemption being for both market participants and from the market participant—as claimed, which it believes would Commission staff. For these reasons, the opposed to calculating it upon receipt of provide no value to the Commission in Commission is proposing to delete the form—is necessary particularly with determining whether a hedge was bona column two of Form 204, and has respect to cross-commodity hedging fide.933 updated the sample forms in Appendix where calculating the hedging ratio may Another commenter stated that A to part 19 accordingly. not be as clear-cut. In its experience because the prompt (spot) month for In response to the commenter administering and collecting Form 204, certain referenced contracts will no requesting clarification regarding the Commission has noted much longer trade as of the last Friday of the Section C of Form 204, the Commission confusion regarding whether cash month, a market participant that confirms that Section C is only required market information should be reported exceeds a spot-month position limit of entities which hold positions in in futures equivalents or in cash market who no longer has that spot-month cotton markets that must be reported on units. Currently, the form requires cash position should not be required to Form 204. Further, the Commission market units, but the Commission has report futures-equivalent positions for proposes that, in order for the seen both units of measurement used referenced contract on Form 204.934 The Commission to effectively evaluate the (sometimes on the same form), which commenter recommended that the legitimacy of a claimed bona fide requires Commission staff to contact Commission should require a market hedging position, filers of Section C of traders in order to validate the numbers Form 204 will be required to on the form. The Commission is 930 CL–Working Group–60947 at 17–18. differentiate between equity stock held proposing to require both in order to 931 CL–COPE–60932 at 10. The commenter made in their capacities as merchants, avoid such confusion. the same requests for clarification regarding the Comment: One commenter proposed cash market information required on Form 504; since the information is similar, the Commission is 929 The Commission notes that Form 704 has been modifications to the information responding here to the comment for both forms. removed from the list of series ’04 forms that could required to be reported on Form 204. 932 be required under a special call. This is a non- CL–ASR–60933 at 5. substantive change resulting from changes made to Specifically, the commenter suggested 933 See CL–Working Group–60396 at 17. § 150.7, discussed infra. that the filer should be required to 934 CL–FIA–59595 at 37–38.

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participant with a position in excess of particular commodity as of one day this, the Commission is not adopting the a spot-month position limit to report on during a month. The information on this commenter’s recommendation to only Form 204 only the cash-market activity form is used for several purposes in require Form 204 when a market related to that particular spot-month addition to reviewing hedged positions, participant exceeds a spot-month limit. derivative position, and not to require it including helping Surveillance analysts In response to the commenter who to report cash-market activity related to understand changes in the market suggested the Commission require a non-spot-month positions where it did fundamentals in underlying commodity ‘‘practical audit trail’’ for bona fide not exceed a non-spot-month position markets.939 The Commission believes hedgers, the Commission notes that limit; the commenter stated that the that adopting the commenters’ other sections of the Commission’s burden associated with such a reporting recommendations to require cash regulations provide rules regarding obligation would increase market information underlying a single detailed individual transaction significantly.935 Separately, another derivative hedge position would result recordkeeping as suggested by the commenter claimed that Form 204 in a more burdensome reporting process commenter. appears to address only non-spot-month for firms, particularly those who hedge position limits and asked the on a portfolio basis. Instead, the ii. Cotton Merchants and Dealers Commission to clarify how it will Commission is confirming that, as Reporting on Form 304—§ 19.02 distinguish reporting on Form 204 that requested by the commenter, cash Proposed Rule: In the December 2013 is related to a spot-month position limit market positions should be reported on Position Limits Proposal, the versus a non-spot-month position an aggregated or ‘‘macro’’ basis. Commission proposed to continue to limit.936 The Commission notes that this require the filing of Form 304, which One commenter recommended that ‘‘snapshot’’ requirement has historically requires information on the quantity of reporting rules require traders to been—and is currently—required on call cotton bought or sold, on a weekly identify the specific risk being hedged at Form 204 for the nine legacy basis. The Commission noted that Form the time a trade is initiated, to maintain agricultural contracts. Further, the 304 is required in order for the records of termination or unwinding of Commission understands that exchange Commission to produce its weekly a hedge when the underlying risk has hedge application forms require similar cotton ‘‘on call’’ report.941 The been sold or otherwise resolved, and to cash position information; firms that Commission also proposed to relocate create a practical audit trail for have applied to an exchange for hedge the list of required information for Form individual trades, to discourage traders exemptions in non-legacy contracts 304 from current § 19.01(a) to proposed from attempting to mask speculative should already be familiar with § 19.01(a)(3). trades under the guise of hedges.937 providing cash market information Commission Reproposal: In response Comments Received: The Commission when they exceed a position limit or a did not receive any comments on the to the modifications to Form 204 position accountability level. proposed by the commenter, the proposed changes to Form 304. The commenters that focus on the Commission Reproposal: The Commission notes that no modifications Form 204 as it relates to exceeding are necessary because the form, as Commission is reproposing Form 304, either spot-month position limits or as originally proposed. proposed, requires the reporting of non-spot-month position limits contrast aggregated quantity of cash positions each other: one believed Form 204 was iii. Conditional Spot-Month Limit that underlie bona fide hedging to be filed in response to exceeding only Exemption Reporting on Form 504— positions in equivalent core referenced spot-month position limits and the other § 19.01(a)(1) futures contract units, excluding a de that Form 204 was to be filed in Proposed Rule: As proposed, minimis portion of the commodity, response to exceeding only non-spot- products, and byproducts that it § 19.01(a)(1) would require persons month position limits. However, the availing themselves of the conditional excludes in its regular business Commission has never distinguished 938 spot-month limit exemption (pursuant practice. Reproposed Form 204 also between spot-month limits and non- requires cross-hedgers to report the to proposed § 150.3(c)) to report certain spot-month limits with respect to the detailed information concerning their aggregated quantity of bona fide hedging filing of Form 204. The Commission positions it is cross hedging in terms of cash market activities for any notes that, as discussed in the December commodity specially designated by the the actual commodity as well as specify 2013 Position Limits Proposal, Form the futures market in which it is Commission for reporting under § 19.03 204 is used to review positions that of this part. In the December 2013 hedging. exceed speculative limits in general, not The Commission reproposes that the Position Limits Proposal, the just in the spot-month.940 Because of Form 204 requires a market participant Commission noted its concern about the to report all cash market positions in cash market trading of those availing 939 In the December 2013 Position Limits any commodity in which the participant Proposal, the Commission highlighted the themselves of the conditional spot- has exceeded a spot-month or non-spot- importance of the data collected on Form 204 to its month limit exemption and so proposed month position limit. Form 204 is not Surveillance program, stating that ‘‘[c]ollection of to require that persons claiming a intended to match a firm’s hedged this information would facilitate the Commission’s conditional spot-month limit exemption surveillance program with respect to detecting and positions to underlying cash positions deterring trading activity that may tend to cause must report on new Form 504 daily, by on a one-to-one basis; rather, it is sudden or unreasonable fluctuations or 9 a.m. Eastern Time on the next intended to provide a ‘‘snapshot’’ into unwarranted changes in the prices of the referenced business day, for each day that a person the firm’s cash market position in a contracts and their underlying commodities.’’ See is over the spot-month limit in certain December 2013 Position Limits Proposal, 78 FR at 75742. 935 CL–FIA–59595 at 38. 940 The Commission stated that the Form 204 who claims any exemption from federal speculative 936 CL–ASR–60933 at 4. ‘‘must show the trader’s positions in the cash position limits can demonstrate a legitimate 937 CL–Sen. Levin–59637 at 8. market and are used by the Commission to purpose for doing so.’’ See December 2013 Position 938 See supra discussion of the exclusion of determine whether a trader has sufficient cash Limits Proposal, 78 FR at 75741–2. certain source commodities, products, and positions that justify futures and option positions 941 The Commission’s Weekly Cotton On-Call byproducts of the cash commodity hedged when above the speculative limits’’ because the Report can be found here: http://www.cftc.gov/ reporting on Form 204. Commission is seeking to ‘‘ensure that any person MarketReports/CottonOnCall/index.htm.

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special commodity contracts specified In response to the first three The Commission notes that since the by the Commission. commenters, the Commission reiterates Commission is proposing to limit the The Commission proposed to require a key distinction between the Form 504 conditional spot month limit exemption reporting on new Form 504 for and the Form 204. Form 504 is required to natural gas markets, the Form 504 conditional spot-month limit of speculators that are relying upon the will only be required from participants exemptions in the natural gas conditional spot-month limit in natural gas markets who seek to avail commodity derivative contracts only. exemption. Form 204 is required for themselves of the conditional spot- Comments Received: One commenter hedgers that exceed position limits. To month limit exemption and any stated its belief that the information the extent a firm is hedging, there is no corresponding burden will apply to only required on Form 504 is redundant of requirement to file the Form 504. those participants. information required on Form 204 and In the unlikely event that a firm is iv. Pass-Through Swap Exemption would overly burden hedgers.942 The both hedging and relying upon the Reporting on Form 604—§ 19.01(a)(2) commenter suggested that, if the conditional spot-month limit Commission decides to retain the exemption, the firm would be required Proposed Rule: As proposed, conditional spot-month limit to file both forms at most one day a § 19.01(a)(2) would require a person exemption, and thereby Form 504, the month, given the timing of the spot- relying on the pass-through swap Commission should require only an month in natural gas markets (the only exemption who holds either of two affirmative representation from market market for which Form 504 will be position types to file a report with the 949 participants that they do not hold any required at first). In that event, however, Commission on new Form 604. The physical delivery Referenced the Commission believes that requiring first type of position, filed on Section A Contracts.943 similar information on both forms of Form 604, is a swap executed opposite a bona fide hedger that is not Another commenter stated that Form should encourage filing efficiencies a referenced contract and for which the 504 creates a burden for hedgers to track rather than duplicating the burden. For risk is offset with referenced contracts their cash business and affected example, both forms require the filer to (e.g., cross commodity hedging contracts and to create systems to file identify fixed price purchase positions). The second type of position, multiple forms. The commenter noted commitments; the Commission believes filed on Section B of Form 604, is a its belief that end-users/hedgers should it is not overly burdensome for the same cash-settled swap (whether or not the never be subjected to the daily filing of firm to report such similar information swap is, itself, a referenced contract) reports.944 Further, the commenter on the Form 204 and the Form 504, executed opposite a bona fide hedger suggested the Commission delete Form should a market participant ever be that is offset with physical-delivery 504 entirely, asserting that it will be required to file both forms. referenced contracts held into a spot- unnecessary if the Commission adopts The Commission is not adopting the month. the commenter’s separate cash settled commenters’ recommendations to delete These reports on Form 604 would limit idea (the commenter proposed a the Form 504 or to require only an explain hedgers’ needs for large higher cash settled limit with no affirmative representation that the referenced contract positions and would condition on the physical delivery condition of the conditional spot-month give the Commission the ability to verify market).945 Another commenter limit exemption has been met (i.e. that the positions were a bona fide hedge, suggested deleting the Form 504 the trader holds no position in physical with heightened daily surveillance of because it believes that no matter how delivery referenced contracts). The spot-month offsets. Persons holding any extensive the Commission makes Commission explained in the December type of pass-through swap position reporting requirements, the Commission 2013 Position Limits Proposal that its other than the two described above will still need to request additional primary motive in requiring the cash would report on Form 204.950 information on a case-by-case basis to market information required on Form Comments Received: The Commission ensure hedge transactions are 504 is the need to detect and deter 946 received three comments regarding legitimate. manipulative activities in the Form 604, all from the same commenter. A third commenter suggested that the underlying cash commodity that might These comments and the Commission’s Commission should modify the data be used to benefit a derivatives position 948 responses are detailed below. requirements for Form 504 in a manner (or vice-versa). Comment: One commenter similar to the approach used by ICE In response to the third commenter, recommended that the Commission Futures U.S. for natural gas contracts, the Commission does not believe that a remove the requirement in Form 604 to that is, requiring a description of a description of a cash market position is submit futures-equivalent derivative market participant’s cash-market sufficient to allow Commission staff to positions as of a specified date filed in administer its Surveillance program. 949 Under the definition of bona fide hedging advance of the spot-month.947 Descriptions are not as exact as reported position in Section 4a(c)(2) of the Act, a person who Commission Reproposal: The information, and the Commission uses a swap to reduce risks attendant to a position that qualifies as a bona fide hedging position may Commission has tentatively determined believes the information gathered in pass-through those bona fides to the counterparty, under § 19.03 to designate the Henry daily Form 504 reports would be more even if the person’s swap position is not in excess Hub Natural Gas referenced contracts complete—and thus more beneficial—in of a position limit. As such, positions in commodity for reporting of a conditional spot- determining compliance and detecting derivative contracts that reduce the risk of pass- through swaps would qualify as bona fide hedging month limit exemption under and deterring manipulation. positions. See supra discussion of the proposed § 19.00(a)(1)(i). definition of bona fide hedging position. 948 Specifically, the Commission stated that 950 Persons holding pass-through swap positions 942 CL–Working Group–59693 at 65–66. ‘‘[w]hile traders who avail themselves of this that are offset with referenced contracts outside the exemption could not directly influence particular spot month (whether such contracts are for physical 943 CL–Working Group–59693 at 65–66. settlement prices by trading in the physical-delivery delivery or are cash-settled) need not report on 944 CL–COPE–59662 at 24. referenced contract, the Commission remains Form 604 because swap positions that are 945 CL–COPE–59662 at 24. concerned about such traders’ activities in the referenced contracts will be netted with offsetting 946 CL–NGFA–60941 at 7–8. underlying cash commodity.’’ See December 2013 referenced contract positions outside the spot 947 CL–FIA–59595 at 37. Position Limits Proposal, 78 FR at 75744. month pursuant to proposed § 150.2(b).

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positions, claiming that the Commission that last into the spot-month would be report.956 Finally, proposed did not explain why it needs to obtain filed daily during the spot period, not as § 19.01(b)(3) would require series ‘04 data on a market participant’s futures- of the last Friday of the month.953 Pass- reports to be transmitted using the equivalent position as part of proposed through swap offset positions outside of format, coding structure, and electronic Form 604 in light of the commenter’s the spot-month are required to be filed data transmission procedures approved presumption that the Commission as of the last Friday of the month. The in writing by the Commission or its already has a market participant’s Commission expects that, in most cases, designee. future-equivalent position from large- the Form 604 would be filed outside of Comments Received: One commenter trader reporting rules and access to SDR the spot-month which means only stated its support for the proposed data.951 Section A would need to be filed. That monthly, rather than daily, filing of Commission Reproposal: In response filing is required as of the last Friday of Form 204.957 Another commenter to the commenter, the Commission the month, the same timeline that is recommended an annual Form 204 notes that futures-equivalent position required for the Form 204, for filing requirement, rather than a information is necessary to allow staff to convenience and ease of filing. monthly filing requirement. The match the offset futures position with Comment: Finally, the commenter commenter noted that because the the non-referenced-contract swap recommended that CFTC require a general size and nature of its business position underlying the hedge because market participant with a position in is relatively constant, the differences such positions are not subject to part 20 excess of a spot-month position limit to between each monthly report would be reporting. The Commission notes that report on Form 604 only the cash- insignificant. The commenter Form 604 is filed outside of the spot market activity related to that particular recommended the CFTC ‘‘not impose month only if the swap position being spot-month derivative position, and not additional costs of monthly reporting offset is not a referenced contract. Since to require it to report cash-market without a demonstration of significant only referenced contracts are activity related to non-spot-month additional regulatory benefits.’’ The automatically netted for purposes of positions where it did not exceed a non- commenter noted its futures position determining compliance with position spot-month position limit, since the typically exceeds the proposed position limits, the Commission would not have burden associated with such a reporting limits, but such positions are bona fide knowledge or reason to net a pass- obligation would increase hedging positions. In addition to through swap position with the significantly.954 futures, the commenter noted it participant’s futures positions without Commission Reproposal: The executes a small notional volume of 958 the filing of Form 604. During the spot Commission notes in response to the swaps as hedges of forward contracts. month, the Commission notes that, commenter that neither Sections A nor Similarly, another commenter while it has access to referenced B of Form 604 would require the filer suggested that if the Commission does not eliminate the forms in favor of the contract swap positions in part 20 data, to report cash market activity. requirements in the 2016 Supplemental the Commission would not know that a This commenter makes the same Position Limits Proposal the particular swap forms the basis for a remarks regarding Form 204, but the Commission should require only an pass-through swap offset exemption, Form 204 requires cash-market activity annual notice that details its maximum and so again would not have knowledge in a particular commodity whereas the cash market exposure that justifies an or reason to net a pass-through swap Form 604 requires information on a exemption, to be filed with the position with the participant’s futures particular swap market position. position. Without Section B of Form 604 exchange.959 The Commission is reproposing Form filed during the spot month, the One commenter suggested that the 604, as originally proposed. Commission may believe a firm is in reporting date for Form 204 should be violation of physical-delivery spot e. Time and Place of Filing Reports— the close of business on the day prior to month limits despite the firm being § 19.01(b) the beginning of the spot period and that it should be required to filed no eligible for a pass-through swap offset Proposed Rule: As proposed, exemption. The Commission is later than the 15th day of the month § 19.01(b)(1) would require all reports following a month in which a filer proposing to require the identification except those submitted in response to of a particular swap position and the exceeded a federal limit to allow the special calls or on Form 504, Form 604 market participant sufficient time to offsetting referenced contract position to during the spot-month, or Form 704 to alleviate concerns about the disruption collect and report its information.960 be filed monthly as of the close of With regards to proposed of the price discovery function of the business on the last Friday of the month underlying physical-delivery contract § 19.01(b)(2), one commenter and not later than 9 a.m. Eastern Time recommended CFTC change the during the spot month period. on the third business day following the Comment: The same commenter also proposed next-day reporting of Form last Friday of the month.955 For reports noted that the spot-month for certain 504 for the conditional spot-month limit submitted on Form 504 and Form 604 referenced contracts will no longer trade exemption and Form 604 for the pass- during the spot-month, proposed as of the last Friday of the month and through swap offsets during the spot- § 19.01(b)(2) would require filings to be so recommended that a market month, to a monthly basis, noting submitted as of the close of business for participant exceeding a spot-month each day the person exceeds the limit 956 position limit who no longer has that In proposed § 19.01(b)(2), the Commission during the spot period and not later inadvertently failed to include reports filed under spot-month position should not be than 9 a.m. Easter Time on the next § 19.00(a)(1)(ii)(B) (i.e. Form 604 during the spot required to report futures-equivalent month) in the same filing timeframe as reports filed business day following the date of the derivatives positions for referenced under § 19.00(a)(1)(i) (i.e. Form 504). The correct contract on Form 604.952 filing timeframe was described in multiple places 953 on the forms published in the Federal Register as Commission Reproposal: As See supra discussion regarding the time and place of filing series ’04 reports. part of the December 2013 Position Limits Proposal. proposed, pass-through swap offsets 954 CL–FIA–59595 at 38. 957 CL–Working Group–59693 at 65. 955 The timeframe for filing Form 704 is included 958 CL–DFA–59621 at 2. 951 CL–FIA–59595 at 37. as part of proposed § 150.7. See supra for 959 CL–FIA–60937 at 17. 952 CL–FIA–59595 at 37–38. discussion regarding the filing of Form 704. 960 CL–Working Group–60947 at 17–18.

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market participants need time to constant throughout a year, the same is Form 504 to be filed daily provides an generate and collect data and verify the not true for many other market important benefit that outweighs the accuracy of the reported data. The participants. The Commission believes potential burdens for filers commenter further stated that CFTC did that varying the filing arrangement As a practical matter, the Commission not explain why it needs the data on depending on a particular market or notes that the Form 604 is collected Form 504 or Form 604 on a next-day market participant is impractical and during the spot-month only under basis.961 would lead to increased burdens for particular circumstances, i.e. for an Another asserted that the daily filing market participants due to uncertainty offsetting position in physical delivery requirement (Form 504) for participants regarding when each firm, or each firm referenced contracts during the spot- who rely on the conditional spot-month by each commodity, is supposed to file. month. Because the ‘‘five-day rule’’ limit exemption ‘‘imposes significant The Commission is reproposing, as applies to such positions, the spot- burdens and substantial costs on market originally proposed, the provision in month filing of the Form 604 would participants.’’ The commenter urged a proposed § 19.01(b)(2) to require next- only occur in contracts whose spot- monthly rather than a daily filing of all day, daily filing of Forms 504 and 604 month period is longer than 5 days cash market positions, which the in the spot-month. In response to the (excluding, for example, energy commenter claimed is consistent with commenter, the Commission notes that contracts but including many current exchange practices.962 it described its rationale for requiring agricultural commodities).965 Commission Reproposal: The Forms 504 and 604 daily during the The Commission is reproposing Commission is reproposing spot-month in the December 2013 §§ 19.01(b)(1)–(2), as originally § 19.01(b)(1), as originally proposed, Position Limits Proposal.963 In order to proposed, with some minor with some minor clarifications to the detect and deter manipulation during clarifications to the language to make language to make the text easier to the spot-month, concurrent information the text easier to follow. The follow. As discussed above, the regarding the cash positions of a Commission inadvertently left out of Commission believes that Form 204 speculator holding a conditional spot- proposed § 19.01(b)(2) a reference to the provides a monthly ‘‘snapshot’’ of the month limit exemption (Form 504) or requirement to file Section B of Form cash market positions of traders whose the swap contract underlying a large 604 (pass-through swap offsets held into positions are in excess of spot-month or offsetting position in the physical the spot-month). No commenter non-spot-month speculative position delivery contract (Form 604) is appeared to be confused about this limits and for that reason it is necessary necessary during the spot-month. requirement, as the correct timeframe to provide its Surveillance program the Receiving Forms 504 or 604 before or was described in multiple places on the ability to detect and deter market after the spot-month period would not forms published in the Federal Register manipulation and protect the price help the Surveillance program to protect as part of the December 2013 Position discovery process. The Commission is the price discovery process of physical- Limits Proposal, but to avoid future retaining the last Friday of the month as delivery contracts and to ensure that confusion the Commission has modified the required reporting date in order to market participants have a qualifying the language—but not the substance—of avoid confusion and uncertainty, pass-through swap contract position § 19.01(b)(1)–(2) to clarify the time and particularly for those participants who underlying offsetting futures positions place for filing series ’04 reports. already file Form 204 and thus are held during the spot-month. Finally, the Commission is accustomed to that reporting date. The Commission notes that, as reproposing the electronic filing In response to the commenters’ reproposed, the Form 504 is required requirement, as originally proposed.966 suggestions that Form 204 be filed only for the Natural Gas commodity, Further instructions on submitting ’04 964 annually, the Commission notes that which has a 3-day spot period. Daily reports will be available at http:// throughout the course of a year, most reporting of the Form 504 during the www.cftc.gov/Forms/index.htm. commodities subject to federal position spot-month allows Surveillance to limits under proposed § 150.2 are monitor a market participant’s cash F. § 150.7—Reporting Requirements for subject to seasonality of prices as well market activity that could impact or Anticipatory Hedging Positions as less predictable imbalances in supply benefit their derivatives position. Given 1. Reporting Requirements for and demand such that an annual filing the short filing period for natural gas Anticipatory Hedging Positions and would not provide Surveillance insight and the importance of accurate New Form 704 into cash market trends underlying information during the spot-month, the changes in the derivative markets. This Commission believes that requiring the Proposed Rule: The Commission’s insight is necessary for Surveillance to revised definition of bona fide hedging determine whether price changes in 963 December 2013 Position Limits Proposal, 78 in § 150.1 enumerates two new types of derivative markets are caused by FR at 75744–5. The Commission noted that its anticipatory bona hedging positions. experience overseeing the ‘‘dramatic instances of Two existing types of anticipatory fundamental factors or manipulative disruptive trading practices in the natural gas behavior. Further, the Commission markets’’ warranted enhanced reporting for that hedges are being continued from the believes that an annual filing could commodity during the spot month on Form 504. existing definition of bona fide hedging actually be more burdensome for firms, The Commission noted its intent to wait until it in current § 1.3(z): Hedges of unfilled gained additional experience with limits in other anticipated requirements and hedges of as an annual filing could lead to special commodities before imposing enhanced reporting calls or requests between filings for requirements for those commodities. The additional information in order for the Commission further noted that it was concerned 965 It should be noted, however that an exchange, Commission’s Surveillance program to that a trader could hold an extraordinarily large using its discretion, could require the filing of Form position early in the spot month in the physical- 604, for example, in an energy contract, as part of fulfill its responsibility to detect and delivery contract along with an offsetting short the exchange’s recognition of a non-enumerated deter market manipulation. In addition, position in a cash-settled contract (such as a swap), bona fide hedging position under § 150.9, discussed the Commission notes that while one and that such a large position could disrupt the below. participant’s positions may remain price discovery function of the core referenced 966 The Commission notes that the electronic futures contract. filing requirement was proposed in § 19.01(b)(3) but 964 Reproposed § 150.3(c) provides a conditional due to other changes within that section it is now 961 CL–FIA–59595 at 35. spot-month limit exemption only for the natural gas located in § 19.01(b)(4). The substance of the 962 CL–ICE–59669 at 7. cash-settled referenced contracts. requirement has not changed.

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unsold anticipated production, as well person’s anticipated activity (i.e., anticipatory hedges in current § 1.48 as anticipatory cross-commodity hedges unfilled anticipated requirements, because that section would be of such requirements or production.967 unsold anticipated production, etc.).970 duplicative. The revised § 150.1 definition expands Under proposed § 150.7(b), the Comments Received: One commenter the list of enumerated anticipatory bona Commission may reject all or a portion asserted that the reporting requirements fide hedging positions to include hedges of the position as not meeting the for anticipatory hedges of an operational of anticipated royalties and hedges of requirements for bona fide hedging or commercial risk comprising an anticipated services contract payments positions under proposed § 150.1. To initial, supplementary and annual or receipts, as well as anticipatory cross- support this determination, proposed report are unduly burdensome. The commodity hedges of such contracts.968 § 150.7(c) would allow the Commission commenter recommended that the As discussed above, § 1.48 has long to request additional specific Commission require either an initial and required special reporting for hedges of information concerning the anticipated annual report or an initial and unfilled anticipated requirements and transaction to be hedged. Otherwise, supplementary report.971 hedges of unsold anticipated production Form 704 filings that conform to the Another commenter suggested because the Commission remains requirements set forth in § 150.7 would deleting the Form 704 because it concerned about distinguishing between become effective ten days after believes that no matter how extensive anticipatory reduction of risk and submission. As proposed, § 150.7(e) the Commission makes reporting speculation. Such concerns apply would require an anticipatory hedger to requirements, the Commission will still equally to any position undertaken to file a supplemental report on Form 704 need to request additional information reduce the risk of anticipated whenever the anticipatory hedging on a case-by-case basis to ensure hedge transactions. Hence, the Commission needs increase beyond that in its most transactions are legitimate.972 The proposed to extend the special reporting recent filing. commenter suggested that the requirements in proposed § 150.7 for all As proposed, § 150.7(f) would add a Commission should be able to achieve types of enumerated anticipatory hedges requirement for any person who files an its goal of obtaining enough information that appear in the definition of bona fide initial statement on Form 704 to provide to determine whether to request hedging positions in proposed § 150.1. annual updates that detail the person’s additional information using the Form The Commission proposed to add a actual cash market activities related to 204 along with currently collected data new series ’04 reporting form, Form 704, the anticipated exemption. With an eye sources and so the additional burden of to effectuate these additional and towards distinguishing bona fide the new series ’04 reports outweighs the updated reporting requirements for hedging of anticipatory risks from benefit to the Commission.973 anticipatory hedges. Persons wishing to speculation, annual reporting of actual Several commenters remarked on the avail themselves of an exemption for cash market activities and estimates of cost associated with the proposed Form any of the anticipatory hedging remaining unused anticipated 704. One commenter stated that the transactions enumerated in the updated exemptions beyond the past year would additional reporting requirements, definition of bona fide hedging in enable the Commission to verify including new Form 704 to replace the § 150.1 are required to file an initial whether the person’s anticipated cash reporting requirements under current statement on Form 704 with the market transactions closely track that rule 1.48, and annual and monthly Commission at least ten days in advance person’s real cash market activities. In reporting requirements under proposed of the date that such positions would be addition, § 150.7(g) would enable the rules 150.7(f) and 150.7(g) ‘‘will impose in excess of limits established in Commission to review and compare the significant additional regulatory and proposed § 150.2. Advance notice of a actual cash activities and the remaining compliance burdens on commercials trader’s intended maximum position in unused anticipated hedge transactions and believes that the Commission commodity derivative contracts to offset by requiring monthly reporting on Form should consider alternatives, including anticipatory risks allows the 204. Absent monthly filing, the targeted special calls when Commission to review a proposed Commission would need to issue a appropriate.’’ 974 Another commenter position before a trader exceeds the special call to determine why a person’s stated the reporting requirements for the position limits and, thereby, allows the commodity derivative contract position series 04 forms is overly burdensome Commission to prevent excessive is, for example, larger than the pro rata and would impose a substantial cost to speculation in the event that a trader balance of her annually reported market participants because while the were to misconstrue the purpose of anticipated production. proposal would require the Commission these limited exemptions.969 The As is the case under current § 1.48, to respond fairly quickly, it does not trader’s initial statement on Form 704 § 150.7(h) requires that a trader’s provide an indication of whether the provides a detailed description of the maximum sales and purchases must not Commission will deem the requirement exceed the lesser of the approved accepted if the Commission doesn’t 967 See current definition of bona fide hedging exemption amount or the trader’s respond within a time frame. The transactions at 17 CFR 1.3(z)(2)(i)(B) and (ii)(C), respectively. Cross-commodity hedges are current actual anticipated transaction. commenter is concerned that a market permitted under 17 CFR 1.3(z)(2)(iv). Compare with For purposes of simplicity, the special participant may have to refuse business paragraphs (3)(iii) and (4)(i), respectively, of the reporting requirements for anticipatory if it does not receive an approved definition of bona fide hedging positions in hedges are located within the exemption in advance of a proposed § 150.1, discussed above. Commission’s position limits regime in transaction.975 A third commenter 968 See sections (4)(iii), (4)(iv), and (5), respectively, of the definition of bona fide hedging part 150, and alongside the stated that Form 704 is ‘‘commercially positions in § 150.1, discussed above. Commission’s updated definition of impracticable and unduly burdensome’’ 969 Further, advance filing may serve to reduce bona fide hedging positions in § 150.1. because it would require filers to the burden on a person who exceeds position limits Thus, the Commission is proposing to and who may then otherwise be issued a special 971 CL–IECAssn–59679 at 11. call to determine whether the underlying delete the reporting requirements for 972 requirements for the exemption have been met. If CL–NGFA–60941 at 7–8. the Commission were to reject such an exemption, 970 Proposed 150.7(d)(2) would require additional 973 Id. such a person would have already violated position information for cross hedges, for reasons discussed 974 CL–APGA–59722 at 10. limits. above. 975 CL–EDF–59961 at 6.

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‘‘analyze each transaction to see if it fits contains a requirement for supplemental target special calls and other into an enumerated hedge category.’’ filings similar to proposed § 150.7(e), alternatives to the annual and monthly The commenter is concerned that such but unlike current § 1.48, the proposed filings, the Commission believes these ‘‘piecemeal review’’ would require a rules also require monthly reporting on filings are critical to the Commission’s legal memorandum and the Form 204 and annual updates to the Surveillance program. Anticipatory development of new software to track initial statement. After considering the hedges, because they are by definition positions and, since the Commission commenter’s concerns, the Commission forward-looking, require additional proposed that Form 704 to be used in believe the monthly reporting on Form detail regarding the firm’s commercial proposed § 150.11, the burden 204 and annual updates on Form 704 practices in order to ensure that a firm associated with the form has will provide sufficient updates to the is not using the provisions in proposed increased.976 initial statement and is deleting the § 150.7 to evade position limits. In One commenter highlighted supplemental filing provision in contrast, special calls are backward- discrepancies between the instructions proposed § 150.7(e) to reduce the looking and would not provide the for Form 704 and the data on the sample burden on filers as suggested by the Commission’s Surveillance program Form 704. The commenter noted that commenter. with the information needed to prevent instructions for column five request the In addition, the Commission is markets from being susceptible to ‘‘Cash commodity same as (S) or cross- combining the list of required excessive speculation. However, the hedged (C–H) with Core Reference information on Form 704 into one Commission expects the new filing Futures Contract (CFRC)’’ while the section, since such information is requirements to be an improvement over sample Form 704 lists ‘‘CL–NYMEX’’ as almost identical for the initial statement current practice under § 1.48 because as the information reported in that column. and the required annual updates. In this facts and circumstances change, The commenter also noted that Form Reproposal, two nearly identical lists of Surveillance will have a more timely 704 has eleven columns, while the information have been combined into understanding of the market sample Form 704 contains only ten one list in § 150.7(d). This participant’s hedging needs. columns, omitting a column for ‘‘Core reorganization is intended to make The Commission notes in response to Referenced Futures contract compliance with § 150.7, including the the commenter that Form 704 is filed in (CRFC).’’ 977 filing of Form 704, simpler and easier to anticipation of risk to be assumed at a The commenter also requested that understand for market participants. future date; market participants will the Commission clarify instructions for Changes have been made throughout need to provide a detailed description of column six of proposed Form 704 to part 19 and part 150 to conform to the anticipated activity but there is no permit a reasonable estimate of deletion of the required supplemental requirement to analyze individual anticipated production (or other filing and the reorganization of § 150.7. transactions or submit a memorandum. anticipatory hedge) based on In particular, the Commission altered The Commission also notes that commercial experience, in the event the § 19.01(a)(4) to reflect the deletion of the concerns regarding a firm having to market participant does not have three supplemental update and to clarify that decline business, because an exemption years of data related to the anticipated persons required to file series ’04 has not been approved, are hedge, for example, of anticipated reports under § 19.00(a)(1)(iv) must file unwarranted. Series ’04 reports (other production of a newly developed only Form 204 as required in § 150.7(e). than the initial statement of Form 704) well.978 Finally, the sample Form 704 found are self-effectuating and do not require Commission Reproposal: As in Appendix A to part 19 has also been Commission notification to become discussed in the December 2013 updated to reflect the combination of effective. With respect to Form 704, the Position Limits Proposal, the the initial statement and annual update Commission explained in the December into one section. Specifically, on Commission remains concerned about 2013 Position Limits Proposal that if the proposed Form 704 had two sections: distinguishing between anticipatory Commission does not notify a market Section A required information reduction of risk and speculation.979 participant within the timeframe regarding the initial statement and Therefore, the Commission is again indicated in § 150.7(b), the filing supplemental updates and Section B proposing the requirement to file Form becomes effective automatically.980 was required for annual updates. Due to 704 for anticipatory hedges. The The commenter is correct in noting the above-mentioned changes, Section B Commission notes that most of the that there is an error on the Sample has been deleted and Section A has information required on Form 704 is Form 704 such that column five (‘‘Core been re-labeled as requiring information currently required under § 1.48, and that Referenced Futures Contract (CRFC)’’) regarding both the initial statement and such information is not found in any was inadvertently omitted from the the annual update. In order to other Commission data source, Sample Form provided in the proposed differentiate between a firm’s initial including Form 204. rules. The Commission is amending the statement and its annual updates The Commission is proposing several Sample Form 704 in the reproposed changes to § 150.7 in order to make the regarding the same, the Commission has added a check-box field that requires rules to ensure it accurately reflects the requirements for Form 704 clearer and traders to identify whether they are requirements of the Form 704 as more concise. For example, the filing Form 704 to submit an initial described in § 150.7(d). Further, the Commission is adopting the statement or to file the required annual Commission is deleting the condition commenter’s suggestion to require the update. The Commission believes the that requires the specified operating initial statement and annual update but addition of this field poses no eliminate the supplemental filing as 980 See the December 2013 Position Limits significant additional burden; rather, the proposed in § 150.7(e). Current § 1.48 Proposal, 78 FR at 75746: ‘‘Under proposed Commission believes the changes to the § 150.7(b), the Commission may reject all or a form, as discussed above, reduce burden portion of the position as not meeting the 976 CL–EEI–EPSA–60925 at 9. to a far greater extent than a minor requirements for bona fide hedging positions under 977 CL–FIA–59595 at 39. § 150.1. . . . Otherwise, Form 704 filings that 978 CL–FIA–59595 at 39. addition of a check box adds burden. conform to the requirements set forth in proposed 979 See December 2013 Position Limits Proposal, In response to the commenter who § 150.7 would become effective ten days after 78 FR at 75746. suggested the Commission consider submission.’’

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period may not exceed one year for certain bona fide hedging positions and specifically, CEA sections 5 and 5h.983 agricultural commodities, as end-users to grant certain spread exemptions, with In addition, the Commission pointed in certain agricultural commodities may regard to both exchange-set and federal out that as self-regulatory organizations, hedge their positions several years out position limits.981 The Commission exchanges do not act only as along the curve. pointed out that in each case, the independent, private actors; 984 when The Commission notes, in response to proposed rules would establish a formal the Act is read as a whole, as the the commenter’s concern regarding CFTC review process that would permit Commission noted in 1981, ‘‘it is column 6 of Form 704, that the the Commission to revoke all such apparent that Congress envisioned requirement to file the past three years exchange actions. cooperative efforts between the self- regulatory organizations and the of annual production is also in current As the Commission observed at that Commission. Thus, the exchanges, as § 1.48. Understanding the recent history time, its authority to permit certain well as the Commission, have a of a firm’s production is necessary to exchanges to recognize positions as continuing responsibility in this matter ensure the requested anticipated bona fide hedging positions is found, in hedging amount is reasonable. However, under the Act.’’ 985 The Commission part, in CEA section 4a(c)(1), and under the Commission notes that it may CEA section 8a(5), which provides that permit a reasonable, supported estimate 983 Id. at 38465. The Commission noted that CFTC the Commission may make such rules of anticipated production for less than § 1.3(ee) defines SRO to mean a DCM, SEF, or as, in the judgment of the Commission, registered futures association (such as the National three years of annual production data, are reasonably necessary to effectuate Futures Association), and also pointed out that in the Commission’s discretion, if a under the Commission’s regulations, self-regulatory any of the provisions or to accomplish market participant does not have three organizations have certain delineated regulatory any of the purposes of the CEA. CEA responsibilities, which are carried out under years of data. The Commission is section 4a(c)(1) provides that no CFTC Commission oversight and which are subject to amending the form instructions to rule applies to ‘‘transaction or positions Commission review. Id. clarify that Commission staff could 984 Id. The Commission stated that it ‘‘views as which are shown to be bona fide determine that such an estimate is instructive’’ three examples of case law addressing hedging transactions or positions,’’ as grants of authority by an agency (the Securities and reasonable and so would be accepted. those terms are defined by Commission Exchange Commission, the ‘SEC’) to a self- Finally, the Commission notes that rule consistent with the purposes of the regulatory organization (‘SRO’) (in the SEC cases several references to other provisions the SRO was NASD, now FINRA), providing insight CEA.982 The Commission noted that within part 150 contained in into the factors addressed by the court regarding ‘‘shown to be’’ is passive voice, which oversight of an SRO; §§ 150.7(b), 150.7(d), and 150.7(h) were could encompass either a position (i) In 1952, the Second Circuit reviewed an SEC incorrectly cited in the December 2013 holder or an exchange being able to order that failed to set aside a penalty fixed by Position Limits Proposal; the NASD suspending the defendant broker-dealer from ‘‘show’’ that a position is entitled to Commission is revising these membership. Citing Sunshine Anthracite Coal Co. treatment as a bona fide hedging v. Adkins, 310 U.S. 381 (1940), the Second Circuit paragraphs to ensure all references are position, and does not specify that the found that, in light of the statutory provisions up-to-date and correct. vesting the SEC with power to approve or Commission must determine in advance disapprove NASD’s rules according to reasonably 2. Delegation whether the position or transaction was fixed statutory standards, and the fact that NASD shown to be bona fide. The Commission disciplinary actions are subject to SEC review, there Proposed Rule: In § 150.7(i), the was ‘no merit in the contention that the Maloney Commission proposed to delegate to the interpreted CEA section 4a(c)(1) to Act unconstitutionally delegates power to the Division of Market Oversight director or authorize the Commission to permit NASD.’ R.H. Johnson v. Securities and Exchange staff the authority: To provide notice to certain SROs (i.e., DCMs and SEFs, Commission, 198 F. 2d 690, 695 (2d Cir. 1952). a firm who has filed Form 704 that they meeting certain criteria) to recognize (ii) In 1977, the Third Circuit, in Todd & Co. v. positions as bona fide hedging positions Securities and Exchange Commission (‘Todd’), 557 do not meet the requirements for bona F.2d 1008 (3rd Cir. 1977), likewise concluded that fide hedging; to request additional or for purposes of federal limits, subject to the Act did not unconstitutionally delegate updated information under § 150.7(c); Commission review. legislative power to a private institution. The Todd court articulated critical factors that kept the and to request under § 150.7(d)(2) The Commission observed that for Maloney Act within constitutional bounds. First, information concerning the basis for and decades, exchanges have operated as the SEC had the power, according to reasonably derivation of conversion factors used in self-regulatory organizations, and fixed statutory standards, to approve or disapprove computing the position information pointed out further that these self- NASD’s rules before they could go into effect. Second, all NASD judgments of rule violations or provided in Form 704. regulatory organizations have been penalty assessments were subject to SEC review. Comments Received: The Commission charged with carrying out regulatory Third, all NASD adjudications were subject to a de received no comments on the proposed functions, including, since 2001, novo (non-deferential) standard of review by the SEC, which could be aided by additional evidence, delegation of authority under § 150.7. complying with core principles, and if necessary. Id. at 1012. Based on these factors, the Commission Reproposal: The operate subject to the regulatory court found that ‘[NASD’s] rules and its Commission is reproposing § 150.7(i), as oversight of the Commission pursuant to disciplinary actions were subject to full review by originally proposed. the CEA as a whole, and more the SEC, a wholly public body, which must base its decision on its own findings’ and thus that the G. § 150.9—Process for Recognition of statutory scheme was constitutional. Id. at 1012–13. 981 Positions as Non-Enumerated Bona Fide See generally 2016 Supplemental Position See also First Jersey Securities v. Bergen, 605 F.2d Limits Proposal, 81 FR at 38464–82; the 690 (1979), applying the same three-part test Hedging Positions Commission incorporates herein its explanation of delineated in Todd, and then upholding a statutory its proposed adoption of §§ 150.9, 150.10 and narrowing of the Todd test. 1. Overview of Proposed Rules Related 150.11. Under the proposal, exchanges would be (iii) In 1982, the Ninth Circuit considered the to Recognition of Bona Fide Hedging able to: (i) Recognize certain non-enumerated bona constitutionality of Congress’ delegation to NASD Positions and Granting of Spread fide hedging positions, i.e., positions that are not in Sorrel v. Securities and Exchange Commission, Exemptions enumerated by the Commission’s rules (pursuant to 679 F. 2d 1323 (9th Cir. 1982). Sorrel followed R.H. proposed § 150.9); (ii) grant exemptions to position Johnson, Todd and First Jersey in holding that In the 2016 Supplemental Position limits for certain spread positions (pursuant to because the SEC reviews NASD rules according to Limits Proposal, the Commission noted proposed § 150.10); and (iii) recognize certain reasonably fixed standards, and the SEC can review enumerated anticipatory bona fide hedging any NASD disciplinary action, the Maloney Act that it was proposing three sets of positions (pursuant to proposed § 150.11). does not impermissibly delegate power to NASD.’’ Commission rules under which an 982 2016 Supplemental Position Limits Proposal, 985 2016 Supplemental Position Limits Proposal, exchange could take action to recognize 81 FR at 38464. 81 FR at 38465.

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noted that its approach to its oversight disposition of such application by an Commission notified the market of its SROs was subsequently ratified by exchange. participant to the contrary.991 The Commission could issue such a Congress in 1982, when it gave the 2. Proposed § 150.9—General CFTC authority to enforce exchange set notification in accordance with the limits. Further, the Commission Proposed Rule: In light of DCM proposed review procedures. That is, if observed that as it stated in 2010, ‘‘since experience in granting non-enumerated a party were to hold positions pursuant 1982, the Act’s framework explicitly bona fide hedging position exemptions to a non-enumerated bona fide hedging anticipates the concurrent application of to exchange-set position limits for position recognition granted by the Commission and exchange-set futures contracts, and after exchange, such positions would not be speculative position limits. The consideration of comments subject to federal position limits, unless Commission further noted that the recommending exchange review of non- or until the Commission were to ‘concurrent application of limits is enumerated bona fide hedging position determine that such non-enumerated particularly consistent with an requests, the Commission proposed to bona fide hedging position recognition exchange’s close knowledge of trading permit exchanges to recognize non- was inconsistent with the CEA or CFTC activity on that facility and the enumerated bona fide hedging positions regulations thereunder. Under this with respect to the proposed federal Commission’s greater capacity for framework, the Commission would speculative position limits. Under monitoring trading and implementing continue to exercise its authority in this proposed § 150.9, an exchange, as an remedial measures across regard by reviewing an exchange’s SRO 988 that is under Commission interconnected commodity futures and determination and verifying whether the oversight and whose rules are subject to option markets.’ ’’ 986 facts and circumstances in respect of a Commission review,989 could establish derivative position satisfy the The Commission also noted that rules under which the exchange could requirements of the general definition of under its proposal, it would retain the recognize as non-enumerated bona fide bona fide hedging position proposed in power to approve or disapprove the hedging positions, positions that meet § 150.1.992 If the Commission rules of exchanges, under standards set the general definition of bona fide determined that the exchange-granted out pursuant to the CEA, and to review hedging position in proposed § 150.1, recognition was inconsistent with an exchange’s compliance with those which implements the statutory section 4a(c) of the Act and the rules.987 Moreover, the Commission directive in CEA section 4a(c) for the Commission’s general definition of bona observed that it was not diluting its general definition of bona fide hedging fide hedging position in § 150.1 and so ability to recognize or not recognize positions in physical commodities.990 notified a market participant relying on bona fide hedging positions or to grant The exchange’s recognition would be such recognition, the market participant or not grant spread exemptions, as it subject to review by the Commission. would be required to reduce the reserved to itself the ability to review Exchange recognition of a position as a derivative position or otherwise come any exchange action, and to review any non-enumerated bona fide hedging into compliance with position limits application by a market participant to position would allow the market within a commercially reasonable an exchange, whether prior to or after participant to exceed the federal amount of time. position limit to the extent that it relied The Commission noted its belief that 986 Id. at 38466. upon the exchange’s recognition unless permitting exchanges to so recognize 987 The Commission stated that ‘‘In connection and until such time that the non-enumerated bona fide hedging with recognition of bona fide hedging positions, the positions is consistent with its statutory Commission notes that the statute is silent or 988 As noted above, under the Commission’s ambiguous with respect to the specific issue— regulations, SROs have certain delineated 991 whether the CFTC may authorize SROs to recognize regulatory responsibilities, which are carried out See generally the discussion of proposed positions as bona fide hedging positions. CEA under Commission oversight and which are subject § 150.9(d) and the requirements regarding the section 4a(c) provides that no Commission rule to Commission review. See also 2016 Position review of applications by the Commission in the establishing federal position limits applies to Limits Supplemental Proposal, n. 126 (describing 2016 Position Limits Supplemental Proposal. The positions which are shown to be bona fide hedging reviews of DCMs carried out by the Commission). Commission noted that exchange participation is positions, as such term shall be defined by the 989 See CEA section 5c(c), 7 U.S.C. 7a–2(a) voluntary, not mandatory and that exchanges could CFTC. As noted above, the ‘shown to be’ phrase is (providing Commission with authority to review elect not to administer the process. Market passive voice, which could encompass either a rules and rule amendments of registered entities, participants could still request a staff interpretive position holder or an exchange being able to including DCMs). letter under § 140.99 or seek exemptive relief under ‘‘show’’ that a position is entitled to treatment as 990 As previously noted, Congress has required in CEA section 4a(a)(7), per the December 2013 a bona fide hedge, and does not specify that the CEA section 4a(c) that the Commission, within Position Limits Proposal. The process does not Commission must be the party determining in specific parameters, define what constitutes a bona protect exchanges or applicants from charges of advance whether the position or transaction was fide hedging position for the purpose of violations of applicable sections of the CEA or other shown to be bona fide; the Commission interprets implementing federal position limits on physical Commission regulations. For instance, a market that provision to permit certain SROs (i.e., DCMs commodity derivatives, including, as previously participant’s compliance with position limits or an and SEFs, meeting certain criteria) to recognize stated, the inclusion in new section 4a(c)(2) of a exemption thereto would not confer any type of safe positions as bona fide hedges for purposes of directive to narrow the bona fide hedging definition harbor or good faith defense to a claim that he had federal limits when done so within a regime where for physical commodity positions from that engaged in an attempted manipulation, a perfected the Commission can review and modify or overturn currently in Commission regulation § 1.3(z). See manipulation or deceptive conduct; see the such determinations. Under the 2016 Position 2016 Supplemental Position Limits Proposal, nn. 32 discussion of § 150.6 (Ongoing application of the Limits Supplemental Proposal, an SRO’s and 105 and accompanying text; see also December Act and Commission regulations) as proposed in recognition is tentative, because the Commission 2013 Positions Limits Proposal at 75705. In the December 2013 Position Limits Proposal, 78 FR would reserve the power to review the recognition, response to that mandate, the Commission at 75746–7. subject to the reasonably fixed statutory standards proposed in its December 2013 Position Limits 992 See the general discussion of the in CEA section 4a(c)(2) (directing the CFTC to Proposal to add a definition of bona fide hedging Commission’s review process proposed in define the term bona fide hedging position). An position in § 150.1, to replace the definition in § 150.9(d); see also the requirement for a weekly SRO’s recognition would also be constrained by the current § 1.3(z). See 78 FR at 75706, 75823. report, proposed in § 150.9(c), which would support SRO’s rules, which would be subject to CFTC For the avoidance of doubt, the Commission is the Commission’s surveillance program by review under the proposal. The SROs are parties still reviewing comments received on these facilitating the tracking of non-enumerated bona that are subject to Commission authority, their rules provisions. The Commission is proposing to finalize fide hedging positions recognized by exchanges, are subject to Commission review and their actions the general definition of bona fide hedging position keeping the Commission informed of the manner in are subject to Commission de novo review under based on the standards of CEA section 4a(c), and which an exchange is administering its procedures the proposal—SRO rules and actions may be may further define the bona fide hedging position for recognizing such non-enumerated bona fide changed by the Commission at any time.’’ Id. definition consistent with those standards. hedging positions.

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obligation to set and enforce position would be efficient and in the best fide hedging position would be able to limits on physical commodity contracts, interest of the markets, in light of file one application for relief, only to an because the Commission would be current resource constraints,996 to rely exchange, rather than to both an retaining its authority to determine on the exchanges to initially process exchange with respect to exchange-set ultimately whether any non-enumerated applications for recognition of positions limits and to the Commission with bona fide hedging positions so as non-enumerated bona fide hedging respect to federal limits.997 recognized is in fact a bona fide hedging positions. In addition, because many Comments Received position. The Commission’s authority to market participants are familiar with set position limits does not extend to current DCM practices regarding bona Exchange Authority Under the Proposal any position that is shown to be a bona fide hedging positions, permitting DCMs The Commission received some fide hedging position.993 Further, most, to build on current practice may reduce comments on its 2016 Supplemental if not all, DCMs already have a the burden on market participants. Position Limits Proposal that addressed framework and application process to Moreover, the Commission believed that concerns only marginally responsive to recognize non-enumerated positions, for the process outlined in the 2016 that proposal; the Commission will purposes of exchange-set limits, as Position Limits Supplemental Proposal address those comments in connection within the meaning of the general bona should reduce duplicative efforts with the relevant provisions.998 fide hedging definition in § 1.3(z)(1).994 because market participants seeking Several commenters supported the The Commission has a long history of recognition of a non-enumerated bona Commission’s proposal to allow overseeing the performance of the DCMs exchanges to recognize non-enumerated in granting exemptions under current and the New York Mercantile Exchange (May 19, bona fide hedge positions with respect exchange rules regarding exchange-set 2008). While DMO may sometimes identify to federal speculative position limits; 999 995 deficiencies or make recommendations for position limits and believed that it improvements, it is the Commission’s view that it on the other hand, some commenters should be permissible for DCMs to process expressed views against any 993 CEA section 4a(c)(1), 7 U.S.C. 6a(c)(1). See applications for exchange recognition of positions Commission involvement in the also 2016 Position Limits Supplemental Proposal, as non-enumerated bona fide hedging positions. exchange-administered exemption n. 65. Consistent with the fifteen SEF core principles 994 Rulebooks for some DCMs can be found in the established in section 5h(f) of the CEA, 7 U.S.C. 7b– process. That is, according to those links to their associated documents on the 3(f), and with the implementing regulations under commenters, exchanges should be given Commission’s Web site at http://sirt.cftc.gov/SIRT/ part 37, 17 CFR part 37, the Commission will full discretion or greater leeway to SIRT.aspx?Topic=TradingOrganizations. perform similar RERs for SEFs. The Commission’s manage an exemption process without 995 preliminary view is that it should be permissible for The Commission based this view on its long 1000 experience overseeing DCMs and their compliance SEFs to process applications as well, after obtaining Commission interference. In with the requirements of CEA section 5 and part 38 the requisite experience administering exchange-set addition, a commenter requested that of the Commission’s regulations, 17 CFR part 38. As position limits discussed below. See 2016 the Commission provide additional the Commission noted in the 2016 Supplemental Supplemental Position Limits Proposal, 81 FR at regulatory certainty for end-users, Position Limits Proposal, under part 38, a DCM 38469, n. 126 and accompanying text. must comply, on an initial and ongoing basis, with 996 Since the enactment of the Dodd-Frank Act, including that the Commission should twenty-three Core Principles established in section Commissioners, CFTC staff, and public officials simply expand the DCM’s current 5(d) of the CEA, 7 U.S.C. 7(d), and part 38 of the have expressed repeatedly and publicly that authority to grant bona fide hedge CFTC’s regulations and with the implementing Commission resources have not kept pace with the exemptions and maintain the regulations under part 38. The Division of Market CFTC’s expanded jurisdiction and increased Oversight’s Market Compliance Section conducts responsibilities. The Commission anticipates there Commission’s current oversight role in regular reviews of each DCM’s ongoing compliance may be hundreds of applications for non- respect of DCM processes and rules with core principles through the self-regulatory enumerated bona fide hedging positions. This is under the DCM Core Principles.1001 programs operated by the exchange in order to based on the number of exemptions currently Similarly, some commenters enforce its rules, prevent market manipulation and processed by DCMs. For example, under the expressed the view that there could be customer and market abuses, and ensure the existing process, during the period from June 15, recording and safe storage of trade information. 2011 to June 15, 2012, the Market Surveillance circumstances where multiple These reviews are known as rule enforcement Department of ICE Futures U.S. received 142 reviews (‘‘RERs’’). Some periodic RERs examine a exemption applications, 121 of which related to 997 One commenter specifically requested that the DCM’s market surveillance program for compliance bona fide hedging position requests, while 21 Commission streamline duplicative processes. CL– with Core Principle 4, Monitoring of Trading, and related to arbitrage or cash-and-carry requests; 92 AGA–60382 at 12 (stating that ‘‘AGA . . . urges the Core Principle 5, Position Limitations or new exemptions were granted. Rule Enforcement Commission to ensure that hedge exemption Accountability. On some occasions, these two types review of ICE Futures U.S., July 22, 2014, p. 40. requests and any hedge reporting do not require of RERs may be combined in a single RER. Market Also under the existing process, during the period duplicative filings at both the exchanges and the Compliance can also conduct horizontal RERs of from November 1, 2010 to October 31, 2011, the Commission, and therefore recommends revising the compliance of multiple exchanges in regard to Market Surveillance Group from the CME Market the rules to streamline the process by providing that particular core principles. In conducting an RER, Regulation Department took action on and an applicant need only apply to and report to the the Division of Market Oversight (DMO) staff approved 420 exemption applications for products exchanges, while the Commission could receive any examines trading and compliance activities at the traded on CME and CBOT, including 114 new necessary data and applications by coordinating exchange in question over an extended time period exemptive applications, 295 applications for data flow between the exchanges and the selected by DMO, typically the twelve months renewal, 10 applications for increased levels, and Commission.’’). See also CL–Working Group–60396 one temporary exemption on an inter-commodity immediately preceding the start of the review. Staff (explaining that ‘‘To avoid employing duplicative spread. Rule Enforcement Review of the Chicago conducts extensive review of documents and efforts, the Commission should simply rely on Mercantile Exchange and the Chicago Board of systems used by the exchange in carrying out its DCMs to administer bona fide hedge exemptions Trade, July 26, 2013, p. 54. These statistics are now self-regulatory responsibilities; interviews from federal speculative position limits as they a few years old, and it is possible that the number compliance officials and staff of the exchange; and carry out their core duties to ensure orderly of applications under the processes outlined in this prepares a detailed written report of findings. In markets.’’). nearly all cases, the RER report is made available proposal will increase relative to the number of 998 One commenter expressed the view that Class to the public and posted on CFTC.gov. See applications described in the RERs. The CFTC III milk should not be subject to the prohibition on materials regarding RERs of DCMs at http:// would need to shift substantial resources, to the holding cross commodity hedge positions in the www.cftc.gov/IndustryOversight/ detriment of other oversight activities, to process so spot month or during the last five days, because it TradingOrganizations/DCMs/dcmruleenf on the many requests and applications and has is a cash settled contract. CL–DFA–60927 at 5. The Commission’s Web site. Recent RERs conducted by determined, as described below, to permit DMO covering DCM Core Principle 5 and exchanges to process applications initially. The Commission is addressing Class III milk separately. 999 exemptions from position limits have included the Commission anticipates it will regularly, as CL–NMPF–60956 at 2; CL–ISDA–60931 at 6– Minneapolis Grain Exchange, Inc. (‘‘MGEX’’) (June practicable, check a sample of the exemptions 7; CL–API–60939 at 4; CL–NFP–60942 at 6–8; and 5, 2015), ICE Futures U.S. (July 22, 2014), the granted, including in cases where the facts warrant CL–IECAssn–60949 at 3–4. Chicago Mercantile Exchange (‘‘CME’’) and the special attention, retrospectively as described 1000 CL–CME–60926 at 7; CL–NGFA–60941 at 3. Chicago Board of Trade (‘‘CBOT’’) (July 26, 2013), below, including through RERs. 1001 CL–NFP–60942 at 6–8.

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commercial firms face similar risks and strategies will exacerbate price volatility make a de novo review.1008 Instead, as require recognition of positions as non- to the detriment of commercial hedgers observed above, the Commission enumerated bona fide hedges for the by increasing momentum or rumor believes it has the authority to provide same purpose, and there should be a trading and the costs of hedging in such exchanges with the ability to do so method for a generic recognition of non- a price volatile environment. The pursuant to reasonably fixed statutory enumerated bona fide hedge positions commenter believes that this will standards and subject to CFTC de novo for commercial firms meeting satisfy impact the Commission’s ability to review.1009 specified facts and circumstances, review and oversee exchange Similarly, regarding requests to allowing an exchange to announce exemptions, especially if the provide exchanges with a method for a generic recognition of non-enumerated Commission does not have access to generic recognition of a non-enumerated bona fide hedges for hedgers that satisfy open interest swap data and the intra- bona fide hedging position that allows certain facts and circumstances; to allow day high frequency trading data to an exchange to announce generic exchange to announce generic determine whether such exchange- recognition of non-enumerated bona recognition for hedgers that certain granted exemption is economically fide hedging positions for hedgers that specified facts.1002 appropriate.1006 satisfy certain facts and circumstances, Others did not support providing the Commission notes that, as discussed exchanges with such authority. Instead, Implementation Timeline above, it would be an illegal delegation those commenters asserted that only the of Commission authority to give full Commission can appropriately and Regarding implementation of final discretion to exchanges to recognize comprehensively administer regulations, one commenter requested positions or transactions as enumerated exemptions to federal limits,1003 or cited that the CFTC provide a sufficient bona fide hedging positions without concerns with respect to conflicts of phase-in period for exchanges to review reasonably fixed statutory standards, interest that could arise between for- non-enumerated hedges ahead of and without review by the Commission, profit exchanges and their exemption- implementation because it is hard to for purposes of federal position limits. seeking customers.1004 In the discern the number of current positions Instead, the Commission points out that alternative, several of these commenters that will not be considered bona fide any exchange can petition the recommended that the Commission hedging positions in the proposed rule Commission under § 13.2 for make any final non-enumerated bona unless granted a non-enumerated bona recognition of a typical position as an fide hedging position determinations, or fide hedging position e exemption from enumerated bona fide hedging position that exchanges have a limited advisory an exchange.1007 if the exchange believes there is a fact role with respect to granting pattern that is so certain as to not Commission Reproposal Regarding exemptions. One commenter expressed require a facts and circumstances § 150.9 the view that it is concerned that the review. Commission’s constrained resources As explained further below, in this In this light, the Commission is will prevent the Commission from Reproposal, the Commission is adopting reproposing a consistent approach, effectively overseeing self-regulatory certain amendments to the proposed subject to amendments described below, organizations’ recognition of bona fide § 150.9 and providing certain for processing recognitions of bona fide hedging position exemptions. The clarifications. In response to various hedging positions for purposes of commenter suggested that the general comments and federal position limits (i.e., a standard Commission at least provide guidance recommendations for the non- process that the Commission, exchanges regarding what is the Commission’s enumerated bona fide hedging position and market participants know and authority in the event that an exchange- process, the Commission provides the understand). As was noted in the 2016 Position Limits Proposal, the managed position accountability level following responses. fails in numerous contracts to prevent Commission believes that the consistent speculation, or raises other Exchange Authority Under Reproposed approach under reproposed § 150.9 concerns.1005 Further to this point, the § 150.9 should increase administrative certainty commenter expressed the view that it for applicants seeking recognition of was concerned that granting exemptions In response to comments that the non-enumerated bona fide hedging from position limits for swaps that are Commission should give exchanges positions in the form of reduced traded by high frequency trading greater leeway or discretion for application-production time by market purposes of federal position limits in participants and reduced response time 1002 CL–EEI–EPSA–60925 at 9 (noting also that the exemption process and expand by exchanges and reduce duplicative ‘‘unlike a hedge exemption, the exchanges are not DCM’s current authority to grant bona efforts because applicants would be granting a firm specific quantity of bona fide fide hedge exemptions, the Commission hedging contracts but, rather, are validating the saved the expense of applying to both bona fide nature of a hedge transaction’’); CL– believes, as noted above, that it would an exchange for relief from exchange-set COPE–60932 at 8–9 (recommending that ‘‘[t]he be an illegal delegation to give full Supplemental NOPR should be revised to permit discretion to exchanges to recognize 1008 See supra section G.1. (discussing the the DCM to generically recognize a non-enumerated positions or transactions as bona fide Commission’s authority to adopt § 150.9); see also bona fide hedge in cases where multiple hedging positions, for purposes of discussion regarding adoption of § 150.9(d). commercial firms have sought a non-enumerated 1009 As observed above, the Second Circuit found bona fide hedge for a similar risk, based upon federal position limits, without in Sunshine Anthracite Coal Co. v. Adkins, that in similar circumstances.’’). reasonably fixed statutory standards light of statutory provisions vesting the SEC with 1003 CL–Better Markets–60928 at 3–5; CL–Public (such as the requirement that exchanges power to approve or disapprove NASD’s rules Citizen–60940 at 3; CL–PMAA–NEFI–60952 at 2; use the Commission’s bona fide hedging according to reasonably fixed statutory standards, CL–AFR–60953 at 2–3; CL–RER1–60961 at 1. and the fact that NASD disciplinary actions are 1004 CL–Public Citizen–60940 at 3; CL–PMAA– position definition, which incorporates subject to SEC review, there was ‘‘no merit in the NEFI–60952 at 2; CL–RER2–60962 at 1; CL–AFR– the standards of CEA section 4a(c)), and contention that the Maloney Act unconstitutionally 60953 at 2–3; CL–RER1–60961 at 1; CL–PMAA– with no ability for the Commission to delegates power to the NASD.’’ R.H. Johnson v. NEFI–60952 at 2; CL–RER2–60962 at 1; CL–Better Securities and Exchange Commission, 198 F. 2d Markets–60928 at 3–5; CL–Public Citizen–60940 at 690, 695 (2d Cir. 1952). See supra discussion under 1–2; CL–AFR–60953 at 3–4. 1006 CL–IATP–60951 at 6. preamble section G.1; see also preamble discussion 1005 CL–IATP–60951 at 2. 1007 CL–NCFC–60930 at 5. regarding the adoption of § 150.9(d).

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position limits and to the Commission 3. Proposed § 150.9(a)—Requirements Proposed § 150.9(a)(1) provided that for relief from federal limits.1010 for a Designated Contract Market or exchange rules must incorporate the The Commission, however, clarifies Swap Execution Facility To Recognize general definition of bona fide hedging that exchanges can recognize strategies Non-Enumerated Bona Fide Hedging position in § 150.1. It also provided that, as non-enumerated bona fide hedging Positions with respect to a commodity derivative positions for purposes of federal a. Proposed § 150.9(a)(1) position for which an exchange elects to position limits (including those that the process non-enumerated bona fide Proposed Rule Commission has not enumerated) so hedging position applications, (i) the long as a facts-and-circumstances The Commission contemplated in position must be in a commodity review leads the exchange to believe proposed § 150.9(a)(1) that exchanges derivative contract that is a referenced that such strategies meet the definition may voluntarily elect to process non- contract; (ii) the exchange must list such of bona fide hedging position. Further, enumerated bona fide hedging position commodity derivative contract for regarding comments that exchanges applications by filing new rules or rule trading; (iii) such commodity derivative should not have authority to grant amendments with the Commission contract must be actively traded on such exemptions, the Commission disagrees pursuant to part 40 of the Commission’s exchange; (iv) such exchange must have and believes the exchange’s experience regulations. The Commission administering position limits to its established position limits for such anticipated that, consistent with current commodity derivative contract; and (v) actively traded contract, and the practice, most exchanges will self- such exchange must have at least one Commission’s de novo review of certify such new rules or rule year of experience administering exchange determinations that positions amendments pursuant to § 40.6. The are bona fide hedging positions Commission expected that the self- exchange-set position limits for such (afterwards) are adequate to guard certification process should be a low commodity derivative contract. The against or remedy any conflicts of burden for exchanges, especially for requirement for one year of experience interest. The Commission points out those that already recognize non- was intended as a proxy for a minimum that it has had a long history of enumerated positions meeting the level of expertise gained in monitoring cooperative enforcement of position general definition of bona fide hedging futures or swaps trading in a particular limits with DCMs and, in addition notes position in § 1.3(z)(1).1013 The physical commodity. that when recognizing non-enumerated Commission explained its view that The Commission believed that the bona fide hedging positions for allowing DCMs to continue to follow exchange non-enumerated bona fide purposes of federal limits, exchanges are current practice, and extend that hedging position process should be required to use the Commission’s bona practice to exchange recognition of non- limited only to those exchanges that fide hedging position definition.1011 enumerated bona fide hedging positions have at least one year of experience As to the concerns that allowing bona for purposes of the federal position overseeing exchange-set position limits fide hedging position determinations for limits, would permit the Commission to swap positions that are traded by high in an actively traded referenced contract more effectively allocate its limited in a particular commodity because an frequency trading strategies will resources to oversight of the exchanges’ individual exchange may not be familiar exacerbate price volatility to the actions.1014 detriment of commercial hedgers and enough with the specific needs and impact the Commission’s ability to 1013 DCMs currently process applications for differing practices of the commercial review and oversee exchange exemptions from exchange-set position limits for participants in those markets for which determinations (especially if the non-enumerated bona fide hedging positions and the exchange does not list any actively enumerated anticipatory bona fide hedges, as well traded referenced contract in a Commission does not have access to as for exemptions from exchange-set position limits open interest swap data and the intra- for spread positions, pursuant to CFMA-era particular commodity. Thus, if a day high frequency trading data to regulatory guidance. See 2016 Supplemental referenced contract is not actively determine whether such exchange- Position Limits Proposal, n. 102, and accompanying traded on an exchange that elects to text. This practice continues because, among other granted determination is economically things, the Commission has not finalized the rules process non-enumerated bona fide appropriate), the Commission notes that proposed in the December 2013 Position Limits hedging position applications for it does have access to open interest Proposal. positions in such referenced contract, swap data, trade data and order data. As noted above and as explained in the December that exchange might not be incentivized 2013 Position Limits Proposal, while current The Commission views its access to § 150.5 regarding exchange-set position limits pre- to protect or manage the relevant open interest swap data, trade data and dates the CFMA ‘‘the CFMA core principles regime commodity market, and its interests order data as well as its ability under concerning position limitations or accountability might not be aligned with the policy § 150.9 to review all exchange for exchanges had the effect of undercutting the mandatory rules promulgated by the Commission in objectives of the Commission as recognitions as sufficient to allow it to § 150.5. Since the CFMA amended the CEA in 2000, expressed in CEA section 4a. The carry out its responsibilities under the the Commission has retained § 150.5, but only as Commission expected that an individual Act. guidance on, and acceptable practice for, compliance with DCM core principle 5.’’ December exchange will describe how it will General Reproposal Under § 150.9 2013 Position Limits Proposal, 78 FR at 75754. determine whether a particular listed The DCM application processes for bona fide referenced contract is actively traded in Regarding implementation timing, the hedging position exemptions from exchange-set Commission is proposing to implement its rule submission, based on its position limits generally reference or incorporate familiarity with the specific needs and a delayed compliance date after the general definition of bona fide hedging position publication of a final rule, as discussed contained in current § 1.3(z)(1), and the above.1012 Commission believes the exchange processes for applications, the Commission may review such approving non-enumerated bona fide hedging processes pursuant to a periodic rule enforcement position applications are at least to some degree review or a request for information pursuant to 1010 See, e.g., 2016 Position Limits Proposal at informed by the Commission process outlined in § 37.5. Separately, under proposed § 150.9(d), the 38470, 38488. current § 1.47. proposal provides that the Commission may review 1011 See § 150.9(a)(1). 1014 If the Commission becomes concerned about a DCM’s determinations in the case of any specific 1012 See discussion under Proposed Compliance an exchange’s general processing of non- non-enumerated bona fide hedging position Date, above; see also § 150.2(e)(1). enumerated bona fide hedging position application.

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differing practices of the commercial Comments on Proposed § 150.9(a)(1) exchange-set limits lower than 1015 participants in the relevant market. Requirement That Exchanges Recognize federally-set levels, or where the The Commission was also mindful 1021 Non-Enumerated Bona Fide Hedging exchanges set the limits themselves. that some market participants, such as Positions Consistent With the General commercial end users in some Requests for Recognition of Non- Bona Fide Hedging Definition circumstances, may not be required to Enumerated Bona Fide Hedging trade on an exchange, but may In connection with the requirement Positions in the Spot Month nevertheless desire to have a particular under § 150.9 to apply the bona fide A commenter expressed the view that derivative position recognized as a non- hedging definition to recognitions, two the Commission should not enumerated bona fide hedging position. commenters requested that the ‘‘categorically prohibit exchanges from The Commission noted its belief that Commission specifically allow granting non-enumerated and commercial end users should be able to exchanges to recognize anticipatory anticipatory hedge exemptions, as avail themselves of an exchange’s non- merchandising as a non-enumerated appropriate, during the spot month’’ enumerated bona fide hedging position bona fide hedging positions should the and reminded the Commission that application process in lieu of requesting facts and circumstances warrant orderly trading requirements remain a staff interpretive letter under § 140.99 including those rejected strategies applicable to all positions, as provided or seeking CEA section 4a(a)(7) [transactions or positions that fail to under the bona fide hedging position exemptive relief. This is because the meet the ‘change in value’ requirement definition. The commenter further Commission believed that exchanges or the ‘economically appropriate expressed the view that the statutory 1017 that list particular referenced contracts test’]. definition of bona fide hedging position would have enough information about Another commenter expressed the allows for such recognition during the the markets in which such contracts view that the Commission should spot month and that a ‘‘one-size-fits-all’’ trade and would be sufficiently familiar extend the process proposed in the 2016 prohibition will ‘‘unnecessarily restrict with the specific needs and differing Supplemental Position Limits Proposal commercially reasonable hedging practices of the commercial participants to include risk management 1022 1018 activity during the spot month.’’ in such markets in order to exemptions. The commenter Several commenters were generally knowledgeably recognize non- acknowledged but disagrees with the against the application of the five-day enumerated bona fide hedging positions Commission’s view that such risk rule to non-enumerated bona fide for derivatives positions in commodity management exemptions would not be hedging position exemptions, and derivative contracts included within a allowed under the statutory standards recommended that the Commission particular referenced contract. The for a bona fide hedging position, and authorize the exchanges to grant non- Commission also viewed this to be suggests that the Commission could use enumerated hedge and spread CEA section 4a(a)(7) authority to consistent with the efficient allocation exemptions during the last five days of provide exemptions for risk of Commission resources. trading or the spot period, and other Consistent with the restrictions management positions. A commenter recommended that the alternatives and proposed regulation regarding the offset of risks arising from text.1023 a swap position in CEA section rules clarify that the Exchanges may 4a(c)(2)(B), proposed § 150.9(a)(1) recognize and grant exemptions on the Standards Exchanges Must Meet To would not permit an exchange to basis of a strategy, or hedging need, or Provide Recognitions a combination of strategies or hedging recognize a non-enumerated bona fide Several commenters recommended requirements associated with managing hedging position involving a commodity 1019 that the Commission not adopt the index contract and one or more an ongoing business. Separately, one commenter proposed ‘‘active trading’’ and ‘‘one year referenced contracts. That is, an recommended that ‘‘the Commission experience’’ requirements regarding a exchange may not recognize a non- should confirm that exchanges may DCM’s qualification to administer enumerated bona fide hedging position continue to adopt their own rules for exemptions from federal position where a bona fide hedging position 1024 exemptions from speculative position limits. One commenter requested could not be recognized for a pass limits for futures contracts that are removal of the ‘‘actively traded’’ through swap offset of a commodity subject to DCM limits, but not to federal requirement, expressing concerns that, index contract.1016 limits,’’ 1020 while two others stated that based on its understanding, the the Commission should confirm that the requirement would impose an ‘‘absolute 1015 For example, a DCM (‘‘DCM A’’) may list a 2016 Supplemental Position Limits prohibition’’ on exchange-administered commodity derivative contract (‘‘KX,’’ where ‘‘K’’ exemptions for new contracts of at least refers to contract and ‘‘X’’ refers to the commodity) Proposal’s ‘‘prescriptive procedures’’ 1025 that is a referenced contract, actively traded, and will not apply to exemptions involving one year. Similarly, a commenter DCM A has the requisite experience and expertise stated that the standard ‘‘would in administering position limits in that one contract arbitrarily limit competition and operate KX. DCM A can therefore recognize non- from Congress to narrow the scope of what enumerated bona fide hedging positions in contract constitutes a bona fide hedge in the context of index 1021 KX. But DCM A is not limited to recognition of just trading activities. ‘‘Financial products are not CL–ICE–60929 at 7; CL–Working Group– that one contract KX–DCM A can also recognize any substitutes for positions taken or to be taken in a 60947 at 14. other contract that falls within the meaning of physical marketing channel. Thus, the offset of 1022 CL–ICE–60929 at 9. referenced contract for commodity X. So a market financial risks from financial products is 1023 CL–ICE–60929 at 22; CL–NCGA–NGSA– participant could, for example, apply to DCM A for inconsistent with the proposed definition of bona 60919 at 13; CL–CME–60926 at 6 and 8; CL–API– recognition of a position in any contract that falls fide hedging for physical commodities.’’ December 60939 at 3; CL–FIA–60937 at 3 and 12; CL–Working within the meaning of referenced contract for 2013 Position Limits Proposal, 78 FR at 75740. See Group–60947 at 7–9; CL–NCC–ACSA–60972 at 2; commodity X. However, that market participant also the discussion of the temporary substitute test CL–CMC–60950 at 9–11; CL–ISDA–60931 at 3 and would still need to seek separate recognition from in the December 2013 Position Limits Proposal, 78 10; CL–CCI–60935 at 8–9; CL–MGEX–60936 at 11; each exchange where it seeks an exemption from FR at 75708–9. CL–FIA–60937 at 10, 11; CL–MGEX–60936 at 11. that other exchange’s limit for a commodity 1017 CL–ICE–60929 at 12; CL–Working Group– 1024 CL–CCI–60935 at 3–4; CL–CME–60926 at 13; derivative contract in the same commodity X. 60947 at 6. CL–FIA–60937 at 9; CL–CMC–60950 at 3; CL– 1016 This is consistent with the Commission’s 1018 CL–AMG–60946 at 6–7. Working Group–60947 at 10; CL–IECAssn–60949 at interpretation in the December 2013 Position Limits 1019 CL–CCI–60935 at 5. 12–13. Proposal that CEA section 4a(c)(2)(b) is a direction 1020 CL–FIA–60937 at 4. 1025 CL–CMC–60950 at 3.

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as a bar to the establishment of new Commission Reproposal Regarding by the exchange is capped at the level exchanges and new contracts.’’ 1026 § 150.9(a)(1) 1032 of the applicable federal limit in 1034 In the alternative, one commenter The Commission is reproposing the § 150.2. argues that one year of experience in rule, as originally proposed, subject to Requests for Recognition of Non- administering position limits in similar the amendments described below. contracts within a particular ‘‘asset Enumerated Bona Fide Hedging class’’ would be a more reasonable Requirement That Exchanges Recognize Positions in the Spot Month requirement.1027 In addition, a Non-Enumerated Bona Fide Hedging The Commission considered the commenter expressed the view that the Positions Consistent With the General recommendations that the Commission: Commission should not define ‘‘actively Bona Fide Hedging Position Definition Allow exchanges to recognize a position traded’’ in terms of minimum monthly Regarding comments that the as a bona fide hedging position for up 1028 volume. Commission should permit the to a five-day retroactive period in circumstances where market recognition of anticipatory Previously Granted Hedge Exemptions participants need to exceed limits to merchandising as non-enumerated bona One commenter expressed the view address a sudden and unforeseen fide hedging strategies, as noted above, that since the exchanges have been hedging need; specifically authorize while exchanges’ recognition of non- working with commercial end user for exchanges to recognize positions as enumerated bona fide hedging positions several decades and currently have a bona fide hedging positions and grant must be consistent with the process under § 1.3(z) that may contain spread exemptions during the last five Commission’s bona fide hedging specific scenarios that work well and days of trading or less, and/or delegate position definition, the Commission are not listed in the 2016 Position to the exchanges for their consideration agrees that exchanges should, in each Limits Proposal, the Commission should the decision whether to apply the five- case, make a facts-and-circumstances deem every currently recognized hedge day rule to a particular contract after strategy by any exchange as a non- determination as to whether to their evaluation of the particular facts enumerated bona fide hedging position recognize an anticipatory hedge as a and circumstances. As the Commission which would eliminate disruption and non-enumerated bona fide hedging clarified above, the reproposed rules do encourage the autonomy of the position, consistent with the not apply the prudential condition of exchanges.1029 Commission’s recognition ‘‘that there the five-day rule to non-enumerated The commenter also expressed the can be a gradation of probabilities that hedging positions other than to pass view that, with respect to the status of an anticipated transaction will through swap offsets.1035 Therefore, as 1033 previously exchange-recognized non- occur.’’ reproposed, the five-day rule would enumerated bona fide hedging positions In response to the request that the only apply to certain positions (pass- for which such exchange no longer Commission expand the proposed bona through swap offsets, anticipatory and provides an annual review, the non- fide hedging position recognition cross-commodity hedges).1036 However, enumerated bona fide hedging positions process to include risk management to provide exchanges with flexibility, in should remain a non-enumerated bona exemptions, the Commission notes that regards to exchange process under fide hedging position and the this suggestion is contrary to the intent § 150.9, the Commission will allow participants utilizing that strategy of Congress (to narrow the bona fide exchanges to waive the five-day rule on should have ample notice that the hedging position definition to preclude a case-by-case basis.1037 As the exchange will no longer provide the commodity index hedging, a.k.a. risk Commission noted above, it expects that annual review in order to allow time for management exemptions). exchanges will carefully consider the individual entity to apply to the Regarding comments requesting whether allowing retroactive CFTC directly for a non-enumerated clarification on exchange authority to recognition of a positions as a non- bona fide hedging position recognize as bona fide hedging positions enumerated bona fide hedge would, as exemption.1030 multiple hedging strategies, the raised by one commenter, diminish the Commission clarifies that a single overall integrity of the process. In Recognition of OTC Positions as Bona application to an exchange can specify Fide Hedges and apply to multiple hedging strategies 1034 Similarly, as noted above, reproposed Another commenter requested or needs. § 150.5(a)(2)(i) provides that any exchange may Commission clarification regarding an As to comments requesting grant exemptions from any speculative position exchange’s obligation with respect to clarification regarding whether the limits it sets under paragraph § 150.5(a)(1), provided that such exemptions conform to the recognizing and monitoring non- proposed application process applies to requirements specified in § 150.3, and provided enumerated bona fide hedging position exchange-set limits, the Commission further that any exemptions to exchange-set limits determinations for OTC positions. The notes that the requirements of not conforming to § 150.3 are capped at the level commenter cited to preamble language reproposed § 150.9(a) addresses of the applicable federal limit in § 150.2. 1035 See the discussion regarding the five-day rule to support the possibility of an processes for recognition of bona fide in connection with the definition of bona fide obligation, but argued that the text of hedge positions for purposes of federal hedging position and in the discussion of 150.9 proposed § 150.9 does not mention or limits and not exemption processes (Process for recognition of positions as non- contemplate such requests for OTC such as those exchanges currently enumerated bona fide hedging positions). positions. The commenter also implement and oversee for any 1036 See § 150.1 definition of bona fide hedging position sections (2)(ii)(A), (3)(iii), (4), and (5) questioned whether such recognition is exchange-set limits. In addition, such (Other enumerated hedging position). To provide feasible given the exchanges’ lack of processes for exchange-set limits that greater clarity as to which bona fide hedging visibility into OTC markets.1031 are lower than the federal limit could positions the five-day rule applies, the reproposed differ as long as the exemption provided rules reorganize the definition. 1037 In addition, reproposed § 150.5(a)(2)(ii) 1026 CL–IECAssn–60949 at 12–13. 1027 (Application for exemption) permits exchanges to CL–CME–60926 at 14. 1032 See the 2016 Supplemental Position Limits adopt rules that allow a trader to file an application 1028 CL–IECAssn–60949 at 13. Proposal, 81 FR at 38469–71 (providing further for an enumerated bona fide hedging exemption 1029 CL–IECAssn–60949 at 11–12. explanation of proposed § 150.9(a)(1)). within five business days after the trader assumed 1030 Id. at 12. 1033 December 2013 Position Limits Proposal, 78 the position that exceeded a position limit, and 1031 CL–CME–60926 at 11–12. FR at 75719. adopted a similar modification to 150.5(b)(5)(i).

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addition, the Commission also points qualifications of exchange regulatory granted risk-management strategies out that exchanges should carefully divisions when considering whether to applicable to previously established consider whether to adopt in those rules designate a new exchange as a contract derivative positions in commodity the two safeguards noted by market or to recognize a facility as a index contract.1041 commenters: (i) Requiring market SEF; as such exchanges are new, staff Regarding comments that exchanges participants making use of the experience has clearly been gained at should be required to provide additional retroactive application to demonstrate 1040 other exchanges. notice or phase-out time for any bona that the applied-for hedge was required In addition, regarding the fide hedging position recognitions that to address a sudden and unforeseen Commission’s authority to adopt this may expire, the Commission notes that, hedging need; and (ii) providing that if standard, the Commission notes that the emergency hedge recognition was CEA section 4a(c) provides that the under reproposed § 150.5, exchanges not granted, exchange rules would Commission ‘‘shall’’ define what may issue recognition determinations continue to require the applicant to constitutes a bona fide hedging for one year only. As such a market unwind its position in an orderly transaction or position. In light of this participant is provided a one-year notice manner and also would deem the responsibility, the Commission believes for the potential expiration of the applicant to have been in violation for it is important that exchanges recognition of their position as a non- any period in which its position authorized to recognize non-enumerated enumerated bona fide hedging position, exceeded the applicable limits. bona fide hedging positions have and may seek recognition of the position experience (as indicated by their one from another (or the same) DCM, or Standards Exchanges Must Meet To from the CFTC directly prior to the Provide Recognitions year of experience regulating a particular contract) and interests (as expiration of the one-year period. The Regarding comments on the ‘‘active indicated by their actively traded Commission is not proposing to trading’’ and ‘‘one year of experience’’ contract) that are aligned with the authorize exchanges to provide an requirements under proposed Commission’s interests. The commenter unlimited recognition of positions as § 150.9(a)(1)(v), as noted in the 2016 provides no alternatives to the one-year non-enumerated bona fide hedging Supplemental Position Limits Proposal experience in the actively traded positions, and is not proposing to preamble 1038 and above, the contract as proxies for an exchange’s require exchanges to provide further Commission is not persuaded that an interests being aligned with that of the notice to market participants prior to the exchange with no active trading and no Commission. expiration of previous determinations. experience would have their interests The Commission clarifies, however, Recognition of OTC Positions as Bona aligned with the Commission’s policy that an exchange can petition the Fide Hedging Positions objectives in CEA section 4a. However, Commission, pursuant to § 140.99, for a it is clear from the comments that some waiver of the one-year experience Regarding comments requesting a interpreted the requirement as a requirement if such exchange believes clarification with respect to OTC narrower standard than intended. that their experience and interests are positions, the Commission clarifies that The Commission is, therefore, aligned with the Commission’s interests exchanges do not have an obligation to amending § 150.9(a)(1)(v) to clarify that with respect to recognizing non- monitor for compliance with OTC-only the active one-year of experience enumerated bona fide hedging positions. requirement can be met by any contract positions. listed in the particular referenced contract.1039 As such, the Commission Previously Granted Hedge Exemptions 1041 As stated above, § 150.3(f) provides (1) recognition of the offset of the risk of a pre-existing is reproposing § 150.9(a)(1)(v) to provide With respect to comments regarding financial instrument as bona fide using a derivative that the exchange has at least one year currently recognized exchange-granted position, including a deferred derivative contract of experience and expertise non-enumerated bona fide hedging month entered after the effective date of a final rule, administering position limits for ‘‘a provided a nearby derivative contract month is position exemptions, as noted above, liquidated (such recognition will not extend such particular commodity’’ rather than for the Commission believes the statutory relief to an increase in positions after the effective ‘‘such commodity derivative contract.’’ directive to define bona fide hedging date of a limit); (2) possible application of Further, in response to concerns that the position narrows the current § 1.3(z)(1) previously granted exemptions to pre-existing standard would limit competition and financial instruments that are within the scope of definition. As a result, currently existing § 1.47 exemptions, rather than only to pre- operate as a bar to the establishment of recognized bona fide hedging strategies existing swaps; and (3) recognition of exchange- new exchanges and new contracts, the may not meet the new narrower bona granted non-enumerated exemptions in non-legacy Commission notes that experience fide hedging position standards. While commodity derivatives outside of the spot month manifests in the people carrying out (consistent with the Commission’s recognition of certain strategies may not meet the risk management exemptions outside of the spot surveillance in a commodity rather than definition of bona fide hedging position month), provided such exemptions are granted in an institutional structure. An reproposed in this rulemaking, to prior to the compliance date of a final rule, and exchange’s experience could be reduce the potential for market apply only to pre-existing financial instruments as demonstrated through the relevant of the effective date of a final rule. These last two disruption by forced liquidations, the were proposed to reduce the potential for market experience of the surveillance staff Commission proposes, as discussed disruption, since a market intermediary would regarding the particular commodity. In above, to clarify and expand the relief continue to be able to offset risks of pre-effective- fact, the Commission has historically in § 150.3(f) (previously granted date financial instruments, pursuant to previously- reviewed the experience and granted federal or exchange risk management exemptions) to grandfather previously exemptions. See supra discussion of the Commission’s reproposed definition for bona fide 1038 2016 Supplemental Position Limits Proposal, 1040 For example, the Commission reviews the hedging position; see also the discussion regarding 81 FR at 38471. experience of chief compliance officers when the reproposed § 150.3(f). In response to the 1039 Regarding the comment that the Commission reviewing SEF applications. See § 37.1501(b)(2) comment requesting that the Commission use its should not define ‘‘actively traded,’’ the (‘‘Qualifications of chief compliance officer. The authority under CEA section 4a(a)(7) to provide Commission concurs, and notes that, as proposed individual designated to serve as chief compliance exemptions for risk management positions, as noted in the 2016 Supplemental Position Limits Proposal, officer shall have the background and skills above, that appears contrary to Congressional intent this interpretation will be left to the exchanges’ appropriate for fulfilling the responsibilities of the to narrow the definition of a bona fide hedging reasonable discretion. position.’’). position.

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b. Proposed § 150.9(a)(2); § 150.9(a)(3); derivative contract for which the that such detailed information may and § 150.9(a)(4)—Application Process application is submitted and the include both a factual and legal analysis 1044 Proposed Rules. As proposed, offsetting cash positions. Proposed indicating why recognition is justified § 150.9(a)(2) would permit an exchange § 150.9(a)(3)(iii) required a statement for such applicant’s position. The to establish a less expansive application concerning the maximum size of all Commission expected that if the process for non-enumerated bona fide gross positions in derivative contracts to materials submitted in response to proposed § 150.9(a)(3)(ii) are relatively hedging positions previously recognized be acquired during the year after the 1045 comprehensive, requests for additional and published on such exchange’s Web application is submitted. Proposed information pursuant to proposed site than for non-enumerated bona fide § 150.9(a)(3)(iv) required detailed § 150.9(a)(3)(v) would be relatively hedging positions based on novel facts information regarding the applicant’s infrequent. Nevertheless, the and circumstances. This is because the activity in the cash markets for the Commission believed that it is Commission believed that some lesser commodity underlying the position for important to include the requirement in degree of scrutiny may be adequate for which the application is submitted 1046 proposed § 150.9(a)(3)(v) that applicants applications involving recurring fact during the past three years. These submit any other information necessary patterns, so long as the applicants are proposed application requirements are to enable the exchange to determine, similarly situated. However, the similar to existing requirements for recognition under current § 1.48 of a and the Commission to verify, that it is Commission understood that DCMs appropriate to recognize a position as a currently use a single-track application non-enumerated bona fide hedge. The Commission also proposed to non-enumerated bona fide hedging process to recognize non-enumerated require in § 150.9(a)(3)(ii) and (v) that position so that DCMs can protect and positions, for purposes of exchange all applicants submit detailed manage their markets. limits, as within the meaning of the information to demonstrate why the Under the proposal, the Commission general bona fide hedging position position satisfies the requirements of would permit an exchange to recognize definition in § 1.3(z)(1).1042 The CEA section 4a(c) 1047 and any other a smaller than requested position for Commission did not know whether any information necessary to enable the purposes of exchange-set limits. For exchange would elect to establish a exchange to determine, and the instance, an exchange might recognize a separate application process for non- Commission to verify, whether it is smaller than requested position that enumerated bona fide hedging positions appropriate to recognize such a position otherwise satisfies the requirements of based on novel versus non-novel facts as a non-enumerated bona fide CEA section 4a(c) if the exchange and circumstances, or what the salient hedge.1048 The Commission anticipated determines that recognizing a larger differences between the two processes position would be disruptive to the might be, or whether a dual-track 1044 See § 1.47(b)(1), 17 CFR 1.47(b)(1), requiring exchange’s markets. This is consistent application process might be more a description of the futures positions and the with current exchange practice. This is likely to produce inaccurate results, e.g., offsetting cash positions. also consistent with DCM and SEF core inappropriate recognition of positions 1045 See § 1.47(b)(4), 17 CFR 1.47(b)(4), requiring principles. DCM core principle 5(A) that are not bona fide hedging positions the maximum size of gross futures positions which will be acquired during the following year. provides that, ‘‘[t]o reduce the potential within the parameters set forth by 1046 See §§ 1.47(b)(6), 1.48(b)(1)(i) and (2)(i), 17 threat of market manipulation or 1043 Congress in CEA section 4a(c). In CFR 1.47(b)(6), 1.48(b)(1)(i) and 2(i), requiring three congestion (especially during trading proposing to permit separate application years of history of production or usage. during the delivery month), the board of processes for novel and non-novel non- 1047 Although many commenters have requested trade shall adopt for each contract of the enumerated bona fide hedging that the Commission retain the pre-Dodd Frank Act standard contained in current § 1.3(z), 17 CFR board of trade, as is necessary and positions, the Commission sought to 1.3(z), there is explicit and implicit support in the appropriate, position limitations or provide flexibility for exchanges, but comments on the December 2013 Position Limits position accountability for will insist on fair and open access for Proposal for pegging what applicants must speculators.’’ 1049 SEF core principle market participants to seek recognition demonstrate to the current statutory provision as 6(A) contains a similar provision.1050 amended by the Dodd-Frank Act. One commenter of compliant positions as non- requested that the Commission ‘‘publicly clarify By requiring in proposed § 150.9(a)(3) enumerated bona fide hedging that hedge positions are bona fide when they satisfy that all applicants submit a core set of positions. the hedge definition codified by Congress in section information and materials, the The Commission believed that there is 4a(c)(2) of the Act, as added by the Dodd-Frank Commission anticipated that all Act.’’ CL–CME–59718 at 46. Another commenter a core set of information and materials supported a ‘‘process for Commission approval of exchanges would develop similar non- necessary to enable an exchange to a ‘non-enumerated’ hedge that . . . complies with determine, and the Commission to the statutory definition of the term ‘bona fide information necessary to enable the Commission to verify, whether the facts and hedge.’ ’’ CL–NGSA–59673 at 2. CEA section determine whether a particular futures position 4a(c)(2) contains standards for positions that meets the requirements of the general definition of circumstances attendant to a position constitute bona fide hedging positions. The bona fide hedging. Under current application satisfy the requirements of CEA section Commission expects that exchanges would consider processes, market participants provide similar 4a(c). Accordingly, the Commission the Commission’s relevant regulations and information to DCMs, make various representations proposed to require in § 150.9(a)(3)(i), interpretations, when determining whether a required by DCMs and agree to certain terms position satisfies the requirements of CEA section imposed by DCMs with respect to exemptions (iii) and (iv) that all applicants submit 4a(c)(2). However, exchanges may confront novel granted. The Commission has recognized that DCMs certain factual statements and facts and circumstances with respect to a particular already consider any information they deem representations. Proposed applicant’s position, dissimilar to facts and relevant to requests for exemptions from position § 150.9(a)(3)(i) required a description of circumstances previously considered by the limits. See, e.g., Rule Enforcement Review of ICE Commission. In these cases, an exchange may Futures U.S., July 22, 2014, p. 41. the position in the commodity request assistance from the Commission; see the 1049 CEA section 5(d)(5)(A), 7 U.S.C. 7(d)(5)(A); discussion of proposed § 150.9(a)(8) in the 2016 § 38.300, 17 CFR 38.300. The Commission 1042 17 CFR 1.3(z)(1). Position Limits Supplemental Proposal. proposed, consistent with previous Commission 1043 7 U.S.C. 6a(c). The Commission noted that it 1048 See § 1.47(b)(2), 17 CFR 1.47(b)(2), requiring determinations, a preliminary finding that could, under the proposal, review determinations detailed information to demonstrate that the futures speculative position limits are necessary in the made by a particular exchange, for example, that positions are economically appropriate to the December 2013 Position Limits Proposal. December recognizes an unusually large number of bona fide reduction of risk in the conduct and management 2013 Position Limits Proposal, 78 FR at 75685. hedging positions, relative to those of other of a commercial enterprise. See also § 1.47(b)(3), 17 1050 CEA Section 5h(f)(6)(A), 7 U.S.C. 7b– exchanges. CFR 1.47(b)(3), requiring, upon request, such other 3(f)(6)(A); § 38.300, 17 CFR 38.300.

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enumerated bona fide hedging position applicant must have received possible, allow the exchanges to application processes. However, the recognition for a non-enumerated bona administer exemptions for non- Commission intended that exchanges fide hedging position before such enumerated bona fide hedging have sufficient discretion to applicant exceeds any limit then in positions, enumerated bona fide accommodate the needs of their market effect, and that the exchange administer hedging positions, and spread positions participants. The Commission also the process, and the various steps in the in the same manner as they have been intended to promote fair and open process, in a timely manner. This means to date.1057 access for market participants to obtain that an exchange must, in a timely Several commenters recommended recognition of compliant derivative manner, notify an applicant if a that the Commission not require positions as non-enumerated bona fide submission is incomplete, determine exchanges to demand and collect three hedges. whether a position is a non-enumerated years of cash market information in Proposed § 150.9(a)(4) set forth certain bona fide hedging position, and notify order to process an entity’s application timing requirements that an exchange an applicant whether a position will be for a non-enumerated bona fide hedging must include in its rules for the non- recognized, or the application rejected. exemption. According to the enumerated bona fide hedge application The Commission anticipated that rules commenters, it would be burdensome process. A person intending to rely on of an exchange may nevertheless set on both the applicant and the exchange, an exchange’s recognition of a position deadlines for various parts of the as well as unnecessary and not as a non-enumerated bona fide hedging application process. The Commission authorized by the CEA.1058 As an position would be required to submit an does not believe that reasonable alternative, commenters cited practices application in advance and to reapply at deadlines or minimum review periods currently authorized for, and practiced least on an annual basis. This is are inconsistent with the general by, the exchanges, and that typically consistent with commenters’ views and principle of timely administration of the only require applicants to provide such DCMs’ current annual exemption review application process. An exchange could data from the preceding year, though the process.1051 Proposed § 150.9(a)(4) also establish different deadlines for a market participant requesting the hedge would require an exchange to notify an dual-track application process. The exemption must stand ready to provide applicant in a timely manner whether Commission believed that the further supporting documentation for 1059 the position was recognized as a non- individual exchanges themselves are in the requested exemption on request. enumerated bona fide hedging position the best position to evaluate how One commenter expressed the view or rejected, including the reasons for quickly each can administer the that exchanges do not need the any rejection.1052 On the other hand, application process, in order best to ‘‘detailed information’’ that the 2016 and consistent with the status quo, accommodate the needs of market Supplemental Position Limits Proposal proposed § 150.9(a)(4) would allow the participants. In addition to review of an requires of market participants seeking an exchange-administered hedge exchange to revoke, at any time, any exchange’s timeline when it submits its exemption. The commenter believes recognition previously issued pursuant rules for its application process under that requiring an exemption applicant to to proposed § 150.9 if the exchange part 40, the Commission would review perform its own legal and economic determined the recognition is no longer the exchange’s timeliness in the context analysis would be cost prohibitive and in accord with section 4a(c) of the of a rule enforcement review. Act.1053 impractical. Further, the commenter The Commission did not propose to Comments Received asserted that it is unclear whether an prescribe time-limited periods (e.g., a One commenter expressed the view exchange could still grant an exemption specific number of days) for submission that it does not support different even if it disagrees with an applicant’s 1060 or review of non-enumerated bona fide application processes for novel and non- analysis. hedge applications. The Commission novel hedges.1054 Some commenters requested proposed only to require that an Two commenters expressed the view clarification regarding the proposed that the 2016 Supplemental Position § 150.9(a)(3) requirement with respect to 1051 See, e.g., statement of Ron Oppenheimer on Limits Proposal should be revised to 1057 behalf of the Working Group (supporting an annual eliminate, to the maximum extent CL–NCGA–NGSA–60919 at 9. non-enumerated bona fide hedge application), 1058 CL–NCGA–NGSA–60919 at 10; CL–EEI– statement of Erik Haas, Director, Market Regulation, possible, the ‘‘overly prescriptive rules’’ EPSA–60925 at 4; CL–ICE–60929 at 8; 16, CL– ICE Futures U.S. (describing the DCM’s annual governing what exchanges must collect COPE–60932 at 9; CL–CCI–60935 at 7; CL–COPE– exemption review process), and statement of Tom from non-enumerated bona fide hedging 60932 at 9; CL–FIA–60937 at 3; 12, CL–AGA–60943 LaSala, Chief Regulatory Officer, CME Group position applicants and instead give the at 6; CL–AMG–60946 at 3–4; CL–Working Group– (envisioning market participants applying for non- 60947 at 11; CL–NCGA–NGSA–60919 at 10; CL– enumerated bona fide hedge on a yearly basis), exchanges more discretion and CCI–60935 at 7; CL–CME–60926 at 9; CL–FIA– transcript of the EEMAC open meeting, July 29, flexibility to fashion non-enumerated 60937 at 3, 12; CL–Working Group–60947 at 11 2015, at 40, 53, and 58, available at http:// bona fide hedging position rules that are (footnotes omitted); and CL–ICE–60929 at 8, 16 www.cftc.gov/idc/groups/public/@aboutcftc/ more closely aligned with current hedge (noting that in many cases exchanges already have documents/file/emactranscript072915.pdf. 1055 access to this data, or can easily obtain it). 1052 See, e.g., statement of Ron Oppenheimer on approval processes. Conversely, 1059 CL–NCGA–NGSA–60919 at 10; CL–CCI– behalf of the Working Group (noting that exchanges another commenter recommended that 60935 at 7; CL–CME–60926 at 9; CL–Working retain the ability to revoke an exemption if market the Commission require a standardized Group–60947 at 11 (footnotes omitted); CL–FIA– circumstances warrant), transcript of the EEMAC and harmonized process across all 60937 at 3, 12; CL–Working Group–60947 at 11; open meeting, July 29, 2015, at 57, available at CL–NCGA–NGSA–60919 at 10; CL–CCI–60935 at 7; http://www.cftc.gov/idc/groups/public/@aboutcftc/ participating exchanges for non- CL–CME–60926 at 9; CL–AGA–60943 at 6; and CL– documents/file/emactranscript072915.pdf. enumerated bona fide hedging position AMG–60946 at 3–4 (recommending that exchanges 1053 As noted above, the 2016 Supplemental applications.1056 have authority to, but not be required to, collect up Position Limits Proposal did not impair the ability One commenter recommended that to 3 years of data). of any market participant to request an the Commission, to the greatest extent 1060 CL–CME–60926 at 9. See also CL–AMG– interpretation under § 140.99 for recognition of a 60946 at 4 (requesting a clarification that that this position as a bona fide hedging position if an demonstration (of how the position meets the exchange rejects their recognition application or 1054 CL–IECAssn–60949 at 14. definition of a bona fide hedging position does not revokes recognition previously issued. See 2016 1055 CL–ETP–60915 at 1; CL–MGEX–60936 at 5– require submission of legal opinion from counsel Position Limits Supplemental Proposal, n. 78 and 6. which would be ‘‘unduly burdensome’’ for market accompanying text. 1056 CL–EDF–60944 at 1–3. participants).

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the compilation of gross positions for Regarding comments on current gross positions in derivative contracts every commodity derivative contact that exchange processes for administering for which the application is submitted.’’ the applicant holds, and whether the exemptions, and comments regarding The Commission further clarifies that proposed regulations are intended to the information required in the the statement should be based on a good apply to an applicant’s maximum size of application process, reproposed § 150.9 faith estimate. all gross positions for each and every would require that exchanges collect a In addition, the Commission notes commodity derivative contract the minimum amount of information, and that the minimum information to be applicant holds (as opposed to the exchanges would have discretion to required by the exchange under maximum gross positions in the require additional information. That is, § 150.9(a)(3)(iii), would be for the gross commodity derivative contract(s) for § 150.9 provides parameters for a basic position for the following year, since the which the exemption is sought).1061 In application and processing process for applicant will need to reapply each year addition, one commenter suggested that the recognition of non-enumerated bona for exchange recognition of its position ‘‘the Commission should clarify that an fide hedging positions; the parameters as a bona fide hedging position. application for a non-enumerated hedge allow exchanges flexibility, while also With respect to the condition that or spread exemption only must include facilitating Commission review. Also, exchanges require applicants to provide derivative positions related to the the Commission reiterates that three years of data supporting their requested exemption.’’ 1062 reproposed § 150.9 addresses federal application, the Commission is One commenter expressed the view limits and not exchange exemption reproposing § 150.9(a)(3)(iv) to require that it is concerned regarding how processes, such as those exchanges only one year of data. exchanges should coordinate the currently implement and oversee for Regarding commenter concerns about granting of exemptions with respect to any exchange-set limits. Such processes whether or how exchanges should contracts on the same underlying for exchange-set limits that are lower coordinate in granting exemptions commodities that trade on different than the federal limit could differ as consistently across exchanges, the exchanges, and requests guidance from long as the exemption provided by the reproposed rules would allow each the Commission on that matter.1063 exchange is capped at the level of the exchange to use their own expertise to In connection with proposed applicable federal limit in § 150.2. decide which positions should be § 150.9(a)(4), several commenters Regarding concerns that recognized as bona fide hedging expressed the view that the Commission § 150.9(a)(3)(ii), as proposed, required positions and what limit levels to should allow exchanges to recognize an an application to include a legal opinion impose for their venue. The enumerated or non-enumerated bona or analysis for exchange recognition of Commission notes that it serves in an fide hedging position exemption a position as a non-enumerated bona oversight role to monitor exchange retroactively in circumstances where fide hedging position, the Commission determinations and position limits market participants need to exceed clarifies that the regulation does not across exchanges. The Reproposal does limits to address a sudden and require applicants to obtain a legal not require exchanges to coordinate unforeseen hedging need.1064 opinion or analysis. Rather, under with respect to making such § 150.9(a)(3), it is the exchange’s duty to determinations; however, neither does Commission Reproposal make a determination regarding whether reproposed § 150.9 prohibit The Commission has determined to a contract meets the application coordination. repropose the rule, largely as originally requirements; it may ask for additional Regarding application of the five-day proposed, except that the Commission information than the minimum required rule to non-enumerated bona fide has revised the regulatory text to: (i) if it determines that further information hedging positions, as the Commission Clarify what the statement must address is necessary to make its determination. discussed above, the Reproposal does under § 150.9(a)(3)(iii) and To further clarify this point, the not apply the prudential condition of 150.9(a)(3)(iv); and (ii) require only one Commission is proposing the following the five-day rule to non-enumerated year of history rather than three years in change to § 150.9(a)(3)(ii) to provide that bona fide hedging positions. As § 150.9(a)(3)(iv), each as described the exchange require at a minimum discussed in connection with the further below. ‘‘information to demonstrate why the definition of bona fide hedging position 1065 Regarding comments that the position satisfies the requirements of and in the context of § 150.5(a), the Commission should not have different section 4a(c) of the Act and the general five-day rule would only apply to application processes for novel vs. non- definition of bona fide hedging position certain positions (pass-through swap novel products, (pursuant to proposed in § 150.1,’’ rather than ‘‘detailed offsets, anticipatory and cross- 1066 § 150.9(a)(2)) the Commission is information.’’ The same change is also commodity hedges). However, in clarifying that exchanges are authorized being proposed for § 150.9(a)(3(iv) for regards to exchange processes under but not required to have a different the same reasons. § 150.9 (and § 150.10, and § 150.11), the application process for novel and non- Regarding interpreting Commission is allowing exchanges to novel hedge applications. Further, § 150.9(a)(3)(iii) as requiring the waive the five-day rule on a case-by- § 150.9 does not prevent industry from inclusion in a non-enumerated bona case basis. working together to adopt a universal fide hedging position application of a Regarding exchanges’ authority to application for novel and non-novel statement regarding the maximum gross retroactively recognize positions as bona hedges. positions to be acquired by the applicant during the year after the 1065 See 2016 Position Limits Supplemental Proposal for the discussion regarding the five-day 1061 application is submitted, the CL–CCI–60935 at 6–7; and (CL–Working rule in connection with the definition of bona fide Group–60947 at 10). Commission clarifies that the provision hedging position and in the discussion of § 150.5 1062 CL–FIA–60937 at 4, 13. requires only information related to the (Exchange-set speculative position limits). 1063 CL–ISDA–60931 at 6–7. contract for which the application is 1066 See § 150.1 definition of bona fide hedging 1064 See, e.g., CL–NCGA–NGSA–60919 at 10–11; submitted; consequently, the position sections (2)(ii)(A), (3)(iii), (4), and (5) CL–EEI–EPSA–60925 at 4; CL–ICE–60929 at 11; (Other enumerated hedging position). As noted CL–ISDA–60931 at 13; CL–FIA–60937 at 13; CL– Commission is reproposing above, to provide greater clarity as to which bona Working Group–60947 at 13–14; and CL–CME– § 150.9(a)(3)(iii) to require a ‘‘statement fide hedge positions the five-day rule applies, the 60926 at 12. concerning the maximum size of all reproposed rules reorganize the definition.

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fide hedging positions, reproposed noted above, DCMs currently exercise bona fide hedging positions to be held § 150.9(a)(5) would require an applicant discretion with regard to exchange-set in the five day/spot month period.1071 to receive exchange recognition in limits to approve exemptions meeting Commenters also requested that the advance of the date that a position the general definition of bona fide Commission remove the proposed would otherwise be in excess of a hedging position. The Commission requirement that an exchange must position limit. Thus, the Reproposal works cooperatively with DCMs to adopt enhanced reporting rules for would not permit retroactive enforce compliance with exchange-set market participants that rely on recognition of a non-enumerated bona speculative position limits. In the 2016 exchange recognitions of positions as fide hedging position. The Commission Position Limits Supplemental Proposal, non-enumerated bona fide hedging preliminarily does not believe that it the Commission believed that a positions.1072 Generally, commenters should authorize an exchange to continuation of this cooperative process, suggested that any additional reporting recognize a non-enumerated bona fide and an extension to the proposed requirements be kept simple, hedging position retroactively, as this federal position limits, would be streamlined and minimally may diminish the ability of the consistent with the policy objectives in burdensome.1073 One commenter Commission to review timely such an CEA section 4a(3)(B).1070 The expressed the view that the Commission exchange determination, potentially Commission is reproposing should clarify certain aspects relating to diminishing the utility of position limits § 150.9(a)(5), as originally proposed. the mechanics and content of proposed reporting requirements for those seeking in preventing unwarranted price d. Proposed § 150.9(a)(6) fluctuations.1067 By way of contrast with an exchange-administered hedge regard to enumerated bona fide hedging Proposed Rule: Proposed § 150.9(a)(6) exemption.1074 positions, the Commission expects that required exchanges that elect to process Commission Reproposal: The exchanges will carefully consider non-enumerated bona fide hedging Commission has determined to amend whether allowing retroactive position applications to promulgate and clarify the proposal as follows. recognition of an enumerated bona fide reporting rules for applicants who own, First, the Commission clarifies that it hedging exemption, under reproposed hold or control positions recognized as does not require additional filings under § 150.5, would, as noted by one non-enumerated bona fide hedging § 150.9(a)(6); rather, it is in the commenter, diminish the overall positions. The Commission expected exchanges’ discretion to determine integrity of the process. And the that the exchanges would promulgate whether there is a reporting requirement exchanges should also consider whether enhanced reporting rules in order to for a non-enumerated bona fide hedging obtain sufficient information to conduct to adopt in those rules the two position. Consequently, the Commission an adequate surveillance program to safeguards noted: (i) Requiring market is amending the regulation text to clarify detect and potentially deter excessively participants making use of the that exchanges are authorized to, rather large positions that may disrupt the retroactive application to demonstrate than required to, determine whether to price discovery process. At a minimum, that the applied-for hedge was required require enhanced reporting, providing these rules should require applicants to to address a sudden and unforeseen only that exchanges that determine to report when an non-enumerated bona hedging need; and (ii) providing that if process non-enumerated bona fide fide hedging position has been the emergency hedge recognition was hedging position applications shall have established, and to update and maintain not granted, exchange rules would rules, submitted to the Commission the accuracy of such reports. These continue to require the applicant to under part 40, that require applicants rules should also elicit information from ‘‘to file reports pertaining to the use of unwind its position in an orderly applicants that will assist exchanges in manner and also would deem the complying with proposed § 150.9(c) 1071 CL–IECAssn–60949 at 13; CL–NMPF–60956 applicant to have been in violation for regarding exchange reports to the at 2; CL–NCFC–60930 at 4–5; CL–ICE–60929 at 22; any period in which its position CL–ICE–60929 at 22; and CL–FIA–60937 at 18, 19. 1068 Commission. exceeded the applicable limits. Comments Received: Several 1072 See, e.g., CL–FIA–60937 at 15; CL–CMC– 60950 at 12–13; CL–CCI–60935 at 7–8; CL–NCGA– c. Proposed 150.9(a)(5) and Commission commenters did not support a NGSA–60919 at 12–13; CL–MGEX–60936 at 6; CL– Reproposal Commission requirement for additional ISDA–60931 at 10; CL–NGFA–60941 at 4; CL– filings with respect to non-enumerated Working Group–60947 at 12 (footnotes omitted); Proposed § 150.9(a)(5) made it clear CL–AMG–60946 at 4–5; CL–CCI–60935 at 7–8; CL– AGA–60943 at 6; CL–CMC–60950 at 12–13; and that the position will be deemed to be proposed review procedure that the exchange CL–NCGA–NGSA–60919 at 12–13 (expressing the recognized as a non-enumerated bona action was dismissed. That is, if a party were to view that, reporting of positions for non- hold positions pursuant to a non-enumerated bona fide hedging position when an exchange enumerated bona fide hedges should mirror the fide hedging position recognition granted by the recognizes it; proposed § 150.9(d) mechanism for reporting EBFHs recognized by exchange, such positions would not be subject to provided the process through which the federal position limits, unless or until the exchanges that utilize the process where reports of exchange’s recognition would be subject Commission were to determine that such non- such positions are made to the Commission with an identical copy to be filed with the applicable to review by the Commission.1069 As enumerated bona fide hedging position recognition is inconsistent with the CEA or CFTC regulations exchange(s). See also CL–MGEX–60936 at 5–6 thereunder. Under this framework, the Commission (requesting that reporting and recordkeeping 1067 Current § 1.47 requires a filing in advance for would continue to exercise its authority in this requirements be removed or at least reduced unless Commission recognition of a position as a non- regard by reviewing an exchange’s determination there is a demonstrated need for them and b) only enumerated bona fide hedging position. and verifying whether the facts and circumstances exemptions granted in excess of federal limits 1068 See 2016 Position Limits Supplemental in respect of a derivative position satisfy the should require reporting to the Commission.); and Proposal discussion regarding proposed § 150.5. requirements of the Commission’s general CL–AGA–60943 at 7 (commenting that ‘‘because 1069 See 2016 Position Limits Supplemental definition of bona fide hedging position in § 150.1. Exchanges may, at any time, request records of Proposal, nn. 121–123 and accompanying text; see If the Commission determines that the exchange- hedgers’ cash market and derivative positions or also the 2016 Position Limits Supplemental granted recognition is inconsistent with section other details and explanations concerning the Proposal discussion of proposed § 150.9(d), review 4a(c) of the Act and the Commission’s general commercial risks being hedged, any Exchange of applications by the Commission. Exchange definition of bona fide hedging position in § 150.1, surveillance function can be met by exchange data recognition of a position as a non-enumerated bona a market participant would be required to reduce inquiries, rather than by an affirmative reporting fide hedging position would allow the market the derivative position or otherwise come into obligation by a commercial hedger.’’). participant to exceed the federal position limit until compliance with position limits within a 1073 CL–NFP–60942 at 6–8); and CL–FIA–60937 at such time that the Commission notified the market commercially reasonable amount of time. 4, 15. participant to the contrary, pursuant to the 1070 7 U.S.C. 6a(3)(B). 1074 CL–CME–60926 at 10.

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any such exemption that has been enumerated bona fide hedging proposed § 150.9(a).1081 The proposal granted in the manner, form, and position.1077 required that exchanges maintain frequency, as determined by the Commission Reproposal: While the complete books and records of all designated contract market or swap Commission is reproposing the rule, as activities relating to the processing and execution facility.’’ originally proposed, it clarifies that that disposition of applications in a manner consistent with the Commission’s e. Proposed 150.9(a)(7)—Transparency any data published pursuant to existing general regulations regarding to Market Participants § 150.9(a)(7) should not disclose the identity of, or confidential information recordkeeping.1082 In consideration of Proposed Rule: Proposed § 150.9(a)(7) about, the applicant. Rather, any the fact that DCMs currently recognize required an exchange to publish on its published summaries are expected to be non-enumerated bona fide hedging Web site, no less frequently than general (generic facts and positions which must be updated quarterly, a description of each new circumstances) and not include detail annually and that the proposal would type of derivative position that it that would disclose trade secrets or require annual updates, the Commission recognizes as a non-enumerated bona intellectual property. proposed that exchanges keep books fide hedge. The Commission envisioned and records until the termination, that each description would be an f. Proposed § 150.9(a)(8) and maturity, or expiration date of any executive summary. The 2016 Position Commission Reproposal recognition of a non-enumerated bona Limits Supplemental Proposal required Under proposed § 150.9(a)(8), an fide hedging position and for a period that the description include a summary exchange could elect to request the of five years after such date. The describing the type of derivative Commission review a non-enumerated Commission stated that five years position and an explanation of why it bona fide hedging position application should provide an adequate time period qualifies as a non-enumerated bona fide that raises novel or complex issues for Commission reviews, whether that hedging position. The Commission using the process set forth in proposed be a review of an exchange’s rule believed that the exchanges are in the § 150.9(d).1078 If an exchange makes a enforcement or a review of a market best position when quickly crafting request pursuant to proposed participant’s representations. these descriptions to accommodate an § 150.9(a)(8), the Commission, as would Exchanges would be required to store applicant’s desire for trading anonymity be the case for an exchange, would not and produce records pursuant to current while promoting fair and open access be bound by a time limitation. This is § 1.31 of the Commission’s regulations, for market participants to information because the Commission proposed only and would be subject to requests for regarding which positions might be that non-enumerated bona fide hedging information pursuant to other recognized as non-enumerated bona fide position applications be processed in a applicable Commission regulations hedging positions. The Commission timely manner.1079 Essentially, this including, for example, § 38.5. proposed to spot check these summaries Consistent with current § 1.31, the pursuant to proposed § 150.9(e). proposed provision largely preserved the Commission’s review process under Commission clarified its expectation i. Comments Received current § 1.47,1080 except that a market that the records would be readily accessible until the termination, Several commenters proposed that the participant first seeks recognition of a maturity, or expiration date of the Commission clarify or confirm that non-enumerated bona fide hedging recognition and during the first two exchanges are not required to divulge position from an exchange. years of the subsequent five year period. confidential information (such as trade The Commission is reproposing In addition, the Commission did not secrets, intellectual property, the market § 150.9(a)(8), as originally proposed. intend in proposed § 150.9(b)(1) to participant’s identity or position) when 4. Proposed § 150.9(b)—Recordkeeping create any new obligation for an providing the summary description of Requirements exchange to record conversations with non-enumerated bona fide hedge applicants, which includes their positions.1075 One commenter requested Proposed Rule: Proposed § 150.9(b) representatives; however, the ‘‘that the Commission explicitly provide outlined the recordkeeping Commission expected that an exchange in Rule 150.9(a)(7) that the summaries requirements for exchanges that elected would preserve any written or must be published ‘in a manner that to process non-enumerated bona fide electronic notes of verbal interactions preserves the anonymity of the hedging position applications under with such parties. applicant’ and provide additional Finally, the Commission emphasized 1077 guidance regarding the types of CL–CME–60926 at 11. that parties who avail themselves of 1078 Under proposed § 150.9(a)(8), if the exchange sensitive items that should be omitted exemptions under § 150.3(a), as from any summary, such as the size of determines to request that the Commission consider the application, the exchange must, under proposed proposed in the 2016 Supplemental the position(s) taken or to be taken by § 150.9(a)(4)(v)(C), notify an applicant in a timely Position Limits Proposal, would be the applicant or the delivery point(s) or manner that the exchange has requested that the subject to the recordkeeping Commission review the application. This provision other information that might identify requirements of § 150.3(g), as well as the applicant.’’ 1076 Another commenter provides the exchanges with the ability to request Commission review early in the review process, expressed the view that an exchange rather than requiring the exchanges to process the 1081 Id. Proposed § 150.10(b) and § 150.11(b) should not be required to disclose its request, make a determination and only then begin contain substantially similar recordkeeping own internal analyses when explaining the process of Commission review provided for requirements regarding spread exemptions and its decision to grant an exemption for a under proposed § 150.9(d). The Commission noted anticipatory hedge exemptions. that although most of its reviews would occur after 1082 derivative position recognized as a non- Requirements regarding the keeping and the exchange makes its determination, the inspection of all books and records required to be Commission could, as provided for in proposed kept by the Act or the Commission’s regulations are 1075 See, e.g., CL–ICE–60929 at 23; CL–NCGA– § 150.9(d)(1), initiate its review, in its discretion, at found at § 1.31, 17 CFR 1.31. DCMs and SEFs are NGSA–60919 at 14 (footnote omitted); CL–DFA– any time. already required to maintain records of their 60927 at 6; CL–NCFC–60930 at 5; CL–IATP–60951 1079 Novel facts and circumstances may present business activities in accordance with the at 6; CL–EEI–EPSA–60925 at 9; CL–COPE–60932 at particularly complex issues that could benefit from requirements of § 1.31 and 17 CFR 38.951. See 2016 9; CL–DFA–60927 at 6; and CL–NCFC–60930 at 5. extended consideration, given the Commission’s Supplemental Position Limits Proposal, 81 FR at 1076 CL–NCGA–NGSA–60919 at 14 (footnote current resource constraints. 38474 (providing a more comprehensive discussion omitted). 1080 17 CFR 1.47. of proposed § 150.9(b)).

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requests from the Commission for months-combined), as applicable.1087 Position Limit Proposal clarified that it additional information under § 150.3(h), The proposed report would also provide was the Commission’s expectation that as each was proposed in the December information regarding any revocation of, the summary would focus on the facts 2013 Position Limits Proposal. The or modification to the terms and and circumstances upon which an Commission noted that it might request conditions of, a prior determination by exchange based its determination to additional information, for example, in the exchange to recognize a commodity recognize a commodity derivative connection with review of an derivative position as a non-enumerated position as a non-enumerated bona fide application.1083 bona fide hedge. In addition, the report hedging position, or to revoke or modify Commission Reproposal: The would include any summary of a type such recognition. The Commission also Commission did not receive comments of recognized non-enumerated bona fide noted that it might decide, in light of the on § 150.9(b) (nor on § 150.10(b) or hedge that was, during the course of the information provided in the summary, § 150.11(b)), and is reproposing week, published or revised on the or any other information included in the § 150.9(b), as originally proposed, for exchange’s Web site pursuant to proposed weekly report regarding the the reasons explained in the 2016 proposed § 150.9(a)(7). position, that it should request the Supplemental Position Limits The Commission noted that the exchange’s complete record of the Proposal.1084 proposed weekly report would support application for recognition of the its surveillance program by facilitating position as an non-enumerated bona 5. Proposed § 150.9(c)—Exchange the tracking of non-enumerated bona fide hedge—in order to determine, for Reporting fide hedges recognized by example, whether the application exchanges,1088 keeping the Commission Proposed Rule: Proposed § 150.9(c)(1) presents novel or complex issues that informed of the manner in which an required an exchange that elected to merit additional analysis pursuant to exchange was administering its process non-enumerated bona fide proposed § 150.9(d)(2), or to evaluate procedures for recognizing such whether the disposition of the hedge applications to submit a weekly positions. For example, the report application by the exchange was report to the Commission.1085 The would make available to the consistent with section 4a(c) of the Act proposed report would provide Commission, on a regular basis, the and the general definition of bona fide information regarding each commodity summaries of types of recognized non- hedging position in § 150.1. derivative position recognized by the enumerated bona fide hedges that an In addition, proposed 150.9(c)(2) exchange as a non-enumerated bona fide exchange posts to its Web site pursuant required an exchange to submit to the hedging position during the course of to proposed § 150.9(a)(7). This would Commission any report made to the the week. Information provided in the facilitate any review by the Commission exchange by an applicant, pursuant to report would include the identity of the of such summaries, pursuant to proposed § 150.9(a)(6), that notified the applicant seeking such an exemption, proposed § 150.9(e), and would help to exchange that the applicant owned or the maximum size of the derivative ensure, if the Commission determines controlled a commodity derivative position that was recognized by the that revisions to a summary are position that the exchange had exchange as a non-enumerated bona fide necessary, that such revisions were recognized as an non-enumerated bona 1086 hedging position, and, to the extent carried out in a timely manner by the fide hedging position, at least that the exchange determined to limit exchange. monthly,1090 unless otherwise the size of such bona fide hedging The Commission noted that in certain instructed by the Commission.1091 The position under the exchange’s own instances, information included in the exchange’s submission of these reports speculative position limits program, the proposed weekly report could prompt would notify the Commission that an size of any limit established by the the Commission to request records applicant had taken a commodity exchange. required to be maintained by an derivative position recognized by the The Commission envisioned that the exchange pursuant to proposed exchange as a non-enumerated bona fide proposed report would specify the § 150.9(b).1089 The 2016 Supplemental hedging position, and would also show maximum size and/or size limitations the applicant’s offsetting positions in by contract month and/or type of limit 1087 Under the proposal, an exchange could the cash markets. Requiring an exchange (e.g., spot month, single month, or all- determine to recognize all, or a portion, of the to submit these reports to the commodity derivative position in respect of which an application for recognition has been submitted, Commission would therefore support 1083 The Commission pointed out that in the as an non-enumerated bona fide hedge, for different December 2013 Position Limits Proposal, persons contract months or different types of limits (e.g., a enumerated bona fide hedge, or any revocation or claiming exemptions under proposed § 150.3 must separate limit level for the spot month). See 2016 modification of such recognition, the report would still ‘‘maintain complete books and records Supplemental Position Limits Proposal, 81 FR at include a concise summary of the applicant’s concerning all details of their related cash, forward, 38474. activity in the cash markets for the commodity futures, options and swap positions and 1088 The Commission stated that the exchange’s underlying the position. transactions. Furthermore, such persons must make assignment of a unique identifier to each of the non- 1090 As proposed, the timeframe within which an such books and records available to the enumerated bona fide hedge applications that the applicant would be required to report to the Commission upon request under proposed exchange received, and, separately, the exchange’s exchange would be established by the exchange in § 150.3(h), which would preserve the ‘special call’ assignment of a unique identifier to each type of its rules, as appropriate and in accordance with rule set forth in current 17 CFR 150.3(b).’’ 78 FR commodity derivative position that the exchange proposed § 150.9(a)(6). The Commission also 75741 (footnote omitted). recognized as a non-enumerated bona fide hedge, pointed out that an exchange could decide to 1084 See 2016 Supplemental Position Limits would assist the Commission’s tracking process. require such reports from its participants more Proposal, 81 FR at 38474. Accordingly, the Commission suggested that, as a frequently than monthly. 1085 Id. ‘‘best practice,’’ the exchange’s procedures for 1091 As proposed, under § 150.9(f)(1)(ii), the 1086 The Commission noted that an exchange processing non-enumerated bona fide hedge Commission would delegate to the Director of the could determine to recognize all, or a portion, of the applications contemplate the assignment of such Commission’s Division of Market Oversight, or such commodity derivative position in respect of which unique identifiers. The Commission noted that other employee or employees as the Director an application for recognition had been submitted, under proposed § 150.9(c)(1)(i), an exchange that designated from time to time, the authority to as a non-enumerated bona fide hedging position, assigned such unique identifiers would be required provide instructions regarding the submission to provided that such determination was made in to include the identifiers in the exchange’s weekly the Commission of information required to be accordance with the requirements of proposed report to the Commission. reported by an exchange pursuant to proposed § 150.9 and was consistent with the Act and the 1089 For example, as proposed, for each derivative § 150.9(c). See 2016 Supplemental Position Limits Commission’s regulations. Id. position recognized by the exchange as a non- Proposal, 81 FR at 38475.

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the Commission’s surveillance program, an alternative to the entire proposed proposed to review records required to by facilitating the tracking of non- exchange-administered exemption be maintained by an exchange pursuant enumerated bona fide hedging positions reporting requirements, one commenter to proposed § 150.9(b); however, under recognized by the exchange, and proposed that exchanges provide a the proposal the Commission could helping the Commission to ensure that weekly report to the Commission request additional information under an applicant’s activities conform to the summarizing newly approved hedge proposed § 150.9(d)(1)(ii) if, for terms of recognition that the exchange exemptions.1096 example, the Commission found had established. Commission Reproposal: The additional information was needed for Proposed § 150.9(c)(3)(i) and (ii) Commission is reproposing the rule, its own review. would require an exchange, unless largely as originally proposed, except instructed otherwise by the that the Commission has revised Under the proposal, the Commission Commission, to submit weekly reports §§ 150.9(c)(1)(i) and 150.9(c)(2) for could decide to review a pending under proposed § 150.9(c)(1), and purposes of clarification. In regards to application prior to disposition by an applicant reports under proposed § 150.9(c)(1)(i), the Commission is exchange, but anticipated that it would § 150.9(c)(2). Proposed § 150.9(c)(3)(i) clarifying that the reports required most likely wait to review applications and (ii) contemplated that, in order to under (c)(1)(i) are those for each until after some action has already been facilitate the processing of such reports, commodity derivatives position that had taken by an exchange. As proposed, and the analysis of the information been recognized that week and for any § 150.9(d)(2) and (3) would require the contained therein, the Commission revocation or modification of a Commission to notify the exchange and would establish reporting and previously granted recognition. As to applicable applicant that they had 10 transmission standards, and that it may § 150.9(c)(2), in response to business days from the date of the require reports to be submitted to the commenters, the Commission clarifies request to provide any supplemental Commission using an electronic data that exchanges are authorized under information. The Commission noted format, coding structure and electronic § 150.9(c)(2), but are not required, to that this approach provided the data transmission procedures approved determine whether to incorporate exchanges and the particular market in writing by the Commission, as additional reporting requirements in participant with an opportunity to specified on the Forms and Submissions connection with its recognition of non- respond to any issues raised by the page at www.cftc.gov.1092 Proposed enumerated bona fide hedging Commission. positions. If an exchange does § 150.9(c)(3)(iii) would require such During the period of any Commission determine to require additional reports to be submitted to the review of an application, an applicant Commission no later than 9:00 a.m. reporting, § 150.9(c)(2) requires that the exchange submit reports no less could continue to rely upon any Eastern time on the third business day recognition previously granted by the following the report date, unless the frequently than monthly.1097 In addition, the Commission believes the exchange. If the Commission exchange was otherwise instructed by determined that remediation was 1093 weekly reporting requires only the most the Commission. necessary, the Commission would Comments Received: Several essential information regarding provide for a commercially reasonable commenters expressed views against the exchange-administered exemptions. amount of time for the market § 150.9(c) reporting requirements, or 6. Proposed § 150.9(d)—Review of participant to comply with limits after requested that the Commission reduce Applications by the Commission or alter the reporting requirements for announcement of the Commission’s 1094 Proposed Rule: Proposed § 150.9(d) decision under proposed exchanges. One commenter 1099 requested that the Commission clarify provided for Commission review of § 150.9(d)(4). In determining a time, that proposed weekly reporting applications to ensure that the processes the Commission could consider factors requirements for exchanges only require administered by the exchange, as well such as current market conditions and reporting of the ‘‘most essential as the results of such processes, were the protection of price discovery in the information’’ regarding exchange- consistent with the requirements of market. Proposed § 150.10(d) and administered hedge exemptions.1095 As section 4a(c) of the Act and the § 150.11(d) contain substantially similar Commission’s regulations requirements regarding review of 1098 1092 The delegation proposed in § 150.9(f)(1)(ii) thereunder. The Commission applications by the Commission of would also, in connection with proposed § 150.9(c)(3), delegate to the Director of the 1096 CL–ICE–60929 at 8–9 and 16. recognition would also be constrained by the SRO’s Commission’s Division of Market Oversight, or such 1097 As reproposed, § 150.9(c)(2) also provides rules, which would be subject to CFTC review other employee or employees as the Director that instead of submitting any such reports under the proposal. The Commission pointed out designated from time to time, the authority: (i) To monthly, the Commission could otherwise instruct that SROs are parties subject to Commission provide instructions for the proposed submissions; the exchange otherwise. authority, their rules are subject to Commission and (ii) to specify on the Forms and Submissions 1098 See 2016 Supplemental Position Limits review and their actions are subject to Commission page at www.cftc.gov the manner for submitting to Proposal, 81 FR at 38475–76. As the proposal noted, de novo review under the proposal—SRO rules and the Commission information required to be reported the Commission agreed with the comment of one actions may be changed by the Commission at any by an exchange pursuant to proposed § 150.9(c), participant at the June 19, 2014 Roundtable on time. In addition, the Commission noted that under and to determine the format, coding structure and Position Limits, who said that if the Commission the proposal, the exchange was required to make its electronic data transmission procedures for were to permit exchanges to administer a process determination consistent with both CEA section submitting such information. See 2016 for non-enumerated bona fide hedging positions, 4a(c) and the Commission’s general definition of Supplemental Position Limits Proposal, 81 FR at the Commission should continue to do ‘‘a certain bona fide hedging position in § 150.1. Further, the 38475. amount of de novo analysis and review.’’ Id. Commission noted that CEA section 4a(c)(1) 1093 For purposes of proposed § 150.9(c)(2), the The Commission noted that, under the proposal, requires a position to be shown to be bona fide as timeframe set forth in proposed § 150.9(c)(3)(iii) the SRO’s recognition was tentative, because the defined by the Commission. would be calculated from the date of a exchange’s Commission would reserve the power to review the 1099 The Commission noted a commercially submission to the Commission, and not from the recognition, subject to the reasonably fixed reasonable time period as necessary to exit the date of an applicant’s report to the exchange. statutory standards in CEA section 4a(c)(2) market in an orderly manner, generally, ‘‘would be 1094 CL–AMG–60946 at 3; CL–CME–60926 at 11; (directing the CFTC to define the term bona fide less than one business day.’’ 2016 Supplemental CL–ICE–60929 at 8–9 and 16; and CL–CMC–60950 hedging position) that are incorporated into the Position Limits Proposal, 81 FR at 38476, n. 168 at 13–14. Commission’s proposed general definition of bona (citing the December 2013 Position Limits Proposal, 1095 CL–CME–60926 at 11. fide hedging position in § 150.1. The SRO’s 78 FR at 75713).

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spread exemptions and anticipatory amount of time for an entity to unwind Regarding the recommendation that hedge exemptions. its position should not be limited to one the Commission limit its available time Comments Received: Several business day or less. Instead, these to review exchange granted exemptions, commenters were concerned about the commenters advocated that the this limitation may appear inconsistent Commission review process and/or Commission or the exchange should with case law regarding authorizations provided suggestions on how the determine how long an entity has to for self-regulatory organizations to make Commission should modify or limit its unwind a position given the facts and determinations, subject to de novo authority to review exchange-granted circumstances of each situation.1104 agency review.1108 Regarding whether exemptions.1100 Three commenters expressed the view the Commission would expose One commenter requested that the that when the Commission reviews and exchanges to undue regulatory penalties Commission define in more detail, in affirms a non-enumerated bona fide or uncertainty for exemptions the the final rule, how this review process hedging position determination, such a Commission overturns, the Commission will work.1101 Another commenter determination should result in a new declines to speculate on any actions that recommended that exemptions granted enumerated bona fide hedging it may take, beyond the notice to the by an exchange be given deference by position.1105 applicant. Regarding giving entities a the Commission upon subsequent Some commenters opined that the ‘‘commercially reasonable’’ time for an review, with reversal occurring only Commission should instead explicitly entity to unwind their positions, the when there is evidence of negligence or require Commission review and Commission has not proposed a fixed abuse, or when it may lead to market approval of all hedge exemption time period, but would consider the disruption.1102 Four commenters requests received by an exchange.1106 facts and circumstances of each suggested that the Commission limit the These commenters believe that the situation. time available for it to review a non- Commission should always make the In response to comments that the enumerated bona fide hedging position Commission should create a new exemption granted by an exchange in an final decision regarding whether to grant a particular hedge exemption. enumerated hedge for any non- effort to provide regulatory certainty to enumerated bona fide hedging position entities relying on that exemption.1103 Commission Reproposal: After carefully considering the comments determination the Commission reviews Fourteen commenters expressed the and affirms, the Commission clarifies view that a ‘‘commercially reasonable’’ received, the Commission is reproposing § 150.9(d), as originally that under the de novo review standard, no deference is provided to a prior 1100 CL–CMC–60950 at 14; CL–NFP–60942 at 6– proposed. The Commission believes the 8; CL–DFA–60927 at 1–2; CL–ICE–60929 at 5–8; proposed de novo review of exchange- determination; rather, the Commission CL–ISDA–60931 at 6–7; CL–AGA–60943 at 7; CL– granted non-enumerated bona fide will review as if no decision has been FIA–60937 at 2, 6, 7; CL–COPE–60932 at 7; CL– hedging position exemptions is previously made. This is the same as a COPE–60932 at 7–8; CL–EEI–EPSA–60925 at 10–11; ‘‘hearing de novo.’’ 1109 The CL–RER2–60962 at 1; CL–Public Citizen–60940 at adequate to maintain proper exchange 2; and CL–MGEX–60936 at 7. See also CL–FIA– oversight and to verify that such Commission also notes that, as 60937 at 7, 8; CL–COPE–60932 at 7; CL–NGFA– exemptions provide fair and open previously discussed, an exchange can 60941 at 3; CL–ICE–60929 at 18; CL–API–60939 at access by all market participants. petition under § 13.2 for Commission 4; CL–EEI–EPSA–60925 at 10–11; CL–IECAssn– recognition of a generic position as an 60949 at 9–10 (recommending for an appeals Further, the Commission notes that it process and/or notice and public comment feature must maintain de novo review on a enumerated bona fide hedging position, for the Commission review process); CL–FIA–60937 case-by-case basis; otherwise, as and that market participants have the at 7, 8 (recommending that market participants have discussed above, the exchange flexibility of two processes for continued reliance on any overturned exemption recognition of a position as an for one year after the overturn or modification); CL– exemption process may be considered NGFA–60941 at 3 (suggesting that a vote by the full an illegal delegation of Commission enumerated bona fide hedging position: Commission should be required on the ‘‘weighty authority to exchanges.1107 (i) Request an exemptive, no-action or decision’’ to invalidate a hedge exemption after interpretative letter under § 140.99; and/ thorough analysis and careful consideration); and or (ii) petition under § 13.2 for changes CL–MGEX–60936 at 7 (expressing concerns that 1104 See, e.g., CL–API–60939 at 4; CL–FIA–60937 there is legal uncertainty and lack of clarity in how at 3, 8; CL–MGEX–60936 at 7–8; CL–ISDA–60931 to Appendix B to part 150. the non-enumerated bona fide hedging position at 7; CL–NGFA–60941 at 3; CL–NFP–60942 at 8; The reproposed rule is confined to process will work). CL–AGA–60943 at 2; CL–AGA–60943 at 7; CL– federal limits and does not interfere 1101 CL–AFIA–60955 at 2. AMG–60946 at 5; CL–ICE–60929 at 18; CL–CMC– with existing exemption processes that 1102 60950 at 11; CL–NCGA–NGSA–60919 at 13; CL– CL–MGEX–60936 at 7–8. exchanges currently implement and 1103 CL–FIA–60937 at 3; CL–ICE–60929 at 18; CL– EEI–EPSA–60925 at 10; and CL–ISDA–60931 at 7. API–60939 at 4; and CL–API–60939 at 1. See also See also CL–FIA–60937 at 3, 8 (recommending the oversee with regard to exchange-set CL–API–60939 at 1 (requesting that, if the Commission consider ‘‘(1) the size of, and risks limits. Exchanges remain bound by the Commission conducts a review of an exchange associated with, the participant’s cash and related bona fide hedging position definition in derivative positions; (2) the risks created by the granted non-enumerated bona fide hedging position this part for any recognition for exemption, then the Commission should limit the need to reduce what will become an un-hedged time period to 180 days to issue a decision to cash market exposure; and (3) the availability of purposes of federal limits. But, as noted overturn an exemption); CL–AGA–60943 at 8 sufficient liquidity to enable the market participant above, in regards to reproposed (suggesting that the Commission ‘‘should adopt a to reduce the hedging and the underlying positions § 150.9(a), exchange processes for without incurring losses solely as a result of being rule that follows its current approach under CFTC exchange-set limits that are lower than Rule 1.47); CL–IECAssn–60949 at 11–12 forced to liquidate the hedge within a constrained (recommending a reasonable time period to unwind timeframe.’’). the federal limit could differ as long as positions for which an exemption has been 1105 CL–COPE–60932 at 7; CL–EEI–EPSA–60925 overturned would help to allow the market to at 11; and CL–COPE–60932 at 7. 1108 See 2016 Supplemental Position Limits operate smoothly); and CL–FIA–60937 at 7 (noting 1106 CL–Public Citizen–60940 at 2; and CL–RER2– Proposal, 81 FR at 38465, n. 83. The that the Commission should ‘‘require an exchange 60962 at 1. recommendation might also unduly constrain to post a general description of a non-enumerated 1107 See also 2016 Supplemental Position Limits agency resources. hedge, spread, or anticipatory hedge exemption on Proposal, 81 FR at38464–66 (discussing the 1109 See Black’s Law Dictionary 837 (10th ed. its Web site within 30 days of granting the Commission’s authority to permit certain exchanges 2014) (defining ‘‘hearing de novo’’ as ‘‘[a] reviewing exemption,’’ and thereafter, ‘‘the Commission to recognize positions as bona fide hedging court’s decision of a matter anew, giving no should have 180 days to decide whether to review positions for purposes of federal limits, as well as deference to a lower court’s findings. A new hearing and overturn or modify an exemption posted on an the careful provisions proposed in § 150.9 to do so of a matter, conducted as if the original hearing had exchange’s Web site.’’). within the limitations on its authority). not taken place.’’).

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the exemption provided by the Division of Market Oversight, or such proposed § 150.9(d)(2) and exchange is capped at the level of the other employee or employees as the § 150.10(d)(2), respectively, to applicable federal limit in § 150.2. Director designated from time to time. determine that an application for Regarding requests to revise the In § 150.9(f), the Commission proposed recognition of an non-enumerated bona Commission’s review process (i.e., to delegate, until it ordered otherwise, fide hedging position, or an application include an appeals process, provide to the Director of the Division of Market for a spread exemption, required notice and public comment opportunity, Oversight or such other employee or additional analysis or review, and to require a vote by the Commission to employees as the Director designated provide notice to the exchange and the overturn an exchange-granted from time to time, the authorities under particular applicant that they had 10 exemption, provide more detail on the certain parts of §§ 150.9(a); 150.9(c); days to supplement such application. review process), the Commission notes 150.9(d); and 150.9(e). As noted, similar The Commission did not propose to that it has not proposed to delegate delegations were contained in proposed delegate its authority under proposed authority to staff to overturn an § 150.10(f) and § 150.11(e) for spread § 150.9(d)(3) or § 150.10(d)(3) to make a exchange determination. exemptions and enumerated final determination as to the exchange’s 7. Proposed § 150.9(e)—Review of anticipatory hedge exemptions, disposition. The Commission stated that summaries by the Commission respectively. if an exchange’s disposition raised Proposed § 150.9(f)(1)(i), concerns regarding consistency with the Proposed Rule: In connection with § 150.10(f)(1)(i) and § 150.11(e)(1)(i) Act or presents novel or complex issues, proposed § 150.9(a)(7), for the delegated the Commission’s authority to then the Commission should make the Commission to rely on the expertise of the Division of Market Oversight to final determination, after taking into the exchanges to summarize and post provide instructions regarding the consideration any supplemental executive summaries of non-enumerated submission of information required to information provided by the exchange bona fide hedging positions to their be reported to the Commission by an or the applicant.1111 respective Web sites, the Commission exchange, and to specify the manner proposed, in § 150.9(e), to review such and determine the format, coding Comments Received executive summaries to ensure the structure, and electronic data One commenter recommended that summaries provided adequate transmission procedures for submitting the Commission clarify the delegation disclosure to market participants of the such information. Proposed provisions referenced in RFC 31 by potential availability of relief from § 150.9(f)(1)(v) and § 150.10(f)(1)(v) expressly stating that ‘‘the Commission, speculative position limits. The delegated the Commission’s review not DMO, now and always will retain Commission stated that it believed an authority under proposed § 150.9(e) and the ultimate authority to grant or deny adequate disclosure would include § 150.10(e), respectively, to DMO with Exemption applications.’’ 1112 generic facts and circumstances respect to summaries of types of sufficient to alert similarly situated recognized non-enumerated bona fide Commission Reproposal market participants to the possibility of hedging positions, and types of spread The Commission is reproposing the receiving recognition of a non- exemptions, that were required to be delegation provisions, as originally enumerated bona fide hedging position. posted on an exchange’s Web site proposed. With regard to the comment Such market participants could then use pursuant to proposed § 150.9(a)(7) and received, the Commission notes that, as that information to help evaluate § 150.10(a)(7), respectively. provided in both proposed and whether to apply for recognition of a Proposed § 150.9(f)(1)(i), reproposed § 150.9(f)(3), it retains the non-enumerated bona fide hedging § 150.10(f)(1)(i) and § 150.11(e)(1)(i) authority to make the final position. Thus, the Commission noted, delegated the Commission’s authority to determination to grant or deny hedge adequate disclosure should help ensure the Division of Market Oversight to exemption applications submitted fair and open access to the application agree to or reject a request by an pursuant to this rulemaking. However, process. Due to resource constraints, the exchange to consider an application for the Commission also points out that any Commission pointed out that it might recognition of an non-enumerated bona decisions of an existing Commission not be able to preclear each summary, fide hedging position or enumerated under this rulemaking cannot effectively so it proposed to spot check executive anticipatory bona fide hedging position, bind a future commission, since such summaries after the fact. or an application for a spread future Commission could amend or exemption. Proposed § 150.9(f)(1)(iii), revoke such a rule. Commission Reproposal § 150.10(f)(1)(iii) and § 150.11(e)(1)(iii) The Commission did not receive delegated the Commission’s authority to H. § 150.10—Process for Designated comments on § 150.9(e) (nor on review any application for recognition Contract Market or Swap Execution § 150.10(e)), and is reproposing of a non-enumerated bona fide hedging Facility Exemption From Position Limits § 150.9(e), as originally proposed, for position or enumerated anticipatory for Certain Spread Positions the reasons explained in the 2016 bona fide hedging position, or 1. Background 150.10 Supplemental Position Limits application for a spread exemption, and Proposal.1110 all records required to be maintained by In the 2016 Supplemental Position an exchange in connection with such Limits Proposal, the Commission 8. Proposed § 150.9(f)—Delegation of application. Proposed § 150.9(f)(1)(iii), proposed to permit exchanges, by rule, Authority § 150.10(f)(1)(iii) and § 150.11(e)(1)(iii) to exempt from federal position limits Proposed Rule also delegated the Commission’s certain spread transactions, as 1113 The Commission proposed to delegate authority to request such records, and to authorized by CEA section 4a(a)(1), certain of its authorities under proposed request additional information in 1111 § 150.9 (and § 150.10 and § 150.11), to connection with such application from See 2016 Supplemental Position Limits the exchange or from the applicant. Proposal, 81 FR at 38482. the Director of the Commission’s 1112 CL–Working Group–60947 at 22. Proposed § 150.9(f)(1)(iv) and 1113 7 U.S.C. 6a(a)(1) (authorizing the Commission 1110 See 2016 Supplemental Position Limits § 150.10(f)(1)(iv) delegated the to exempt transactions normally known to the trade Proposal, 81 FR at 38476. Commission’s authority, under as ‘‘spreads’’). DCMs currently process applications

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and in light of the provisions of CEA passage of the Dodd-Frank Act, the and intramarket spread positions, under section 4a(a)(3)(B) and CEA section Commission exercised its exemptive the December 2013 Position Limits 4a(c)(2)(B).1114 In particular, CEA authority pertaining to spread Proposal, would have to be outside of section 4a(a)(1) provides the transactions in promulgating current the spot month for physical delivery Commission with authority to exempt § 150.3. Current § 150.3 provides that contracts, and intramarket spread from position limits transactions the position limits set in § 150.2 may be positions could not exceed the federal normally known to the trade as exceeded to the extent such positions all-months limit when combined with ‘‘spreads’’ or ‘‘straddles’’ or ‘‘arbitrage’’ are spread or arbitrage positions any other net positions in the single or to fix limits for such transactions or between single months of a futures month. As proposed in the December positions different from limits fixed for contract and/or, on a futures-equivalent 2013 Position Limits Proposal, other transactions or positions. The basis, options thereon, outside of the § 150.5(a)(2)(iii) would require traders to Commission noted that the Dodd-Frank spot month, in the same crop year; apply to the exchange for any Act amended the CEA by adding section provided, however, that such spread or exemption, including spread 4a(a)(3)(B), which now directs the arbitrage positions, when combined exemptions, from its speculative Commission, in establishing position with any other net positions in the position limit rules. limits, to ensure, to the maximum extent single month, do not exceed the all- Several commenters responding to the practicable and in its discretion, months limit set forth in § 150.2. In December 2013 Position Limits Proposal ‘‘sufficient market liquidity for bona addition, the Commission has permitted requested that the Commission provide fide hedgers.’’ 1115 The Commission also DCMs, in setting their own position a spread exemption to federal position noted that the Dodd-Frank Act limits under the terms of current limits.1119 Most of these commenters amendments to the CEA in section § 150.5(a), to exempt spread, straddle or urged the Commission to recognize 4a(c)(2)(B) limited the definition of a arbitrage positions or to fix limits that spread exemptions in the spot month as bona fide hedging position regarding apply to such positions that are different well as non-spot months.1120 Several of positions (in addition to those included from limits fixed for other positions.1117 these commenters noted that the under CEA section 4a(c)(2)(A)) 1116 Under the December 2013 Position Commission’s proposal would permit resulting from a swap that was executed Limits Proposal, the exemption in exchanges to grant spread exemptions opposite a counterparty for which the current § 150.3(a)(3) for spread or for exchange-set limits in commodity transaction would qualify as a bona fide arbitrage positions between single derivative contracts subject to federal hedging transaction, in the event the months of a futures contract or options limits, and recommended that the party to the swap is not itself using the thereon, outside the spot month would Commission establish a process for swap as a bona fide hedging transaction. be deleted. As the Commission noted, granting such spread exemptions for In this regard, the Commission the proposal would instead maintain the purposes of Federal limits.1121 interpreted this statutory definition to current practice in § 150.2 of setting In response to these comments, the preclude spread exemptions for a swap single-month limits at the same levels as Commission proposed in its 2016 position that was executed opposite a all-months limits, which would render Supplemental Position Limits counterparty for which the transaction the ‘‘spread’’ exemption Proposal 1122 to permit exchanges to would not qualify as a bona fide unnecessary.1118 In particular, the process and grant applications for hedging transaction. spread exemption set forth in current spread exemptions from federal position As noted in the 2016 Supplemental § 150.3(a)(3) permits a spread trader to limits. At that time, the Commission Position Limits Proposal, prior to the exceed single month limits only to the noted that most, if not all, DCMs already extent of the all months limit. Because have rules in place to process and grant for exemptions from exchange-set position limits the Commission, in current § 150.2 and for certain spread positions pursuant to CFMA-era applications for spread exemptions from regulatory parameters. See 2016 Supplemental as proposed in the December 2013 exchange-set position limits pursuant to Position Limits Proposal, 81 FR at 38467, n. 101. Position Limits Proposal, sets single part 38 of the Commission’s regulations The Commission pointed out that, in current month limits at the same level as all (in particular, current §§ 38.300 and § 150.3(a)(3), the Commission exempts spread months limits, the existing spread positions ‘‘between single months of a futures 38.301) and current § 150.5. And, as contract and/or, on a futures-equivalent basis, exemption would no longer provide noted above, the Commission pointed options thereon, outside of the spread month, in the useful relief. out that it has a long history of same crop year,’’ subject to certain limitations. 17 The Commission also noted that the overseeing the performance of the DCMs CFR 150.3(a)(3). December 2013 Position Limits Proposal in granting spread exemptions under 1114 7 U.S.C. 6a(a)(3)(B) and 7 U.S.C. 6a(c)(2)(B), would codify guidance in proposed respectively. current exchange rules regarding 1115 CEA section 4a(a)(3)(B) also directs the § 150.5(a)(2)(ii) to allow an exchange to exchange-set position limits and Commission, in establishing position limits, to grant exemptions from exchange-set believed that it would be efficient, and diminish, eliminate, or prevent excessive position limits for intramarket and in the best interest of the markets, in speculation; to deter and prevent market intermarket spread positions (as those manipulation, squeezes, and corners; and to ensure light of current resource constraints, to that the price discovery function of the underlying terms were defined in proposed § 150.1) rely on the exchanges to process market is not disrupted. involving commodity derivative applications for spread exemptions from 1116 7 U.S.C. 6a(c)(2)(A). As explained in the 2016 contracts subject to the federal limits. federal position limits. In addition, the Supplemental Position Limits Proposal, 81 FR at To be eligible for the exemption in 38464, n. 66, CEA section 4a(c)(2) generally requires proposed § 150.5(a)(2)(ii), intermarket 1119 the Commission to define a bona fide hedging See, e.g., CL–CMC–59634 at 15; CL–Olam– position as a position that in CEA section 59658 at 7; CL–CME–59718 at 69–71; CL–Citadel– 4a(c)(2)(A): Meets three tests (a position (1) is a 1117 Current § 150.5 applies as non-exclusive 59717 at 8, 9; CL–Armajaro–59729 at 2; and CL– substitute for activity in the physical marketing guidance and acceptable practices for compliance ICEUS–59645 at 8–10. channel, (2) is economically appropriate to the with DCM core principle 5. See December 2013 1120 See CL–CMC–59634 at 15; CL–Olam–59658 reduction of risk, and (3) arises from the potential Position Limits Proposal, 78 FR at 75750–2; see also at 7; CL–CME–59718 at 71; CL–Armajaro–59729 at change in value of current or anticipated assets, 2016 Supplemental Position Limits Proposal, 81 FR 2; and CL–ICEUS–59645 at 8–10. liabilities or services); or, in CEA section at 38477, n. 173. 1121 See CL–Olam–59658 at 7; CL–CME–59718 at 4a(c)(2)(B), reduces the risk of a swap that was 1118 See December 2013 Position Limits Proposal, 71; CL–ICEUS–59645 at 10. executed opposite a counterparty for which such 78 FR at 75736; see also 2016 Supplemental 1122 See 2016 Supplemental Position Limits swap would meet the three tests. Position Limits Proposal, 81 FR at 38477. Proposal, 81 FR at 38476–80.

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Commission stated that, because many process outlined above for proposed listed the other components of the market participants may be familiar § 150.9(a), the Commission expressed its spread to recognize the exemption for with current DCM practices regarding belief that that an exchange should purposes of that other exchange(s)’ spread exemptions, permitting DCMs to process spread exemptions only if it had position limits. In such cases, a trader build on current practice may lower the at least one year of experience seeking such inter-commodity spread burden on market participants and overseeing exchange-set position limits exemptions would need to apply reduce duplicative filings at the in an actively traded referenced contract separately for a spread exemption from exchanges and the Commission. The that was in the same commodity as that each exchange-set position limit. 2016 Supplemental Position Limits of at least one component of the spread. Comments Received Proposal noted that this plan would The Commission stated that an permit exchanges to provide market exchange may not be familiar enough Two commenters recommended that participants with spread exemptions, with the specific needs and differing the Commission should, to the greatest pursuant to exchange rules submitted to practices of the participants in those extent possible, allow the exchanges to the Commission; however, the markets for which an individual administer exemptions for non- Commission also pointed out that it exchange did not list any actively traded enumerated bona fide hedging would retain the authority to review— referenced contract in a particular positions, enumerated bona fide hedges, and, if necessary, reverse—the commodity. If a component of a spread and spread positions in the same exchanges’ actions.1123 was not actively traded on an exchange manner as they have been to date and Proposed § 150.10 and the public that elected to process spread allow exchanges to continue to comments relevant to each proposed exemption applications, such exchange independently evaluate exemption subsection are discussed below. might not be incentivized to protect or applications by relying on the manage the relevant commodity market, exchange’s extensive knowledge of the 2. Discussion 1126 and the interests of such exchange markets. Five commenters recommended that As discussed in greater detail below, might not be aligned with the policy the Commission not adopt the ‘‘active the Commission is reproposing § 150.10, objectives of the Commission as trading’’ and ‘‘one year experience’’ largely as originally proposed. Some expressed in CEA section 4a(a)(3)(B). requirements as proposed in the changes were made in response to The Commission expected that an supplement regarding a DCM’s concerns raised by commenters; other individual exchange would describe qualification to administer exemptions changes conform to changes made in how it would determine whether a from federal position limits.1127 For a § 150.9 or § 150.11. Finally, several non- particular component of a spread was more detailed discussion please see substantive changes were made in actively traded in its rule submission, § 150.9(a)(1) above. response to commenter questions to based on its familiarity with the specific provide greater clarity. Alternatively, several commenters needs and differing practices of the expressed views against the a. Proposed § 150.10(a)(1) participants in the relevant market. Consistent with the restrictions Proposed Rule 1126 CL–NCGA–NGSA–60919 at 9 and CL– regarding the offset of risks arising from IECAssn–60949 at 3–4. The Commission contemplated in a swap position in CEA section 1127 See, e.g., CL–CCI–60935 at 3–4; CL–FIA– proposed § 150.10(a)(1) that exchanges 4a(c)(2)(B), proposed § 150.10(a)(1) 60937 at 3; CL–Working Group–60947 at 10; CL– could voluntarily elect to process spread would not permit an exchange to IECAssn–60949 at 12–13; and CL–CME–60926 at 13 exemption applications, by filing new (expressing that such qualification requirements recognize a spread between a could have the unintended consequences of (1) rules or rule amendments with the commodity index contract and one or harming the ability of market participants to Commission pursuant to part 40 of the more referenced contracts. That is, an effectively manage their risk by preventing the Commission’s regulations.1124 The exchange could not grant a spread Exchanges from recognizing an otherwise process proposed under § 150.10(a) was appropriate exemption from federal speculative exemption where a bona fide hedging position limits, and (2) stifling future innovation in substantially similar to that described position could not be recognized for a the development of new commodity derivative above for proposed § 150.9(a). For pass through swap offset of a products created to meet evolving market needs and example, proposed § 150.10(a)(1) commodity index contract.1125 demands). See also CL–FIA–60937 at 9 (citing the provided that, with respect to a following example: ‘‘For example, CME’s New York The Commission noted that for inter- Mercantile Exchange (‘‘NYMEX’’) recently listed the commodity derivative position for commodity spreads in which different LOOP crude oil storage futures contract (LPS) and which an exchange elected to process components of the spread were traded IFUS recently listed the world cotton futures spread exemption applications, (i) the on different exchanges, the exemption contract (WCT). Assuming for purposes of exchange must list for trading at least illustration that both of these futures contracts were granted by one exchange would be Referenced Contracts, under the Supplemental one component of the spread or must recognized by the Commission as an Proposal neither NYMEX nor IFUS would be list for trading at least one contract that exemption from federal limits for the permitted to grant non-enumerated hedge, spread, is a referenced contract included in at applicable referenced contract(s), but or anticipatory hedge exemptions during the first least one component of the spread; and year of each contract’s existence notwithstanding would not bind the exchange(s) that the extensive experience of these exchanges in (ii) any such exchange contract must be administering limits on positions in a variety of actively traded and subject to position 1125 The Commission’s interprets CEA section similar contracts.’’), CL–CME–60926 at 14 (arguing limits for at least one year on that 4a(c)(2)(b) is a mandate from Congress to narrow the that one year of experience in administering exchange. As noted with respect to the scope of what constitutes a bona fide hedging position limits in similar contracts within a position in the context of index trading activities. particular ‘‘asset class’’ would be a more reasonable ‘‘Financial products are not substitutes for positions requirement.), CL–FIA–60937 at 9 (expressing the 1123 2016 Supplemental Position Limits Proposal, taken or to be taken in a physical marketing view that ‘‘the CEA precludes the Commission from 81 FR at 38477. channel. Thus, the offset of financial risks from establishing limits that apply to ‘‘bona fide hedge 1124 See 2016 Supplemental Position Limits financial products is inconsistent with the proposed positions,’’ and the ‘‘definition of bona fide hedging Proposal, 81 FR at 38464, n. 63, regarding definition of bona fide hedging for physical in CEA Section 4a(c)(2) does not include as relevant Commission authority to recognize spreads under commodities.’’ See 2016 Supplemental Position criteria whether an exchange contract is actively CEA section 4a(a)(1). Any action of the exchange to Limits Proposal, 81 FR at 38471; see also December traded or an exchange has one year of prior recognize a spread, pursuant to rules filed with the 2013 Position Limits Proposal, 78 FR at 75740. See experience administering limits on positions in that Commission, would be subject to review and also the discussion of the temporary substitute test. contract.’’ Thus, the CEA does not permit the one revocation by the Commission. Id. at 75708–9. year prerequisite.)

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Commission authorizing exchanges to their interests aligned with the CEA’s b. Proposed § 150.10(a)(2) grant hedge and spread exemptions, and policy objectives for position limits, Proposed Rule cited concerns with respect to what they such as those in CEA section believe to be a conflict of interest that 4a(a)(3)(B).1131 Proposed § 150.10(a)(2) specifies a could arise between for-profit exchanges Finally, the Commission clarifies that non-exclusive list of the type of spreads and their exemption-seeking customers. an exchange can petition the that an exchange might exempt from The commenters proposed, instead, that Commission for a waiver of the one-year position limits, including calendar the Commission make any final hedge experience requirement pursuant to spreads; quality differential spreads; and spread exemption § 140.99 of the Commission’s processing spreads (such as energy determinations.1128 regulations if such exchange believes ‘‘crack’’ or soybean ‘‘crush’’ spreads); that their experience and interests are and product or by-product differential Commission Reproposal aligned with the Commission’s interests spreads. The Commission pointed out The Commission is reproposing with respect to recognizing spread that this list was not exhaustive, but § 150.10(a)(1), as originally proposed positions. reflected common types of spread with one clarification explained below. Regarding comments that the activity that might enhance liquidity in In reproposing § 150.10(a)(1), the Commission should be the sole commodity derivative markets, thereby Commission provides a basic authority to make a final hedge or facilitating the ability of bona-fide application process for exchanges that spread exemption determination, or that hedgers to put on and offset positions in elect to process spread exemption the Exchange’s one-year of experience those markets. For example, trading applications to federal limits. This administering position limits to its activity in many commodity derivative process allows exchanges flexibility actively traded contract and the markets is concentrated in the nearby while also facilitating the Commission’s Commission’s de novo review are contract month, but a hedger might need review of exchange granted exemptions. inadequate, the Commission disagrees. to offset risk in deferred months where The Commission notes that exchanges The Commission believes the derivative trading activity may be less have authority to determine whether or exchange’s one year of experience active. A calendar spread trader could not to apply the § 150.10(a)(1) process to administering position limits to its provide such liquidity without exposing spread exemptions from exchange-set actively traded contract,1132 and the himself or herself to the price risk limits that are lower than federal limits. Commission’s de novo review of granted inherent in an outright position in a Regarding the comment that the one- exemptions (afterwards) are adequate to deferred month. Processing spreads can year experience and active trading guard against or remedy any conflicts of serve a similar function. For example, a qualification requirements could harm interest. Also, the Commission notes soybean processor might seek to hedge the ability for market participants to that § 150.10(a)(4)(vi) requires his or her processing costs by entering effectively manage their risks because exchanges should take into account into a ‘‘crush’’ spread, i.e., going long the qualification requirements would whether granting a spread exemption in soybeans and short soybean meal and limit the number of exchanges that a physical commodity derivative would, oil. A speculator could facilitate the could grant exemptions,1129 the to the maximum extent practicable, hedger’s ability to do such a transaction Commission clarifies that the one-year ensure sufficient market liquidity for by entering into a ‘‘reverse crush’’ experience and active trading bona fide hedgers, and not unduly spread (i.e., going short soybeans and requirement can be met by any reduce the effectiveness of position long soybean meal and oil). Quality referenced contract in the particular limits to: Diminish, eliminate, or differential spreads, and product or by- commodity.1130 This feature allows a prevent excessive speculation; deter and product differential spreads, may serve broader number of exchanges to grant prevent market manipulation, squeezes, similar liquidity-enhancing functions spread exemptions. Furthermore, the and corners; and ensure that the price when spreading a position in an actively Commission notes that an exchange discovery function of the underlying traded commodity derivatives market with no active trading and or experience market is not disrupted.1133 such as CBOT Wheat against a position in any referenced contract in the in another actively traded market, such particular commodity may not have 1131 CEA section 4a(a)(3)(B) provides that the as MGEX Wheat. Commission shall set limits ‘‘to the maximum The Commission anticipated that a extent practicable, in its discretion—to diminish, 1128 See, e.g., CL–Public Citizen–60940 at 3; CL– spread exemption request might include PMAA–NEFI–60952 at 2; CL–RER2–60962 at 1; CL– eliminate, or prevent excessive speculation as AFR–60953 at 2; CL–RER1–60961 at 1; CL–PMAA– described under this section; to deter and prevent spreads that were ‘‘legged in,’’ that is, NEFI–60952 at 2; CL–RER2–60962 at 1; CL–AFR– market manipulation, squeezes, and corners; to carried out in two steps, or alternatively 60953 at 2 and CL–Better Markets–60928 at 1–5. ensure sufficient market liquidity for bona fide were ‘‘combination trades,’’ that is, all hedgers; and to ensure that the price discovery 1129 As noted above, according to the commenter, components of the spread were the qualification requirements would limit the function of the underlying market is not disrupted.’’ number of exchanges that could grant exemptions In addition, CEA section 4a(a)(7) authorizes the executed simultaneously. to those that list the relevant referenced contract Commission to exempt any class of transaction from This proposal, the Commission and manage position limits in that referenced any requirement it may establish with respect to observed, would not limit the granting contract based on the exchanges experience and position limits. of spread exemptions to positions knowledge of the underlying commodity market 1132 To avoid confusion, the Commission that referenced contract. reiterates that experience manifests in the people outside the spot month, unlike the 1130 As noted above, experience manifests in the carrying out surveillance in a commodity rather existing spread exemption provisions in people carrying out surveillance in a commodity than in an institutional structure. An exchange’s current § 150.3(a)(3), or in rather than in an institutional structure. An experience would be provided through the § 150.5(a)(2)(ii) as proposed in the appropriate experience of the surveillance staff exchange’s experience would be provided through December 2013 Position Limits the appropriate experience of the surveillance staff regarding the particular commodity. regarding the particular commodity. In fact, the 1133 As noted in the 2016 Supplemental Position Proposal. The proposal responded to Commission has historically reviewed the Limits Proposal, the guidance is consistent with the specific requests of commenters to experience and qualifications of exchange statutory policy objectives for position limits on permit spread exemptions in the spot regulatory divisions when considering whether to physical commodity derivatives in CEA section designate a new exchange as a contract market or 4a(a)(3)(B). See 2016 Supplemental Position Limits month. The Commission pointed out to recognize a facility as a SEF; as such exchanges Proposal, 81 FR at 38464. The Commission are new, staff experience has clearly been gained at interprets the CEA as providing it with the statutory the other policy objectives for position limits, such other exchanges. authority to exempt spreads that are consistent with as those in CEA section 4a(a)(3)(B). Id.

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that the CME, for example, whether to grant spread exemptions in hedgers rely on the ability to hold recommended ‘‘the Commission the spot month—including within the positions through the end of the current reaffirm in DCMs the discretion to apply last five days of trading. Commenters month, which has very low volume their knowledge of individual expressed the view that allowing traded for monthly power contracts. commodity markets and their exchanges to grant spread exemptions in Restrictions on spread exemptions judgement, as to whether allowing the spot months/last five days would during the last five days of trading may intermarket spread exemptions in the provide liquidity to the market and help force market participants to exit their spot month for physical-delivery convergence between cash and futures position during a period of lower contracts is appropriate.’’ 1134 markets.1140 liquidity—more than 99% of trading The Commission proposed to revise Eight commenters expressed the view volume occurs outside the current (spot) the December 2013 Position Limits that the Commission should not impose month’’ on its exchange.1143 Proposal in the manner described above the five-day rule for spread positions in One commenter expressed that it is because, as it noted in the 2016 the expiring spot month contract.1141 concerned that the new Form 504 would Supplemental Position Limits Proposal The commenters argued that to impose impose a series of reporting as well as in the examples above, the five-day rule would adversely affect requirements to track and distinguish permitting spread exemptions in the liquidity in the futures market and between types of hedge exemptions and spot month may further one of the four impair convergence between cash and requires reporting of all cash market policy objectives set forth in section futures markets and thus the price holdings for each day of the spot month 4a(a)(3)(b) of the Act: To ensure discovery function of the futures that would be difficult given the sufficient market liquidity for bona fide market. The commenters also expressed portfolio nature of commenter’s hedgers.1135 This policy objective, the the view that the Commission’s business and the fungibility of futures Commission observed, was incorporated concerns about trading activity in the contracts and the underlying cash into the proposal in its requirements final days of an expiring futures contract commodity. The commenter expressed that: (i) The applicant provide detailed can best be addressed by existing the view that once a hedge exemption information demonstrating why the exchange and Commission surveillance is granted under the supplemental, the spread position should be exempted programs and the Commission’s reporting requirements should be from position limits, including how the ‘‘special call’’ authority to request similar to the reporting requirements for exemption would further the purposes information from market participants. existing enumerated bona fide hedging of CEA section 4a(a)(3)(B); 1136 and (ii) One commenter expressed the view position exemptions.1144 the exchange would determine whether that the Commission should not apply Another commenter expressed the the spread position (for which a market the five-day rule to certain enumerated view that it is not necessary to condition participant was seeking an exemption) bona fide hedging positions under spread exemptions on additional filings would further the purposes of CEA proposed § 150.1(3)–(4), cross- to the exchange or the Commission.1145 section 4a(a)(3)(B).1137 Moreover, the commodity hedges under proposed Two commenters requested that the Commission pointed out that it was § 150.1(5), or to non-enumerated bona Commission clarify that the term retaining the ability to review the fide hedge, or spread exemptions. ‘‘spread position’’ includes all types of exchange rules as well as to review how Instead, the Commission should permit spreads and the list of spreads an exchange enforces those rules.1138 the Exchanges to determine the facts referenced in proposed § 150.10 is The Commission also discussed that it and circumstances where a market simply illustrative and not 1146 was concerned, among other things, participant may be permitted to hold a exhaustive. about protecting the price discovery physical-delivery referenced contract in Three commenters requested that the process in the core referenced futures the spot month as part of a position that Commission continue to permit cash contracts, particularly as those contracts is exempt from federal speculative and carry exemptions, stating, among 1142 other reasons, such exemptions serve an approach expiration. Accordingly, as an position limits. economic purpose by helping to alternative, the Commission considered Another commenter expressed that it maintain an appropriate economic whether to prohibit an exchange from ‘‘would support the applicability of the relationship between the nearby and the granting spread exemptions that would spread exemption through the end of next successive delivery month.1147 be applicable during the lesser of the the month, without limiting the last five days of trading or the time exemption during the current month.’’ Commission Reproposal period for the spot month.1139 In that regard, the commenter (an exchange) noted that its ‘‘futures The Commission is reproposing Comments Received contracts on electricity settle to the § 150.10(a)(2), as originally proposed, and clarifying that the five-day rule does Several commenters expressed the independent, spot market overseen by not apply to spreads. Because the view that exchanges must be allowed to the ISO/RTO markets.’’ The commenter Commission did not propose in the use their experience to determine argued that ‘‘since the settlement prices are determined in the ISO/RTO markets, 2016 Supplemental Position Limits Proposal to apply the five-day rule to 1134 CL–CME–59718 at 71. See also 2016 trading during the last five days of the Supplemental Position Limits Proposal, 81 FR at spot month has no impact on final ‘‘spread positions’’, exchanges would 38478. settlement prices’’ on either the have discretion to recognize such spread 1135 CEA section 4a(a)(3)(B)(iii); 7 U.S.C. positions without regard to the five-day 6a(a)(3)(B)(iii). See also the discussion of proposed exchange or the ISO/RTO spot markets. The commenter noted that ‘‘bona fide rule. The Commission cautions § 150.10(a)(3)(ii), below. exchanges to carefully consider whether 1136 See proposed § 150.10(a)(3)(ii). 1137 See proposed § 150.10(a)(4)(vi); see also 2016 1140 CL–ICE–60929 at 24; CL–IECAssn–60949 at Supplemental Position Limits Proposal, 81 FR at 15; and CL–ADM–60934 at 6–7. 1143 CL–Nodal–60948 at 3. 38478. 1141 CL–NCGA–ASA–60917 at 1–2; CL–CME– 1144 CL–ADM–60934 at 8. 1138 The Commission pointed out that it could, for 60926 at 3; CL–ICE–60929 at 9; and CL–AFIA– 1145 CL–ICE–60929 at 25. example, revoke or confirm exchange-granted 60955 at 2; CL–NGFA–60941 at 5–7; CL–ISDA– 1146 CL–Working Group–60947 at 9–10 and CL– exemptions. 60931 at 10; CL–NCFC–60930 at 3–4; and CL– FIA–60937 at 14. 1139 See 2016 Supplemental Position Limits Working Group–60947 at 7–9. 1147 CL–ICE–60929 at 11–12; CL–NCC–ACSA– Proposal, 81 FR at 38478. 1142 CL–CCI–60935 at 8–9. 60972 at 2; and CL–CMC–60950 at 11–12.

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to recognize a spread position in the last their position below the speculative able to take physical delivery in the few days of trading in physical-delivery limit in a timely manner once current nearby month and redeliver the same contracts. For a more detailed market prices no longer permit entry product in a deferred month, often at a discussion please see § 150.9(a)(1) into a full carry transaction. The profit. The Commission noted that above. Commission notes that the condition while market participants are permitted The Commission reiterates, as noted above is more stringent than how to re-deliver the physical commodity, proposed and discussed in the 2016 ICE Futures U.S. has conditioned they are under no obligation to do Supplemental Position Limit Proposal, market participants relying on a cash- so.1152 that an exchange would not be and–carry spread exemption. In that ICE Futures U.S.’s rules condition the permitted to recognize a spread between regard, ICE Futures U.S. has required a cash-and-carry spread exemption upon a commodity index contract and one or market participant to reduce their the applicant’s agreement that ‘‘before more referenced contracts. That is, an positions ‘‘before the price of the nearby the price of the nearby contract month exchange may not grant a spread contract month rises to a premium to rises to a premium to the second (2nd) exemption where a bona fide hedging the second (2nd) contract month.’’ contract month, it will liquidate all long position could not be recognized for a positions in the nearby contract pass-through swap offset of a c. Proposed § 150.10(a)(3) month.’’ 1153 The Commission noted commodity index contract. For a more Proposed Rule that it understood that ICE Futures U.S. detailed discussion please see Proposed § 150.10(a)(3) set forth a required traders to provide information § 150.9(a)(1) above. core set of information and materials about their expected cost of carry, In response to the comment regarding that all applicants would be required to which was used by the exchange to spread exemptions for electricity submit to enable an exchange to determine the levels by which the trader contracts, the Commission notes that determine, and the Commission to has to reduce the position. Those exit electricity contracts are not referenced verify, whether the facts and points were then communicated to the contracts that will be subject to federal circumstances attendant to a spread applicant when the exchange responded limits at this time. Thus, exchanges may position furthered the policy objectives to the trader’s spread exemption elect to process spread exemptions for of CEA section 4a(a)(3)(B). In particular, request. exchange-set position limits for non- the applicant would be required to The 2016 Supplemental Position referenced contracts. Limits Proposal considered whether to In response to the comments demonstrate, and the exchange to determine, that exempting the spread impose on the exchange a requirement regarding the proposed spread to ensure that exit points in cash-and- exemption process imposing additional position from position limits would, to the maximum extent practicable, ensure carry spread exemptions would filing requirements on market facilitate an orderly liquidation in the participants relying on an exchange- sufficient market liquidity for bona fide hedgers, but not unduly reduce the expiring futures contract. The granted spread exemption, the Commission stated that it was Commission clarifies that it is in the effectiveness of position limits to: Diminish, eliminate or prevent concerned that a large demand for exchange’s discretion to determine delivery on cash and carry positions whether there are additional reporting excessive speculation; deter and prevent market manipulation, squeezes, and might distort the price of the expiring requirements for a spread exemption. futures upwards. This would For a more detailed discussion please corners; and ensure that the price discovery function of the underlying particularly be a concern in those see § 150.9(a)(1) above. commodity markets where the cash spot market is not disrupted.1149 In response to the comments received price was discovered in the expiring requesting clarification that the list of The proposal pointed out that one DCM, ICE Futures U.S., currently grants futures contract. spreads in § 150.10(a)(2) 1148 is simply As the Commission noted, ICE certain types of spread exemptions that illustrative and not an exhaustive list of Futures U.S. opined in a recent rule the Commission was concerned may not possible spread exemptions that may be enforcement review that such be consistent with these policy granted by an exchange, the exemptions are ‘‘beneficial for the objectives.1150 ICE Futures U.S. allows Commission acknowledges that the list market, particularly when there are ‘‘cash-and-carry’’ spread exemptions to of spreads in § 150.10(a)(2) is not an plentiful warehouse stocks, which exhaustive list and that exchanges may exchange-set limits, which permit a market participant to hold a long grant other spread exemptions so long minimum spread at which the applicant will enter as they meet the requirements in position greater than the speculative into a straddle position and which would result in § 150.10(a)(1), (3), and (4)(vi). limit in the spot month and an an profit for the applicant; and (iii) the quantity of In response to the comments received equivalent short position in the stocks in exchange-licensed warehouses that it following month in order to guarantee a already owns. The applicant’s entire long position that requested the Commission continue carried into the notice period must have been put to permit ‘‘cash and carry’’ spread return that, at minimum, covers its on as a spread at a differential that covers the exemptions, the Commission has carrying charges, such as the cost of applicant’s cost of carry. See Rule Enforcement financing, insuring, and storing the Review of ICE Futures U.S., July 22, 2014 (‘‘ICE determined to allow exchanges to grant Futures U.S. Rule Enforcement Review’’), at 44–45, ‘‘cash and carry’’ spread exemptions to physical inventory until the next 1151 available at http://www.cftc.gov/IndustryOversight/ exchange and federal limits so long as expiration. Market participants are TradingOrganizations/DCMs/dcmruleenf. See also an exchange has suitable safeguards in 2016 Supplemental Position Limits Proposal, 81 FR 1149 place to require a market participant See 2016 Supplemental Position Limits at 38479, n. 189. Proposal, 81 FR at 38479, n. 192, and accompanying 1152 See 2016 Supplemental Position Limits relying on such an exemption to reduce text (describing the DCM’s responsibility under its Proposal, 81 FR at 38479. application process to make this determination in 1153 ICE Futures U.S. Rule 6.29(e) (at the time of 1148 Proposed § 150.10(a)(2) included the a timely manner). the target period of the ICE Futures U.S. Rule following list of spreads that a designated contract 1150 See ICE Futures U.S. Rule 6.29(e). Enforcement Review (June 15, 2011 to June 15, market or swap execution facility may approve 1151 Carrying charges include insurance, storage 2012), the cash-and-carry provision currently found under this section include: (i) Calendar spreads; (ii) fees, and financing costs, as well as other costs such in ICE Futures U.S. Rule 6.29(e) was found in ICE Quality differential spreads; (iii) Processing as aging discounts that are specific to individual Futures U.S. Rule 6.27(e)). Further, under the spreads; and (iv) Product or by-product differential commodities. The ICE Futures U.S. rules require an exchange’s rules, additional conditions may also spreads. applicant to provide: (i) Its cost of carry; (ii) the apply.

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typically is the only time when the position limits, the exemption must add Commission Reproposal opportunity exists to utilize the to liquidity.’’ 1156 The Commission is reproposing exemption,’’ maintaining that the Two commenters requested that the § 150.10(a)(3), largely as originally exchange’s rules and procedures are proposed application requirements for proposed with one clarifying effective in ensuring orderly market participants be revised to only amendment to § 150.10(a)(3)(iii), as liquidations.1154 The Commission require ‘‘such information as the discussed further below. The observed that it remained concerned relevant exchange deems necessary to Commission believes that exchanges about these exemptions and their determine if the requested exemption is should consider the policy objectives of impact on the spot month price, and consistent with the purposes of CEA section 4a(a)(3)(B), which is the noted that it was still reviewing the standard that the Commission would effectiveness of the exchange’s cash- hedging.’’ Furthermore one commenter requested that the Commission confirm use to review a petition to exempt a and-carry spread exemptions and the spread position from position limits. procedure by which they were granted. that the detailed procedures for exchange-granted exemptions for spread Regarding the comment arguing that As an alternative to providing and anticipatory hedges are not CEA section 4a(a)(3)(b)(iii) does not exchanges with discretion to consider applicable to exemptions granted by require that the granting of a spread granting cash-and-carry spread exemption must increase liquidity, the exchanges for positions below the exemptions, the Commission Commission interprets the CEA as federal level.1157 considered, in the 2016 Supplemental providing it with the statutory authority Position Limits Proposal, prohibiting One commenter expressed the view to exempt spreads that are consistent cash-and-carry spread exemptions to that ‘‘if proposed Regulations with the other policy objectives for position limits. In this regard, the 150.9(a)(3)(iii) and 150.10(a)(3)(iii) position limits, such as those in CEA Commission pointed out that it does not indeed are intended to apply to an section 4a(a)(3)(B). CEA section grant such exemptions to current federal applicant’s maximum size of all gross 4a(a)(3)(B) provides that the position limits. As another alternative, positions for each and every commodity Commission shall set limits to the the Commission considered permitting derivative contract the applicant holds maximum extent practicable, in its exchanges to grant cash-and-carry (as opposed to the maximum gross discretion—to diminish, eliminate, or spread exemptions, but would require positions in the commodity derivative prevent excessive speculation as suitable safeguards be placed on such contract(s) for which the exemption is described under this section; to deter exemptions. For example, the sought), such requirements are and prevent market manipulation, Commission considered requiring that unnecessary and unduly squeezes, and corners; to ensure cash-and-carry spread exemptions be burdensome.’’ 1158 sufficient market liquidity for bona fide conditioned on a market participant hedgers; and to ensure that the price reducing positions below speculative 1156 CL–Working Group–60947 at 22. See also discovery function of the underlying limit levels in a timely manner once CL–ISDA–60931 at 1 (expressing that under the market is not disrupted. The current market prices no longer permit 2016 Supplemental Position Limits Proposal, the Commission believes that exchanges entry into a full carry transaction, rather exchange must certify that a spread exemption who elect to grant spread exemptions to increases liquidity in order to grant it. The than the less stringent condition of ICE commenter expressed the view that the CEA federal position limits should use the Futures U.S. that a trader reduce requires limits that do not impair liquidity, as guidance in CEA section 4a(a)(3)(B) as positions ‘‘before the price of the nearby opposed to limits that specifically increase it. the Commission would when reviewing contract month rises to a premium to Furthermore, the commenter recommended that the de novo a spread exemption 1155 Commission should remove this condition because the second (2nd) contract month.’’ the purpose of a spread exemption ‘‘is not to application. increase liquidity but rather to recognize the more Regarding the comment requesting Comments Received limited speculative opportunity created by such change to the requirements of positions.’’). § 150.10(a)(3) to only require ‘‘such One commenter expressed the view 1157 CL–ICE–60929 at 8. See also CL–Nodal– information as the relevant exchange that an ‘‘exchange should not be 60948 at 2–3 (expressing the view that ‘‘[t]he required to determine whether liquidity Proposed Rule is overly prescriptive as to the deems necessary to determine if the will be increased if a particular Spread information that must be provided by the applicant, requested exemption is consistent with especially when the exchange may have superior Exemption is granted before it is the purposes of hedging,’’ the information regarding intramarket spreads. Unlike Commission believes that the proposal permitted to grant such Spread intermarket spreads, the exchange, and not the Exemption.’’ According to the applicant, is more likely to have direct information requires a minimum amount of commenter, ‘‘this requirement to determine whether an intramarket spread information, and exchanges have achieves the goals of CEA 4a(a)(3)(B). For example, effectively would create an entirely new discretion to require additional [an exchange] has current deliverable supply information. If (as one commenter legal standard for spread exemptions analysis, spread and outright trading activity and flip on its head the requirement information, and market data from spot markets for represented) an exchange has market under CEA section 4a(a)(3)(b)(iii), which the underlying physical commodities. In information that would supplement its performing its pricing and surveillance functions, states that, to the maximum extent analysis of a spread exemption [an exchange] monitors position accumulation application, nothing in the proposal practicable, in establishing speculative information that is not available to market position limits the Commission in its participants as well as out-of-market pricing in real would preclude an exchange from using discretion should ensure sufficient time.’’ The commenter requested that it be allowed that information in its analysis. to determine its application process, and the market liquidity for bona fide hedgers. However, the Commission notes that information it needs to achieve the policy objectives such information must be included in CEA section 4a(a)(3)(b)(iii) does not of CEA 4a(a)(3)(B), ‘‘for which the Commission has require (and should not require) that, in the authority to review the exchange’s rules and the records of that spread exemption granting an exemption from speculative conclusions.’’) application as required under 1158 CL–Working Group–60947 at 10. See also § 150.10(b). CL–ISDA–60931 at 10 (expressing the view that the In response to the request for 1154 ICE Futures U.S. Rule Enforcement Review, proposed rule 150.10(a)(3)(iii) requiring maximum at 45. size of all gross positions in derivative contracts is clarification regarding whether § 150.10 1155 See 2016 Supplemental Position Limits too broad and practically impossible as no market applies to both federal and exchange-set Proposal, 81 FR at 38479. participant can predict trading activity for a year). limits, the Commission clarifies that, as

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explained above in connection with Comments Received Comments Received § 150.5, § 150.10 would not apply if an The Commission notes that it did not Several commenters 1164 exchange grants exemptions from receive comments regarding recommended, ‘‘that the Commission speculative position limits it sets under § 150.10(a)(4). remove the proposed requirement that paragraph § 150.5(a)(1), provided that an exchange must adopt enhanced that any spread exemptions to Commission Determination reporting rules for market participants exchange-set limits not conforming to The Commission is reproposing that rely on non-enumerated hedge § 150.3 and § 150.10 were capped at the § 150.10(a)(4), as originally proposed. exemptions, spread exemptions, or anticipatory exemptions’’ because the level of the applicable federal limit in e. Proposed § 150.10(a)(5) § 150.2. Further, § 150.10 would not proposal ‘‘would force exchanges to apply to exchanges that grant spread Proposed Rule establish rules that require market exemptions to exchange-set limits, in Proposed § 150.10(a)(5) clarified that participants to report all referenced commodity derivative contracts not an applicant’s spread position would be contract positions that they hold or subject to a federal limit. deemed to be recognized as a spread control in reliance upon a non- enumerated hedge, spread, or Regarding the comment about position exempt from federal position limits at the time an exchange anticipatory hedge exemption along whether the phrase ‘‘maximum size of with the underlying cash market all gross positions’’ applies to an recognized it. The Commission noted that this was substantially similar to exposure (e.g., cash positions or applicant’s entire book of derivative proposed § 150.9(a)(5) for non- components of a spread) hedged by positions or just those positions enumerated bona fide hedging position those positions.’’ Many of these pertaining to the exemption application, exemptions.1161 commenters expressed the view that the Commission intended that the such reporting requirements would be applicant only report its maximum size Comments Received overly burdensome and/or confusing. of all gross positions in the commodity One commenter expressed the view Commission Reproposal related to the exemption application that it is concerned regarding how an that it is submitting. In that regard, exchange should coordinate the granting The Commission is reproposing § 150.10(a)(6) with one modification to Commission is reproposing of exemptions with respect to contracts clarify in the regulation text that § 150.10(a)(3)(iii) to clarify as such. For on the same underlying commodities exchanges are authorized, but not a more detailed discussion, please see that trade on different exchanges, and required, to determine whether to requests guidance from the Commission § 150.9(a)(2) above. require reporting by the spread on that matter.1162 d. Proposed § 150.10(a)(4) exemption applicant. For a more Commission Reproposal detailed discussion, please see the Proposed Rule The Commission is reproposing discussion of § 150.9(a)(3) above. Proposed § 150.10(a)(4) set forth § 150.10(a)(5), as originally proposed. g. Proposed § 150.10(a)(7) certain timing requirements that an The Commission notes that the proposal Proposed Rule exchange would be required to include allows each exchange to use its own in its rules for the spread application expertise to decide what exemptions Proposed § 150.10(a)(7) required an process. Those timing requirements and limit levels to employ for their exchange to publish on its Web site, no would substantially mirror those venue with the Commission serving in less frequently than quarterly, a description of each new type of provisions proposed in § 150.9(a)(4) 1159 an oversight role to monitor exemptions derivative position that it recognized as for the non-enumerated bona fide and position limits across exchanges. a spread; the Commission noted that hedging position application process. The Commission also notes that although the proposal does not address this was substantially similar to While these timing requirements are proposed § 150.9(a)(7) for non- similar to those under proposed coordination of granting of exemptions among exchanges, there is nothing in enumerated bona fide hedging position § 150.9(a)(4), the exchange, under exemptions.1165 proposed § 150.10(a)(4), must also the proposal that would prohibit exchanges from coordinating. determine in a timely manner whether information to conduct an adequate surveillance the facts and circumstances attendant to f. Proposed § 150.10(a)(6) program to detect and potentially deter excessively a position further the policy objectives large positions that might disrupt the price Proposed Rule discovery process. 1160 of CEA section 4a(a)(3)(B). 1164 Proposed § 150.10(a)(6) required See, e.g., CL–FIA–60937 at 15; CL–CMC– 60950 at 12–13; CL–CCI–60935 at 7–8; CL–NCGA– exchanges that elect to process spread 1159 The Commission noted, for example, NGSA–60919 at 12–13; CL–MGEX–60936 at 6; CL– proposed § 150.9(a)(4) provided that: (i) A person applications to promulgate reporting ISDA–60931 at 10; CL–NGFA–60941 at 4; CL– intending to rely on a exchange’s exemption from rules for applicants who owned, held or Working Group–60947 at 12 (footnotes omitted) and position limits would be required to submit an controlled positions recognized as CL–AMG–60946 at 4–5. 1165 For example, proposed § 150.9(a)(7) provided application in advance and to reapply at least on spreads; the Commission noted that this an annual basis; (ii) the exchange would be required that an exchange would publish on its Web site, no is substantially similar to proposed less frequently than quarterly, a description of each to notify an applicant in a timely manner whether new type of derivative position that it recognized the position was exempted, and reasons for any § 150.9(a)(6) for non-enumerated bona as a non-enumerated bona fide hedge. The rejection; and (iii) the exchange would be able to fide hedge exemptions.1163 Commission noted that it envisioned that each revoke, at any time, any recognition previously description would be an executive summary. The issued pursuant to proposed § 150.9 if the exchange 1161 For example, proposed § 150.9(a)(5) provided description would be required to include a determined the recognition was no longer in accord that the position will be deemed to be recognized summary describing the type of derivative position with section 4a(c) of the Act. See 2016 as a non-enumerated bona fide hedging position and an explanation of why it qualified as a non- Supplemental Position Limits Proposal, 81 FR at when an exchange recognized it. enumerated bona fide hedge. The Commission 38480, n. 192. 1162 CL–ISDA–60931 at 6–7. observed that the exchanges were in the best 1160 See 2016 Supplemental Position Limits 1163 For example, proposed § 150.9(a)(6) provided position when quickly crafting these descriptions to Proposal, 81 FR at 38476, n. 171 and accompanying that an exchange would promulgate enhanced accommodate an applicant’s desire for trading text. reporting rules in order to obtain sufficient Continued

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Comments Received similar to those proposed under required under proposed 1169 1170 One commenter expressed the view § 150.9(a)(8). § 150.10(a)(6). As noted above, the proposed that proposed § 150.10 would have an Comments Received anti-competitive effect on markets that processes under this rule were rely on intramarket spread trading to The Commission did not receive substantially similar to the enhance liquidity on less actively traded comments regarding § 150.10(a)(8). corresponding provisions in § 150.9(c). The Commission did not receive contracts. The commenter was Commission Reproposal concerned that the information that comments on this section that differed would be published in a fact pattern The Commission is reproposing from those received on § 150.9(c). § 150.10(a)(8), as originally proposed. summary would provide details that Commission Reproposal could be used to identify market i. Proposed § 150.10(b)—Recordkeeping The Commission is reproposing this participants, especially in thinly traded Requirements 1166 rule, largely as originally proposed, for specialized markets. the reasons previously provided in the Another commenter expressed the Proposed Rule discussion regarding § 150.9(c), with the view that exchanges should ‘‘not be Proposed § 150.10(b) outlined the same revision to the regulatory text required to disclose any conditions of recordkeeping requirements for included in reproposed § 150.9(c), to an exemption granted due to the exchanges that elected to process spread clarify that exchanges have the potential for such information to exemption applications submitted discretion to determine whether to compromise the exemption recipient’s pursuant to § 150.10(a). As noted above, incorporate additional reporting position.’’ 1167 the proposed processes under this rule requirements for spread exemption Commission Reproposal were substantially similar to the applicants. In particular, the corresponding provisions in § 150.9(b). The Commission is reproposing Commission is proposing to amend Hence, the Commission does not repeat language in § 150.10(c)(2) to clarify that, § 150.10(a)(6), as originally proposed. the discussion here. The Commission reiterates that the unless otherwise instructed by the purpose of each summary is to provide Commission Reproposal Commission, an exchange that elects to process applications to exempt spread transparency to market participants by The Commission did not receive positions from position limits shall providing fair and open access for comments on § 150.10(b), and is submit to the Commission, no less market participants to information reproposing this rule, as originally frequently than monthly, ‘‘any reports regarding which positions might be proposed, for the same reasons as such [DCM or SEF] requires to be recognized as spreads. The summary discussed in connection with § 150.9(b). would be an executive summary that submitted by an applicant to such [DCM does not provide details of a market j. Proposed § 150.10(c) (Exchange or SEF] pursuant to the rules required participant who received such an Reporting) and Reproposal under paragraph (a)(6) of this section.’’ exemption, but rather, a general Proposed Rule k. Proposed § 150.10(d) (Review of description of what the position is and Proposed § 150.10(c)(1) required applications by the Commission) and why it qualifies for a spread exemption. designated contract markets and swap Reproposal The commenters did not provide any execution facilities that elected to Proposed Rule proposed alternatives to provide such process spread exemption applications transparency to market participants. Proposed § 150.10(d) provided for to submit to the Commission a report for Commission review of applications to h. Proposed § 150.10(a)(8) each week as of the close of business on ensure that the processes administered Proposed Rule Friday showing various information by the exchange, as well as the results concerning the derivative positions that Proposed § 150.10(a)(8) provided of such processes, were consistent with had been recognized by the designated the purposes of section 4a(a)(3)(B) of the options for an exchange to elect to contract market or swap execution request the Commission review a spread Act and the Commission’s regulations facility as an exempt spread position, thereunder. As noted previously, under application that raised novel or complex and for any revocation, modification or issues, using the process set forth in the proposal, the Commission was not rejection of such recognition. Moreover, diluting its ability to grant or not grant proposed § 150.10(d), discussed proposed § 150.10(c)(2) required a below.1168 This was substantially spread exemptions. The Commission designated contract market or swap reserved to itself the ability to review execution facility that elected to process anonymity while promoting fair and open access for any exchange action, and to review any market participants to information regarding which applications for exempt spread application by a market participant to positions might be recognized as non-enumerated positions to submit to the Commission an exchange, whether prior to or after bona fide hedges. (i) a summary of any exempt spread disposition of such application by an 1166 CL–Nodal–60948 at 4. position newly published on the exchange. An exchange could ask the 1167 CL–CME–60926 at 11. designated contract market or swap Commission to consider a spread 1168 If the exchange determined to request under execution facility’s Web site; and (ii) no proposed § 150.10(a)(8) that the Commission exemption application (proposed consider the application, the exchange must, under less frequently than monthly, any report § 150.10(a)(8)). The Commission could proposed § 150.10(a)(4)(v)(C), notify an applicant in submitted by an applicant to such also on its own initiative at any time— a timely manner that the exchange had requested designated contract market or swap before or after action by an exchange— that the Commission review the application. This execution facility pursuant to rules provision provided the exchanges with the ability review any application submitted to an to request Commission review early in the review exchange for recognition of a spread process, rather than requiring the exchanges to for in proposed § 150.10(d)(1), initiate its review, in exemption (proposed § 150.10(d)(1)). process the request, make a determination and only its discretion, at any time. then begin the process of Commission review 1169 For example, proposed § 150.9(a)(8) provided And, as noted above, market provided for under proposed § 150.10(d). The that if an exchange makes a request pursuant to Commission noted that although most of its reviews proposed § 150.9(a)(8), the Commission, as would 1170 See 2016 Supplemental Position Limits would occur after the exchange makes its be the case for an exchange, would not be bound Proposal, 81 FR at 38480; see also discussion of determination, the Commission could, as provided by a time limitation. 150.9(c) at 38474–75.

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participants would still be able to the Commission by an exchange, and to I. § 150.11—Process for Recognition of request a staff interpretive letter under specify the manner and determine the Positions As Bona Fide Hedging § 140.99 from the Commission or seek format, coding structure, and electronic Positions for Unfilled Anticipated exemptive relief under CEA section data transmission procedures for Requirements, Unsold Anticipated 4a(a)(7) from the Commission, as an submitting such information. Proposed Production, Anticipated Royalties, alternative to the three proposed § 150.10(f)(1)(v) delegated the Anticipated Services Contract Payments exchange-administered processes. Commission’s review authority under or Receipts, or Anticipatory Cross- As previously indicated, the processes proposed § 150.10(e) to DMO with Commodity Hedge Positions under the proposed rule was respect to summaries of the types of 1. Overview of the Enumerated substantially similar to the spread exemptions that were required to Anticipatory Bona Fide Hedging corresponding provisions in proposed be posted on an exchange’s Web site Position Exemption Proposal § 150.9(d). Hence, the Commission does pursuant to proposed § 150.10(a)(7). not repeat the discussion here. Proposed § 150.10(f)(1)(i) delegated After reviewing comments in response to the December 2013 Position Commission Reproposal the Commission’s authority to the Division of Market Oversight to agree to Limits Proposal, the Commission The Commission did not receive or reject a request by an exchange to proposed another method by which comments on this section that differed consider an application for recognition market participants may have from those received on § 150.9(d), and is of an application for a spread enumerated anticipatory bona fide reproposing this rule, as originally exemption. Proposed § 150.10(f)(1)(iii) hedge positions recognized. As proposed, for the reasons discussed delegated the Commission’s authority to proposed in the December 2013 Position above in connection with § 150.9(d). review any application for a spread Limits Proposal, § 150.7 would require market participants to file statements l. Proposed § 150.10(e) (Review of exemption, and all records required to be maintained by an exchange in with the Commission regarding certain summaries by the Commission) and anticipatory hedges which would Reproposal connection with such application. Proposed § 150.10(f)(1)(iii) also become effective absent Commission Proposed Rule delegated the Commission’s authority to action or inquiry ten days after The Commission proposed to rely on request such records, and to request submission. As the Commission the expertise of the exchanges to additional information in connection explained in the 2016 Supplemental summarize and post executive with such application from the Position Limits Proposal, the method in summaries of spread exemptions to exchange or from the applicant. proposed § 150.11 was an exchange- their respective Web sites under Proposed § 150.10(f)(1)(iv) delegated administered process to determine proposed § 150.10(a)(7). The the Commission’s authority, under whether certain enumerated Commission also proposed, in proposed § 150.10(d)(2) to determine anticipatory bona fide hedge positions, § 150.10(e), to review such executive when an application for a spread such as unfilled anticipated summaries to ensure they provided exemption required additional analysis requirements, unsold anticipated adequate disclosure to market or review, and to provide notice to the production, anticipated royalties, participants of the potential availability exchange and the particular applicant anticipated service contract payments or of relief from speculative position that they had 10 days to supplement receipts, or anticipatory cross- limits. such application. commodity hedges should be recognized as bona fide hedge The Commission did not propose to Commission Reproposal positions.1172 delegate its authority under proposed As noted above, the proposed The Commission noted that proposed § 150.10(d)(3) to make a final § 150.11 worked in concert with the processes under this rule are determination as to the exchange’s substantially similar to the following three proposed rules: disposition. The Commission stated that • Proposed § 150.3(a)(1)(i), with the corresponding provisions in § 150.9(e). if an exchange’s disposition raised The Commission did not receive effect that recognized anticipatory concerns regarding consistency with the enumerated bona fide hedging positions comments on this section that differed Act or presents novel or complex issues, from those received on § 150.9(e), and may exceed federal position limits; then the Commission should make the • proposed § 150.5(a)(2), with the so does not repeat the discussion here. final determination, after taking into For all the reasons previously provided, effect that recognized anticipatory consideration any supplemental enumerated bona fide hedging positions the Commission is reproposing this rule, information provided by the exchange as originally proposed. may exceed exchange-set position limits or the applicant.1171 for contracts subject to federal position m. Proposed § 150.10(f) (Delegation of Commission Reproposal limits; and Authority) and Reproposal • proposed § 150.5(b)(5), with the As noted above, the proposed Proposed Rule effect that recognized anticipatory processes under this rule are enumerated bona fide hedging positions The Commission proposed to delegate substantially similar to the may exceed exchange-set position limits certain of its authorities under proposed corresponding provisions in § 150.9(f); for contracts not subject to federal § 150.10 to the Director of the the Commission did not receive position limits.1173 Commission’s Division of Market comments on this section that differed The proposed § 150.11 process was Oversight, or such other employee or from those received on § 150.9(f), and so somewhat analogous to the application employees as the Director designated does not repeat the discussion here. For process for recognition of non- from time to time. Proposed all the reasons previously provided, the enumerated bona fide hedging positions § 150.10(f)(1)(i) delegated the Commission is reproposing § 150.9(f), as under proposed § 150.9. The process for Commission’s authority to the Division originally proposed. recognition of enumerated anticipatory of Market Oversight to provide instructions regarding the submission of 1171 See 2016 Supplemental Position Limits 1172 Id. at 38495. information required to be reported to Proposal, 81 FR 38482, Jun. 13, 2016. 1173 Id.

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bona fide hedging positions contained 2. Proposed § 150.11(a) In addition, several commenters five paragraphs: (a) through (e). The first Proposed Rule recommended that the Commission not three paragraphs—§ 150.11(a), (b), and adopt the ‘‘active trading’’ and ‘‘one (c)—required exchanges that elected to As noted, proposed § 150.11(a) year experience’’ requirements as have a process for recognizing permitted exchanges to recognize proposed regarding a DCM’s enumerated anticipatory bona fide certain enumerated anticipatory bona qualification to administer exemptions hedging positions, and market fide hedging positions, such as unfilled from federal position limits.1181 These participants that sought position-limit anticipated requirements, unsold commenters stated that such relief for such positions, to carry out anticipated production, anticipated qualification requirements could have certain duties and obligations. The royalties, anticipated service contract the unintended consequences of: (i) payments or receipts, or anticipatory fourth and fifth paragraphs— harming the ability of market cross-commodity hedges. The proposed § 150.11(d), and (e)—delineated the participants to effectively manage their rule allowed market participants to risk by preventing the exchanges from Commission’s role and obligations in work with exchanges to seek the recognizing an otherwise appropriate reviewing requests for recognition of exemption. exemption from federal speculative enumerated anticipatory bona fide 1174 The process under proposed position limits; and (ii) stifling future hedging positions. § 150.11(a) was similar to the process innovation in the development of new The Commission noted that there under proposed § 150.9(a), described commodity derivative products created would be significant benefits related to above. For example, an exchange with at to meet evolving market needs and the adoption of proposed § 150.11. least one year of experience and demands. Similar to the benefits for recognizing expertise administering position limits Certain commenters opposed the positions as non-enumerated bona fide could elect to adopt rules to recognize Commission delegating hedge hedging positions under § 150.9, commodity derivative positions as exemption authority to exchanges recognizing anticipatory positions as enumerated anticipatory bona fide entirely.1182 These commenters believed bona fide hedging posiitons under hedges. However, the § 150.11(a) that such delegated authority creates an § 150.11 would provide market process was different from the process inherent conflict of interest for participants with potentially a more under proposed § 150.9(a) in that the exchanges because they are incentivized expeditious recognition process than the Commission did not propose to permit to increase trading volume. Among other concerns, these commenters fear Commission proposal for a 10-day separate processes for applications that hedge exemption applicants may Commission recognition process under based on novel versus non-novel facts 1177 develop a preference for those proposed § 150.7. This could potentially and circumstances. exchanges more willing to grant enable commercial market participants As the Commission noted in the 2016 Supplemental Position Limits Proposal, exemptions. Further, the exchanges may to pursue trading strategies in a more not have a full picture of the entire timely fashion to advance their it determined to define certain anticipatory positions as enumerated market in which they are being asked to commercial and hedging needs to grant the exemption. reduce risk. In addition, the bona fide hedging positions when it adopted current § 1.3(z)(2); the According to other commenters, the Commission pointed out that exchanges Commission did not change this Commission should eliminate the five- would be able to use existing resources 1183 determination in the December 2013 day rule. Instead, these commenters and knowledge in the administration Position Limits Proposal.1178 stated, the Commission should and assessment of enumerated Consequently, the Commission did not specifically authorize exchanges to grant anticipatory bona fide hedging anticipate that applications for bona fide hedging position exemptions positions. The Commission and recognition of enumerated anticipatory during the last five days of trading or exchanges have evaluated these types of bona fide hedging positions would be less and allow exchanges to permit positions for years (as discussed in the based on novel facts and circumstances. commercial hedging into the spot period December 2013 Position Limits For the same reason, proposed where the facts and circumstances Proposal).1175 § 150.11(a) did not require exchanges to warrant. Lastly, several commenters advocated The Commission also pointed out that post summaries of any enumerated for removal of the proposed requirement proposed § 150.11, similar to proposed anticipatory bona fide hedging that exchanges adopt enhanced § 150.9 and § 150.10, also would positions. As the Commission noted, reporting requirements for market provide the benefit of enhanced record- other simplifications follow from this difference.1179 participants that rely on exchange- retention and reporting of positions administered hedge exemptions.1184 recognized as enumerated anticipatory Comments Received One argued that such a requirement is bona fide hedging positions. As Several commenters recommended not authorized by the CEA and would previously discussed, records retained have the unintended effect of preventing for specified periods would enable that the Commission specifically exchanges to develop consistent recognize the full scope of anticipatory hedging activities such as anticipatory CL–FIA–60937 at 5, 21; CL–API–60939 at 3; and practices and afford the Commission CL–EEI–EPSA–60925 at 13. accessible information for review, merchandising and anticipatory 1181 CL–CCI–60935 at 3–4; CL–FIA–60937 at 3; surveillance, and enforcement efforts. processing hedges, utility sales and CL–Working Group-60947 at 10; CL–IECAssn– 60949 at 12–13 and CL–CME–60926 at 13. Likewise, weekly reporting under cross-commodity hedges as enumerated bona fide hedging position 1182 CL–Public Citizen–60940 at 1–2; CL–RER1– § 150.11 would facilitate the exemptions.1180 60961 at 1; and CL–Better Markets–60928 at 3–5. Commission’s tracking of such 1183 CL–IECAssn–60949 at 7–9; CL–NCGA– exemptions.1176 NGSA–60919 at 7; CL–ICE–60929 at 9; CL–CMC– 1177 Id. at 38481. 60950 at 9–11; CL–API–60939 at 3; CL–NCC– 1178 Id. ACSA–60972 at 2; and CL-Working Group–60947 at 1174 Id. 1179 Id. 7. 1175 Id. at 38496. 1180 CL- NCC–ACSA–60972 at 2; CL–AGA–60943 1184 CL–FIA–60937 at 3; and CL–CMC–60950 at 1176 Id. at 3; CL–ICE–60929 at 12; CL–CMC–60950 at 6–9; 12–13.

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new entrants to the relevant market.1185 Further, the Commission believes that anticipated hedge exemption is Another further argues that these the active trading requirement can be reasonable. However, as discussed enhanced reporting requirements are satisfied by maintaining any referenced above, the Commission notes that it may unnecessary, impose undue cost contract listed in the particular permit a reasonable, supported estimate burdens on commercial end-users, and commodity at issue. For example, a of, for example, anticipated production the Commission can always request the DCM may immediately begin accepting for less than three years of annual information through its existing hedge exemption requests for a new production data, in the Commission’s authority.1186 And two suggest that the commodity contract pursuant to discretion, if a market participant does Commission allow exchanges flexibility § 150.11(a) if the DCM already not have three years of data. Further, the to request satisfactory data, but not set maintains contract(s) in the same Commission is amending the applicable a fixed prerequisite time period to underlying commodity class that satisfy form instructions to clarify that obtaining exemptions.1187 the experience and active trading Commission staff could determine that requirements. such an estimate is reasonable and Commission Reproposal The Commission clarifies, however, would be accepted. The Commission is After carefully considering the that an exchange can petition the also proposing that exchange staff, on comments received, the Commission is Commission, pursuant to § 140.99, for a behalf of the Commission, also could reproposing the rule, as originally waiver of the one-year experience permit a reasonable, supported estimate proposed. At this time the Commission requirement if such exchange believes of, for example, anticipated production has already proposed several that their experience and interested are for less than three years of annual enumerated bona fide hedging position aligned with the Commission’s interests production data. exemption categories. At this time, the with respect to recognizing enumerated Commission believes that additional anticipatory bona fide hedging 3. Proposed § 150.11(b) (Recordkeeping) fact patterns for bona fide hedging positions. and Reproposal position exemptions will require The Commission appreciates Proposed Rule consideration of the facts and commenter concerns regarding those opposed to delegating any hedge Proposed § 150.11(b) required electing circumstances on a case-by-case basis. designated contract markets and swap The Commission is willing to explore exemption authority to exchanges. However, the Commission reiterates that execution facilities to keep full, further additions to the enumerated list complete, and systematic records of all at a later date. However, the it retains full oversight authority over exchanges issuing hedge exemptions. activities relating to the processing and Commission reiterates that, as disposition of enumerated anticipatory previously discussed, an exchange can Further, the Commission believes an exchange’s required experience bona fide hedging exemption requests petition under § 13.2 for Commission submitted pursuant to § 150.11(a). As recognition of a generic fact pattern as administering position limits for its actively traded contracts, and the previously stated, the Commission an enumerated bona fide hedging believes such recordkeeping position, and that market participants Commission’s de novo review of granted hedge exemptions are adequate to guard requirements are essential to ensure have the flexibility of two processes for adequate compliance and oversight. recognition of a position as an against or remedy any conflicts of enumerated bona fide hedging position: interest that may arise. The Commission Commission Reproposal also notes that exchanges remain bound (i) request an exemptive, no-action or As noted, the proposed processes by the Commission’s bona fide hedging interpretative letter under § 140.99; and/ under this rule are substantially similar position definition for all hedge or (ii) petition under § 13.2 for changes to the corresponding provisions in exemption determinations conducted to Appendix B to part 150. § 150.9(b) and § 150.10(b). Hence, the Separately, as noted in the June 2016 pursuant to part 150 of Commission Regulations. Commission does not repeat the Supplemental Position Limits Proposal discussion here. The Commission did and above, the Commission is not The Commission believes the five-day rule should be applied to anticipatory not receive comments on § 150.11(b), persuaded that an exchange with no bona fide hedging positions. If a market and is reproposing this rule, as active trading and no previous participant wishes to secure an originally proposed, for the same experience with a new product class exemption from the five-day rule, the reasons as § 150.9(b) and § 150.10(b). would have their interests aligned with participant should submit an exemption the Commission’s policy objectives in 4. Proposed § 150.11(c) (Exchange request, pursuant to § 150.9, for CEA section 4a. In addition, as noted Reporting) and Reproposal recognition of a non-enumerated bona above, the Commission points out that fide hedging position. Proposed Rule the experience is manifested by the Further, the Commission believes that Proposed § 150.11(c) required people carrying out surveillance rather reporting requirements applicable to 1188 designated contract markets and swap than tied to a particular exchange. market participants seeking an execution facilities that elected to exemption pursuant to § 150.11 may 1185 process enumerated anticipatory bona CL–FIA–60937 at 3. remain as proposed. The Commission 1186 CL–CMC–60950 at 12–13. fide hedging position applications to 1187 CL–AMG–60946 at 3–4; and CL–FIA–60937 notes that § 150.11(a)(5) clarifies that submit to the Commission a report for at 3, 12. applicants are bound by the reporting each week as of the close of business on 1188 As the Commission noted above when requirements found in § 150.7(e). As Friday showing various information discussing the requirement for one year of noted in § 150.7, understanding the concerning the derivative positions that experience in connection with § 150.9(a), recent history of a firm’s production experience manifests in the people carrying out had been recognized by the designated surveillance in a commodity rather than in an data is necessary to ensure the requested contract market or swap execution institutional structure. An exchange’s experience facility as an enumerated anticipatory could be demonstrated through the relevant when considering whether to designate a new bona fide hedging position, and for any experience of the surveillance staff regarding the exchange as a contract market or to recognize a revocation, modification or rejection of particular commodity. In fact, the Commission has facility as a SEF; as such exchanges are new, staff historically reviewed the experience and experience has clearly been gained at other such recognition. Similar to non- qualifications of exchange regulatory divisions exchanges. enumerated bona fide hedging positions

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and spreads, this rule implemented a Commission is reproposing this rule, as review applications for recognition of weekly reporting obligation for originally proposed. enumerated bona fide hedging positions exchanges. Unlike the other hedge under current § 1.48, as well as 6. Proposed § 150.11(e) (Delegation of exemption application types, exchanges Authority) and Reproposal consistent with the more streamlined would have no monthly reporting or approach to Commission review of web-posting obligations related to Proposed Rule enumerated anticipatory bona fide accepting or granting enumerated As noted previously, the Commission hedging position applications in anticipatory bona fide hedging position proposed to delegate certain of its proposed § 150.7. exemptions. authorities under § 150.11 to the Commission Reproposal Commission Reproposal Director of DMO, or such other employee or employees as the Director In consideration of these reduced As noted above, the proposed may designate from time to time. In reporting requirements and the previous processes under this rule are discussion of this subject regarding particular, proposed § 150.11(e)(1)(ii) substantially similar to the proposed §§ 150.9(c) and 150.10(c), the delegated the Commission’s authority to corresponding provisions in § 150.9(f) Commission is reproposing this rule, as DMO to provide instructions regarding and § 150.10(f). Hence, the Commission originally proposed, for the reasons the submission of information required does not repeat the discussion of related discussed therein. by an exchange, and to specify the comments here. The Commission is manner and determine the format, reproposing this rule, as originally 5. Proposed § 150.11(d) (Review of coding structure, and electronic data proposed, for the reasons discussed applications by the Commission) and transmission procedures for submitting above in connection with § 150.9(f), Reproposal such information. Proposed with the clarification that the Proposed Rule § 150.11(e)(1)(i) delegated the Commission retains the authority to Commission’s authority to DMO to agree As set forth in proposed § 150.11(d), make the final determination to grant or to or reject a request by an exchange to deny hedge exemption applications. an exchange could ask the Commission consider an application for recognition to consider an enumerated anticipatory of an enumerated anticipatory bona fide J. Miscellaneous Regulatory bona fide hedging position application hedge. Proposed § 150.11(e)(1)(iii) Amendments directly. Further, the Commission could delegated the Commission’s authority to also, on its own initiative, at any time— 1. Part 150.6—Ongoing Application of review any application for recognition before or after action by an exchange— the Act and Commission Regulations of an enumerated anticipatory bona fide review any application submitted to an hedging position and delegate the Proposed Rule exchange for recognition of an authority to request related records or enumerated anticipatory bona fide supporting information from the The Commission proposed to amend hedging position. As noted, alternatives exchange or from the applicant. existing § 150.6 to conform the also remain available. Market Lastly, the Commission proposed in provision with the general applicability participants would retain the ability to § 150.11(e)(iv), to delegate its authority of part 150 to SEFs that are trading apply directly to the Commission under to determine, under proposed facilities, and concurrently making non- § 150.7, to separately request staff § 150.11(d)(2), that it was not substantive changes to clarify the interpretive letters pursuant to § 140.99 provision. The provision, as amended or seek exemptive relief under CEA appropriate to recognize a commodity derivative position as an enumerated and clarified, provides this part shall section 4a(a)(7). only be construed as having an effect on The review process set forth in anticipatory bona fide hedging position, position limits and that nothing in part § 150.11(d) was simpler than other or that the disposition by an exchange 150 shall affect any provision hedge exemption requests because such of an application for such recognition is promulgated under the Act or applications are not anticipated to be inconsistent with the filing based on novel facts and circumstances. requirements of proposed § 150.11(a)(2). Commission regulations including but Rather, Commission review would focus The delegation also provided DMO with not limited to those relating to on whether the hedge exemption the authority, after any such manipulation, attempted manipulation, application satisfied the filing determination was made, to grant the corners, squeezes, fraudulent or requirements contained in § 150.11(a). If applicant a reasonable amount of time deceptive conduct, or prohibited 1189 the filing was not complete, then to liquidate its commodity derivative transactions. For example, by proposed § 150.11(d) would provide an position or otherwise come into requiring DCMs and SEFs that are opportunity to supplement to the compliance. trading facilities to impose and enforce applicant and the exchange. This proposed delegation took into exchange-set speculative position limits, account that applications processed by the Commission does not intend for the Commission Reproposal an exchange under proposed § 150.11 fulfillment of such requirements alone Aside from this minor difference, the would be for positions that should to satisfy any other legal obligations proposed processes under this rule were satisfy the requirements for enumerated under the Act and Commission substantially similar to the bona fide hedging positions set forth in regulations of DCMs and SEFs that are corresponding provisions in § 150.9(d) the Commission’s rules, and should trading facilities to detect and deter and § 150.10(d). Hence, the Commission therefore be less likely to raise novel market manipulation and corners. In does not repeat the discussion here. The issues of interpretation, or novel issues another example, a market participant’s Commission believes the proposed de with respect to consistency with the compliance with position limits or an novo review of exchange-granted filing requirements of proposed exemption does not confer any type of anticipatory bona fide hedging position § 150.11(a)(2), than applications safe harbor or good faith defense to a exemptions is adequate to maintain processed under proposed § 150.9 or claim that he had engaged in an proper exchange oversight. For all the § 150.10. Such delegation is consistent reasons previously provided above in with the Commission’s longstanding 1189 The Commission notes that amended § 150.6 the discussion regarding § 150.9(d), the delegation to DMO of its authority to matches vacated § 151.11(h).

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attempted manipulation, a perfected any further delay, as practicable, in § 17.03(h) delegates to the Director of manipulation or deceptive conduct. carrying out Congress’ mandate the Division of Market Oversight or his (underscored by the Commission’s own designee the authority to instruct Comments Received preliminary finding of necessity) to persons pursuant to proposed The Commission received no impose position limits in a timely § 17.03.1193 comments on the proposed amendments manner. to § 150.6. Comments Received 3. Part 15—Reports—General Provisions The Commission did not receive any Commission Reproposal Proposed Rule comments regarding the proposed The Commission is reproposing changes to part 17. § 150.6, with an amendment to clarify The Commission proposed to amend the application of part 150 to other the definition of the term ‘‘reportable Commission Reproposal provisions of the Act or Commission position’’ in current § 15.00(p)(2) by The Commission is reproposing regulations. Specifically, in order to clarifying that: (1) Such positions amendments to part 17, as originally avoid any confusion regarding whether include swaps; (2) issued and stopped proposed, to delete duplicative § 150.6 applies to position limits positions are not included in open aggregation provisions and delegate to regulations found outside of part 150 of interest against a position limit; and (3) the Division of Market Oversight the the Commission’s regulations (e.g., special calls may be made for any day authority to instruct persons pursuant to relevant sections of part 19), the a person exceeds a limit. Additionally, proposed § 17.03. the proposed amendments to § 15.01(d) amendment clarifies that recordkeeping 4. Removal of Commission Regulations and reporting regulations associated added language to reference swaps positions and updated the list of 1.47 and 1.48, and Part 151—Position with speculative position limits are Limits for Futures and Swaps affected by part 150. The amendment reporting forms in current § 15.02 to also clarifies that regulations account for new and updated series ’04 Proposed Rule reporting forms, as discussed above.1191 incorporated by reference to part 150 are As discussed above, the Commission also affected by the regulations Comments Received intended, in a 2011 final rule, to amend promulgated under part 150. These The Commission did not receive any several other sections as part of its then changes, while not substantively comments regarding the proposed adoption on part 151. Among the different from the proposed rule, amendments to part 15. sections the Commission was then provide additional clarity regarding the affecting was the removal and application of part 150 to other Commission Reproposal reservation of §§ 1.47 and 1.48. Both provisions of the Act or Commission The Commission is reproposing sections permitted market participants regulations. amendments to part 15, as originally to seek recognition of positions as bona The Commission also notes that proposed, to update and clarify the fide hedges.1194 § 150.6 applies despite the definition of ‘‘reportable position,’’ add However, prior to the compliance date Commission’s amendments to the references to swaps positions, and add for that 2011 rulemaking, as noted appendices to parts 37 and 38 of the to the list of reporting forms. above, a federal court vacated most Commission’s regulations regarding provisions of that rulemaking, including delayed implementation of exchange-set 4. Part 17—Reports by Reporting the amendments to the definition of a limits for swaps on exchanges without Markets, Futures Commission bona fide hedging position in § 1.3(z), as sufficient swaps position information. Merchants, Clearing Members, and well as to the removal and reservation Foreign Brokers 1195 2. Part 150.8—Severability of §§ 1.47 and 1.48. Because the Proposed Rule Commission did not instruct the Proposed Rule Federal Register to roll back the 2011 In the December 2013 Position Limits changes to the CFR, the current CFR still The Commission proposed to add Proposal, the Commission proposed to shows the versions adopted in 2011, § 150.8 to address the severability of amend current § 17.00(b) to delete which shows §§ 1.47 and 1.48 as individual provisions of part 150. provisions related to aggregation, since ‘‘reserved.’’ As the Commission noted in Should any provision(s) of part 150 be those provisions are duplicative of the December 2013 Position Limits declared invalid, including the aggregation provisions in § 150.4.1192 Proposal, in light of the proposed application thereof to any person or Instead, as proposed, § 17.00(b) provides amendments to part 150, as well as the circumstance, § 150.8 provides that all that ‘‘[e]xcept as otherwise instructed by District Court vacatur of part 151, the remaining provisions of part 150 shall the Commission or its designee and as not be affected to the extent that such specifically provided in § 150.4 of this 1193 Previously, in 2013, the Commission adopted remaining provisions, or the application chapter, if any person holds or has a thereof, can be given effect without the amendments to § 17.03. Ownership and Control financial interest in or controls more Reports, Forms 102/102S, 40/40S, and 71, 78 FR 1190 invalid provisions. than one account, all such accounts 69178 (Nov. 18, 2013). The Commission is now shall be considered by the futures proposing to amend § 17.03 further by adding Comments Received § 17.03(h). commission merchant, clearing member The Commission did not receive any 1194 § 1.47 pertains to requirements for or foreign broker as a single account for comments regarding proposed § 150.8. classification of purchases or sales of contracts for the purpose of determining special future delivery as bona fide hedging under § 1.3(z)(3 Commission Reproposal account status and for reporting of the regulations, while § 1.48 addresses requirements for classification of sales or purchases The Commission is reproposing the purposes.’’ In addition, proposed for future delivery as bona fide hedging of unsold severability clause in § 150.8. The anticipated production or unfilled anticipated Commission believes it is prudent to 1191 See discussion of new and amended series requirements under § 1.3(z)(2) (i)(B) or (i)(C) of the ’04 reports above. regulations. include a severability clause to avoid 1192 In a separate final rulemaking, the 1195 International Swaps and Derivatives Commission is finalizing amendments to § 150.4 Association v. United States Commodity Futures 1190 The Commission notes that proposed § 150.8 regarding the aggregation of positions. See 2016 Trading Commission, 887 F. Supp. 2d 259 (D.D.C. matches vacated § 151.13. Final Aggregation Rule. 2012).

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amendments to the definition of a bona the Commission has preliminarily b. Costs of Speculative Position Limits fide hedging position in 1.3(z), and the found, as a separate and independent Rules removal and reservation of §§ 1.47 and basis for the Rule, that speculative 1.48, the Commission again proposed to position limits are necessary to achieve The Commission recognizes that remove and reserve §§ 1.47 and 1.48. the purposes of the CEA. position limits impose compliance costs on market participants. Under position Commission Reproposal a. Benefits of Speculative Position limits, market participants must monitor The Commission is reproposing to Limits Rules their positions and have safeguards in remove and reserve § 1.47 in light of the place to remain under a federal position The Commission expects that the Commission’s proposal of new limit or an exemption level. Some speculative position limits in the provisions in § 150.9 addressing market participants will have to incur reproposed Rule will promote market exchange recognitions of positions as the costs of seeking exemptions from integrity. Willingness to participate in non-enumerated bona fide hedging federal positons limits. In this the futures and swaps markets may be positions, subject to Commission Reproposal, the Commission has sought reduced by perceptions that a review. Similarly, in connection with to reduce these costs by setting the the reproposal of §§ 150.7 and 150.11, participant with an unusually large federal position limits at an the Commission is proposing to remove speculative position could exert appropriately high level and by relying and reserve, as originally proposed, unreasonable market power. A lack of on the experience and expertise of § 1.48. Finally, the Commission is participation in these markets may harm exchanges to administer exemptions. liquidity, and consequently, may reproposing that part 151 be removed Market participants who find position negatively impact price discovery and and reserved in response to the limits binding may have to transact in market efficiency as well. reproposed revisions to part 150 that less effective instruments such as conform it to the amendments made to Position limits may serve as a futures contracts that are similar but not the CEA section 4a by the Dodd-Frank prophylactic measure that reduces the same as the core referenced futures Act. market volatility due to large trades that contract. These instruments could impact prices. For example, a party who IV. Related Matters include forward contracts, trade is holding large open interest may options, or futures on a foreign board of A. Cost-Benefit Considerations become unwilling or unable to meet a trade. Transacting in substitute Section 15(a) of the CEA requires the call for additional margin or take other instruments may raise transaction costs. Commission to consider the costs and steps that are necessary to maintain the Finally, if transactions shift to other benefits of its actions before position. In such an instance, the party instruments, futures prices might not promulgating a regulation under the may substantially reduce its open reflect fully all the speculative demand CEA or issuing certain orders. Section interest in a short time interval. In to hold the futures contract, because 15(a) further specifies that the costs and general, price impacts could arise from substitute instruments may not benefits shall be evaluated in light of large positions as they are established or influence prices in the same way that five broad areas of market and public liquidated. trading directly in the futures contract concern: (1) Protection of market Exchanges and the Commission may does. In these circumstances, futures participants and the public; (2) gain insight into the markets as market market price discovery and efficiency efficiency, competitiveness, and participants seek exemptions from might be harmed. financial integrity of futures markets; (3) position limits. This may improve the c. Summary of General Comments price discovery; (4) sound risk exchanges’ and the Commission’s ability Regarding Speculative Position Limits management practices; and (5) other to supervise markets and to deter and Rules public interest considerations. The prevent market manipulation. Further, Commission considers the costs and the discipline of seeking exemptions i. Comments on General Aspects of the benefits resulting from its discretionary that are tied to particular situations may Rule determinations with respect to the improve a market participant’s risk One commenter asserted that the Section 15(a) factors. management practices, as it goes The baseline against which the proposed rules have the potential to through the exercise of justifying the increase systemic risk, impair market Commission considers the benefits and need for an exemption. costs of these reproposed rules is the function, and increase the costs and statutory requirements of the CEA and There are additional benefits to volatility of wholesale energy the Commission regulations now in imposing position limits in the spot commodities. Moreover, the commenter effect—in particular the Commission’s month. Spot month position limits are asserted that these adverse impacts are Part 150 regulations and rules 1.47 and designed to deter and prevent corners unrelated to any mandates placed upon 1198 1.48.1196 and squeezes. Spot month position the Commission by Congress. limits may also make it more difficult to Another commenter said that position 1. Necessity Finding mark the close of a futures contract to limits that are not necessary or Out of an abundance of caution in possibly benefit other contracts that appropriate increase commercial light of the district court decision in settle on the closing futures price. parties’ compliance costs and reduce ISDA v. CFTC,1197 and without Marking the close harms markets by market liquidity, which in turn prejudice to any argument the spoiling convergence between futures increases the cost of hedging. The Commission may advance in any forum, prices and spot prices at expiration. commenter believes the Commission Convergence is desirable, because it did not adequately consider these costs 1196 See December 2013 Position Limits Proposal, facilitates hedging of the spot price of a and the lack of corresponding Table 4, at 75712, for a list of existing regulations commodity at expiration. In addition, benefits.1199 related to enumerated bona fide hedges. since many other contracts settle based 1197 International Swaps and Derivatives Association v. United States Commodity Futures on the futures price at expiration, 1198 CL–IECAssn–59679 at 1–2. Trading Commission, 887 F. Supp. 2d 259 (D.D.C. mispricing could affect a larger scope of 1199 CL–EEI–EPSA–59602 at 2 and 3, CL–EEI– 2012). contracts. Sup–60386 at 3.

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One commenter requested that as the compliance costs associated with participants with very large open Commission enacts its final rule it position limits are high and particularly interest. Thus, the Commission expects should avoid imposing materially costly burdensome for market participants minimal compliance costs for those and complex rules and reporting who are unlikely ever to come close to with positions below these high levels. requirements on hedgers unless they are reaching the limits.1204 Small traders would be required only to manifestly necessary to prevent a Another commenter believes that the monitor their open interest and have meaningful threat to market cost-benefit analysis in the 2016 safeguards in place to remain below integrity.1200 supplemental proposal features position limits. The Commission finds In response to 2016 Supplemental unrealistically low estimates of the time the exemption process valuable because Position Limits Proposal RFC 37, a and costs that will be required to it requires participants with very large commenter stated that maintaining the implement and maintain compliance open interest to provide the information status quo in which exchanges programs.1205 required by the exemption application administer an established process for Another commenter asserted that the to the relevant exchange(s) and to the position limits and exemptions will Commission did not adequately Commission. Having this information provide legal certainty and maintain quantify the harm from position limits helps exchanges and the Commission to current costs instead of increasing on liquidity for bona fide hedgers and better understand the markets they them.1201 In response to 2016 the price discovery function, or the regulate. Supplemental Position Limits Proposal implementation and on-going reporting As for the high costs that some RFC 55, this commenter said that the and monitoring costs for market commenters claimed to be required to Commission’s Division of Enforcement participants. The commenter believes implement and maintain compliance has numerous tools at its disposal, and that costs will arise from altering programs, the Commission presented that the Exchanges have position step- speculative trading strategies in and requested comment on its estimates down and exemption revocation response to a limited definition of bona of the costs associated with compliance authorization at their disposal, to fide hedging; reassessing and modifying programs. Commenters did not provide enforce CEA market manipulation existing trading strategies to comply any specific cost estimates to support regulations.1202 with limits; amending DCMs’ current their assertions of the potential for high Sen. Levin commented that the aggregation and bona fide hedging costs. benefits of the proposed rules, while policies; and creating compliant v. Comments on Cross-Border Aspects difficult to quantify, create a net benefit application regimes for SEFs.1206 of the Rule to the public and the markets by helping In response to 2016 Supplemental to ensure the markets’ continued Position Limits Proposal RFC 56, In response to 2016 Supplemental stability, fairness, and profitability.1203 another commenter asserted that unduly Position Limits Proposal RFC 67, a low position limits would reduce commenter noted that swaps and ii. Response to Comments on General liquidity and discourage market futures markets have become more Aspects of the Rule participation, thereby not advancing global and suggested that restrictive The Commission has interpreted the regulatory goals that are already position limit regulations and added Dodd-Frank Act to mandate that the appropriately protected under the status reporting requirements would drive Commission impose federal position quo. In response to 2016 Supplemental global companies to jurisdictions that limits on physical-delivery futures Position Limits Proposal RFC 66, this have more friendly regulatory contracts. In addition, the Commission commenter said the Commission should treatment.1208 Another commenter is making a preliminary alternative consider public interest considerations urged the Commission to consider and finding that position limits are relating to the particular interests of assess the costs and benefits of applying necessary to accomplish statutory commercial end-users, which rely on the rules on an extraterritorial basis.1209 objectives. The Commission believes mitigating price risk in order to remain vi. Response to Comments on Cross- that it has calibrated the levels of those in business. This commenter believes Border Aspects of the Rule limits so as to avoid harmful effects on that commercial end-users are at risk of the markets and, accordingly, does not being squeezed out of the market, and The Commission considers that believe the imposition of federal potentially squeezed out of business, as market participants might use other position limits at the reproposed levels a result of the difficulty of hedging means to engage in derivative activity will have the effects that concerned commercial risks. The commenter urged besides domestic futures and swaps if commenters. These commenter the Commission to apply graduated federal position limits are set too low. concerns are counterpoised by the regulatory requirements for bona fide For instance, price discovery for a desirable effects on markets that Sen. hedging determinations that would futures contract might move to a foreign Levin ascribed to position limits. account for differences between market board of trade that lists a substitute participants.1207 contract. Further, foreign parties might iii. Comments on Cost Estimates elect to engage in foreign swaps instead A commenter expressed concern that iv. Response to Comments on Cost of transacting in U.S. futures and swaps. the CFTC has underestimated the costs Estimates To mitigate these risks, the Commission of compliance with the position limits As shown in the impact analysis, the endeavors not to set the position limits rules, and the number of affected Commission seeks to reduce market at levels that are unduly low. parties, so that the potential unintended participants’ compliance costs by setting vii. Comments on Quantification of consequences of the rules will outweigh the federal position limits at a level Costs of the Rule their benefits. The commenter believes sufficiently high to only affect market this would result because the A commenter criticized the 1204 CL–MFA–60385 at 12–13. See also CL– Commission’s consideration of the costs 1200 CL–ASR–60933 at 5. COPE–59622 at 5 and CL–CMC–59634 at 2. and benefits of the proposed rules for 1201 CL–IECAssn–60949 at 19. 1205 CL–ISDA–60931 at 5. 1202 CL–IECAssn–60949 at 23. 1206 CL–ISDA/SIFMA–59611 at 24–25. 1208 CL–IECAssn–60949 at 26. 1203 CL–Sen. Levin–59637 at 9–10. 1207 CL–IECAssn–60949 at 23, 25–26. 1209 CL–ISDA/SIFMA–59611 at 23.

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failing to consider both direct and is lacking the Commission must make participants must assume that such a indirect costs on commodities markets, guesses, even if imprecise, and conduct reduction in liquidity would have been market participants, and the economy an economic analysis of the likely significant.1220 generally.1210 The Commenter believes impact of the proposed rules.1215 In the Sen. Levin commented that the that legal precedents require that in paper cited by the commenter, Craig Commission correctly identified the order to adopt a position limit rule, the Pirrong suggested that the Commission prevention and reduction of artificial Commission must find a reasonable could provide ‘‘valuable evidence’’ price disruptions to commodity markets likelihood that excessive speculation about costs and benefits by as a positive benefit that would protect will pose a problem in a particular documenting for each commodity both market participants and the public, market, and that position limits are subject to limits, using a long period of and that would outweigh the cost likely to curtail the excessive historical data, how often limits would imposed on certain speculative traders. speculation without imposing undue have been binding and how much large Sen. Levin commented that the costs.1211 To the contrary, this speculators would have had to reduce Commission correctly observed that the commenter said it had not observed their positions in order to comply with sound risk management practices excessive speculation in the years since limits.1216 He believes it would be required by the proposed rules would the financial crisis and, thus, position useful to see how often sudden and benefit speculators, end users, and limits would only increase regulatory unreasonable price changes occurred consumers.1221 Sen. Levin believes burdens with no corresponding during the period the limits would have these benefits would include: The benefit.1212 Moreover, the commenter been binding, in comparison to costs promotion of prudent risk management thinks the Commission did not during periods when limits have been (with Amaranth illustrating the dangers adequately quantify the harm that binding and not associated with sudden of poor risk management), and broader market experts predict position limits and unreasonable price changes.1217 He economic efficiency, public welfare, and will impose on liquidity for bona fide said that a proper cost-benefit analysis political security attributable to the hedgers, the disruption to the price should quantify net benefits relative to availability and price stability of discovery function, or the shifting of the status quo and identify which commodities such as wheat.1222 price discovery offshore. The categories of market participants benefit, viii. Response to Comments on commenter also pointed to a lack of the sources of those benefits, and their quantification of implementation costs, magnitude, and also identify which Quantification of Costs of the Rule initial compliance and monitoring costs, types of participants are more likely to The Commission does not believe that and on-going reporting and monitoring incur the costs associated with the the consideration of costs and benefits costs for market participants, and the limits, identify the sources of those under CEA section 15(a) requires a lack of quantified costs of a limited costs, and quantify them, while quantification of all costs and benefits. definition of bona fide hedging which providing the data and information Nor does the statute require the would require alterations to speculative necessary for replication of the Commission to hazard a guess when the trading strategies to meet the definition; analysis.1218 Last, Mr. Pirrong believes available information is imprecise. The the amendments to DCMs’ current the Commission should address statute requires the Commission to aggregation and bona fide hedging potential costs raised by commenters on consider the costs and benefits of its policies; or the creation of compliant the position limit rules proposed in rulemaking, which contemplates a application regimes for SEFs.1213 2011.1219 qualitative discussion when The commenter cited papers by Craig Another commenter also thought that quantification is difficult. Pirrong and Philip Verleger as proper the Commission should perform a cost- The Commission addresses most of evaluations of the costs and benefits of benefit analysis to determine whether the commenter’s cost and benefit position limits for derivatives,1214 and non-spot month position limits are concerns later in this consideration of asserted that if quantitative information justified. The commenter said that the costs and benefits. As for the Commission’s statements that ‘‘few’’ identification and quantification of costs 1210 CL–ISDA/SIFMA–59611 at 3–4 and 22. See participants would exceed the limits is and benefits suggested by Mr. Pirrong, also CL–ISDA–60370 at 2. not a sufficient analysis and that the the Commission believes it would be of 1211 CL–ISDA/SIFMA–59611 at 2, 3, citing ISDA, 887 F. Supp. 2d at 273. The commenter said the Commission is obligated to do a more limited usefulness. For instance, the Commission should identify marginal benefits of rigorous analysis before declaring 5, 7, quantification would be highly the rule and evaluate the costs and benefits or 11 persons as ‘‘few.’’ Further, the uncertain and require many subjective appropriately (given limitations on available data). commenter pointed out that the interpretations and judgements on the See also CL–ISDA/SIFMA–59611 at 22, n. 83, citing Inv. Co. Inst. v. CFTC, 720 F.3d 370, 378–79 (D.C. Commission has not specifically stated part of investigators. Further, due to Cir. 2013). Another commenter believed that the how often those market participants statutory restrictions on its release of Commission must find there is a problem in market would have exceeded those levels, how confidential data, the Commission pricing as a result of positions exceeding non-spot much over the limit they were, how the would be unable to provide data and month position limits, or a benefit from prohibiting such excess positions, before adopting position position exceedances were distributed other information necessary for the limits. CL–Working Group–59693 at 61. The along the price curve, or whether the public to conduct an independent commenter is concerned that, as a result of non-spot positions were calendar spreads, and replication of the Commission’s month position limits, parties carrying positions claimed that the lack of this information analysis. above the limit will lose the market opportunity The Commission considered experienced in holding the positions, there could be means there is no way to know whether an immediate reduction in liquidity if those parties the removal of those positions would proceeding in stages by first imposing must liquidate those positions, and a reduction in have led to a significant reduction in the positions of the market participants would liquidity and therefore market 1220 CL–Working Group–59693 at 61. The reduce open interest, reducing subsequent non-spot commenter also believes that non-spot month month limits and beginning a continuous position limits would create a restraint on non-spot downward cycle that eventually would draw 1215 CL–ISDA/SIFMA–59611 at 23–24. month liquidity due to strip positions along the liquidity from markets and impact hedgers. Id. 1216 CL–ISDA/SIFMA–59611 at Annex B at 5. curve, and this would create an unnecessary impact 1212 CL–ISDA/SIFMA–59611 at 30 1217 CL–ISDA/SIFMA–59611 at Annex B at 5. on hedgers. Id. at 61–62. 1213 CL–ISDA/SIFMA–59611 at 24–25 1218 CL–ISDA/SIFMA–59611 at Annex B at 5–6. 1221 CL–Sen. Levin–59637 at 9. 1214 CL–ISDA/SIFMA–59611 at 22 fn 83 1219 CL–ISDA/SIFMA–59611 at Annex B at 6. 1222 CL–OSEC–59972 at 2.

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position limits in the spot month before offer spreads and higher transaction fostering innovation and growth for the imposing then in the single month and costs.1226 Another thought the betterment of markets as a specific all months combined. The Commission Commission did not consider that public interest consideration under CEA is preliminarily rejecting this alternative liquidity and price discovery may be section 15(a). While these are of course based on the impact analysis, because diminished if speculative traders’ laudable objectives, the Commission the single month and all months activities are restricted.1227 In response believes they are difficult to accomplish combined positon limits are set to 2016 Supplemental Position Limits through position limits. The sufficiently high to impact only very Proposal RFC 62, another commenter Commission has not cited these general few market participants. Further, the said that price discovery will improve if benefits as a reason for position limits. Commission believes that most of these market participants are allowed to Last, the Commission notes that participants would qualify for various innovate and grow without excessive exchanges have proper incentives and a exemptions to positions limits. governmental interference and variety of tools with which to increase Another commenter asserted that the regulatory reporting costs.1228 And in liquidity on their exchanges and, as a CEA directs the Commission to balance response to 2016 Supplemental Position the four factors listed in CEA section general matter, make their exchanges Limits Proposal RFC 59, this commenter 1229 4a(a)(3)(B) and, thus, the Commission suggested that position limits should be useful to the market. should present rigorous analysis to meet imposed in a manner that will foster xi. Comments Referring to Position this requirement.1223 In particular, the innovation and growth for the Accountability commenter pointed out that the betterment of the markets. Commission has not published an A commenter requested that the x. Response to Comments on Liquidity analysis of how the proposed position Commission compare the costs and Effects limits promote sound risk management benefits of the proposed position limits and ensure that trading on foreign Liquidity is not a factor that the regime with those of a position boards of trade in the same commodity Commission is required to consider accountability regime, because the will be subject to comparable limits so under section 15(a) of the CEA; commenter believed that position that position limits do not cause price nevertheless, the Commission did accountability levels would serve as a discovery to shift to the foreign boards consider how liquidity concerns less costly and disruptive alternative to 1224 of trade. implicate the 15(a) factors. For instance, position limits.1230 Another commenter the Commission’s regulatory goals In response to this commenter, the compared a position accountability Commission interprets CEA section generally include protecting market process to position limits, and argued 4a(a)(3)(B) as a direction to the liquidity, and enhancing market that if the Commission imposes position Commission to set limits ‘‘to the efficiency and improving price maximum extent practicable’’ to further discovery through increased liquidity. limits for non-spot month contracts, the the four policy objectives in that The Commission has sought to reduce commenter would need to expend section. The Commission believes this is market participant burdens with the significant resources to ensure that its a Congressional recognition of the understanding that regulatory information technology systems could impossibility of achieving an actual compliance costs increase transaction identify, gather and report bona fide ‘‘maximum’’ for each of the four policy costs, which might reduce liquidity, all hedging positions. But under position objectives. In any case, as part of this else being equal. The Commission has accountability, the commenter would be consideration of costs and benefits, the considered that liquidity, including the able to reply to a specific request for Commission considers the promotion of risk-bearing capacity of markets, and additional information using its own sound risk management practices and price discovery may be harmed if internal reports that have been designed whether price discovery in a commodity position limits are set too low and so to meet its specific commercial and risk- will shift to a foreign board of trade.1225 has sought to avoid these adverse management needs. The position effects. accountability approach would ix. Comments on Liquidity Effects The Commission preliminarily substantially reduce, if not eliminate, Commenters addressed the effects of declines to treat general goals such as the burden of having to conform position limits on liquidity. One information technology systems to the expressed concern that the proposed 1226 CL–MFA–60385 at 4. Commission’s reporting 1227 position limits may constrain effective See CL–ISDA/SIFMA–59611 at 25. Another requirements.1231 risk transfer by unduly restricting commenter asserted that the Commission determined in 1993 that all-months-combined A third commenter also suggested that hedging or limiting the risk-bearing position limits are unnecessary and that the benefits capacity of large speculators, thereby of such limits did not outweigh the likely costs of while administering position causing reduced liquidity, wider bid- eroding speculative volume and liquidity and the accountability levels, the Commission disruption in the efficient functioning of the non- could conduct a comprehensive cost- storable commodity futures markets. CL–Working 1223 CL–CMC–59634 at 2. Group–59693 at 61 or CL–CMC. The commenter benefit analysis of the impact of spot 1224 See,CL–CMC–59634 at 3. Cf.CEA section provided no citations to Commission actions in month position limits on market 15(a)(2)(D) (titled ‘‘Costs and Benefits’’): ‘‘The costs 1993. Commission staff believes that the commenter liquidity for commercial hedgers and and benefits of the proposed Commission action may be referring to a proposal from CME to price discovery before determining shall be evaluated in light of . . . considerations of eliminate the all-months-combined limits in the sound risk management practices;’’ CEA section live cattle, live hogs, and feeder cattle futures and whether to extend position limits 4a(a)(2)(C) (titled ‘‘Goal’’): ‘‘In establishing the options markets in a March 4, 1993, submission. outside of the spot months, and use the limits required under [CEA section 4a(a)(2)(A)], the The Commission approved the proposal in an information collected to understand the Commission shall strive to ensure that trading on August 2, 1993, letter to the CME. trading activity of market participants foreign boards of trade in the same commodity will 1228 See CL–IECAssn–60949 at 24. Another be subject to comparable limits and that any limits commenter suggested that non-spot month position with large speculative positions and to be imposed by the Commission will note cause limits operate as a barrier to market entry for longer determine if non-spot month price discovery in the commodity to shift to trading dated activities in the name of preventing ‘‘a on the foreign boards of trade.’’ shallow threat’’ of excessive speculation, and that 1225 See the discussion of factors 3 (risk costs resulting from position limits would be 1229 CL–Working Group–59693 at 61–62. management) and 4 (price discovery) under section ultimately passed to the consumer, harming the 1230 CL–MFA–60385 at 13. 15(a), below. American economy. CL–EDF–60398 at 4–5. 1231 CL–Calpine–59663 at 4.

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speculative position limits are enforce federal position limits for swaps determination on which direction to necessary.1232 (although exchanges could take take. voluntary steps in this regard at any xii. Response to Comments Referring to 3. Section 150.1—Definitions Position Accountability appropriate time). As a result, this change in guidance will likely confer The Commission is reproposing new The Commission considered benefits and reduce costs, although it is definitions of, or amendments to the administering position accountability difficult to identify the benefits and definitions of, several terms: Basis levels in the non-spot month, but has costs that result directly from the contract, bona fide hedge, calendar preliminarily determined that the change in guidance because the exact spread contract, commodity derivative adoption of position limits with an time at which exchanges will become contract, commodity index contract, exemption process is the better obligated to monitor and enforce federal core referenced futures contract, eligible approach, because it benefits the position limits for swaps is not affiliate, entity, excluded commodity, supervisory functions of the exchanges currently specified but will instead futures-equivalent, intercommodity and the Commission by providing better depend on the future availability of spread, long position, short position, insight into the markets. In addition, the information. Also, given the spot month, intermarket spread, Commission notes it has a lack of physical commodity, pre-enactment interrelationship between the statutory authority for the Commission swap, pre-existing position, referenced exchanges’ enforcement of federal itself to administer position contract, spread contract, speculative position limits for swaps with the accountability levels. Rather, the CEA position limit, swap, swap dealer, and exchanges’ other actions with respect to authorizes exchanges to administer transition period. These new definitions position accountability levels. In position limits and the Commission’s and amendments are discussed above. contrast, the Commission’s emergency enforcement of federal position limits, it a. Benefits and Costs authority under the CEA is limited. is difficult to identify the incremental Further, the Commission notes it effect that will occur when exchanges A general benefit of including interprets CEA section 4a(a)(3) as a become obligated to enforce federal definitions in the regulation is greater direction to impose, at an appropriate position limits for swaps. clarity. In particular, having specific level, position limits on the spot month, However, the Commission believes definitions of terms set out as a separate each other month (i.e., single month), that because of the change in the part of the regulations helps users of the and the aggregate of all months. Commission’s guidance, exchanges and regulation to understand how the position limit rulemaking relates, in 2. DCM Core Principle 5(B) and SEF market participants will benefit because the delay will result in a lower general, to the concepts and terminology Core Principle 6(B), and new Appendix of CEA as amended by the Dodd-Frank E to Part 150 requirement to invest in technology and personnel to assess federal position Act. Although market participants and a. Summary of Changes limits. In terms of costs, the other users of the regulations must take The Commission is reproposing to Commission believes that there might be time and effort to understand and adapt amend its guidance regarding DCM core a cost to the market associated with this to new definitions in the context of the principle 5(B) and SEF core principle change in guidance because the delay rulemaking, the Commission believes 6(B), and adopting a new Appendix E to may result in exchanges’ reducing their these costs are reduced by setting out Part 150. The amendments have the monitoring of excessive positions in the definitions as a separate part of the effect of delaying the implementation of real-time.1233 regulations rather than incorporating the exchanges’ obligation to adopt swap definitions in the substantive provisions d. Summary of Comments position limits until there is sufficient of the rules. Specific benefits and costs of access to swap position information The Commission requested comment definitions are discussed within the regarding market participants’ swap on its consideration of the benefits and context of specific rules where the positions. costs associated with the proposed definitions are directly applicable. In b. Baseline amendments to guidance, and asked if addition, the Commission believes that there are additional alternatives that the several definitions merit a specific The baselines for these changes are Commission has not identified. Two the Commission’s current guidance on consideration of costs and benefits, commenters requested that the because the adoption of these DCM Core Principle 5, SEF Core Commission formulate a plan to address Principle 6, and the current Part 150. definitions would represent the exercise the lack of data access by DCMs and of substantive discretion on the part of c. Benefits and Costs SEFs.1234 These commenters did not the Commission. provide a detailed alternative, however. Section 15(a) of the CEA requires the b. Bona Fide Hedging Position Commission to consider the costs and On the other hand, one commenter benefits of its discretionary actions with asserted that there should be no delay i. Summary of Changes respect to rules and orders. The in implementing position limits for The Commission is reproposing a Commission believes it is also swaps because, according to the definition of bona fide hedging position appropriate to consider the costs and commenter, the Commission has access in § 150.1. The Commission believes benefits of changes to the appendices to to sufficient swap data it needs to this definition of bona fide hedging 1235 parts 37, 38, and 150 of the implement position limits. The position is consistent with CEA section Commission’s regulations, even though Commission is considering various 4a(c) regarding physical commodities these appendices constitute guidance. alternatives, but has not made a and otherwise closely conforms to the The Commission appreciates that the status quo. Commercial cash market changes to this guidance will delay the 1233 As stated in Section IIA, the Commission activities are covered by the part of the foresees various possibilities in remediating this point in time when exchanges will current inability to monitor position limits in real- definition that sets out an economically become obligated to monitor and time in the future. appropriate test. The Commission also 1234 CL–AFR–60953 at 2; CL–RER2–60962 at 1. notes that since CEA 4c(a)(5) separately 1232 CL–FIA–60303 at 3–4. 1235 CL–Better Markets–60928 at 6. states that intentional or reckless

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disregard for orderly trading execution recognized by exchanges as bona fide and that as a result some of these costs is unlawful and because it is unclear hedging in the past may not satisfy the would likely be passed onto how a market participant would comply definition in the reproposed rule. The consumers.1237 A commenter with an orderly trading requirement in Commission has sought to mitigate costs representing asset managers said that the context of OTC transactions, the arising from this transition by setting the final rule should include a risk Commission is proposing to delete the position limits at levels that are management exemption, including for orderly trading requirement in the appropriately high (so as to limit the commodity index contract positions, definition of bona fide hedging position. extent of positions that may require an because the availability of such an The Commission’s addition of sub- exemption) and by not including any exemption would reduce compliance paragraph (2)(iii)(C) to the definition of requirement that exchanges use the costs and reduce negative consequences bona fide hedging position in § 150.1 reproposed rule’s definition of bona fide for liquidity and price discovery, while reiterates the Commission’s authority to hedging position other than with respect providing the same benefit in terms of permit exchanges to recognize bona fide to the federal position limits in the preventing excessive speculation.1238 A hedging positions in accordance with referenced contracts listed in 150.2(d). third commenter asserted that the § 150.9(a). Those positions are subject to The Commission notes that an ‘‘specifically enumerated’’ criterion in CEA section 4a(c) standards as well as exchange is permitted to recognize the proposed definition would constrain Commission review. exemptions for non-enumerated bona risk management activities by fide hedging positions, certain spread effectively reclassifying large risk ii. Baseline positions, and anticipatory bona fide reducing positions as excessive The baseline for this amendment to hedging positions, under the processes speculation.1239 On the other hand, a the rule is the definition for ‘‘bona fide of § 150.9, 150.10 and 150.11, fourth commenter believed that the hedging transactions and positions,’’ set respectively, subject to assessment of definition of bona fide hedging position forth in current § 1.3(z).1236 the particular facts and circumstances, in the supplemental proposal will iii. Benefits and Costs where price risk arises as a result of benefit consumers through lower prices other fact patterns than those of the enabled by an efficient hedging Futures contracts function to hedge enumerated positions. The Commission mechanism as existing strategies remain price risk because they allow a party to expects to review with an open mind readily available.1240 fix a price for a specified quantity of a any hedging activity that exchanges Another commenter asserted that the particular commodity at a designated choose to exempt as bona fide hedging correlation standards in the proposed point in time. Futures contracts, positions with respect to federal rule would make the bona fide hedging thereby, can be used by market position limits. The Commission position exemption unavailable for participants to create price certainty for believes, however, that it would be hedges related to illiquid delivery physically-settled transactions. Thus, inappropriate to allow the exchanges to locations and result in higher risks for the Commission believes that to qualify act with unbounded discretion in market participants and higher costs for as a bona fide hedging position for a interpreting the meaning of the term consumers.1241 Along similar lines, physical commodity, the position must ‘‘economically appropriate’’ when the another commenter said the ultimately result in hedging against exchanges determine whether to Commission had not sufficiently some form of price risk in the physical recognize an exemption for bona fide considered the commonly accepted marketing channel. hedging. Such a broad delegation is not accounting practice of entering into The Commission is amending the five authorized by the CEA and, in the economic hedges or sufficiently day/spot month rule so that it will allow Commission’s view, would be contrary analyzed the costs and burdens to exchanges to grant spread exemptions to the reasonably certain statutory companies that engage in economic that are valid in the five day/spot month standards in CEA section 4a(c), such as hedging of applying the 0.80 correlation period. The Commission anticipates that the ‘‘economically appropriate’’ test. for cross-commodity hedging required allowing spread exemptions to be That is, if the statutory standards are in the final rule.1242 recognized in the spot month might reasonable certain, then the Commission The Commission believes that the improve liquidity and, thereby, lower may delegate authority to exchanges. If definition of bona fide hedging position costs for market participants. the statutory standards were not and the related exemption process in Also, the rule amendments will allow reasonably certain, then the the reproposed rule will accommodate bona fide hedge exemptions to cover a Commission would be precluded from many existing hedging strategies that period of more than one year of cash delegating authority to the exchanges. market participants use. As it would be market exposure. The current definition Further, as explained in the discussion impossible to enumerate every limits to one year the hedging of of § 150.9, 150.10 and 150.11, exchange acceptable bona fide hedging activity, anticipated production of, or determinations in this regard will be requirements for, an agricultural the Commission has preliminarily subject to the Commission’s de novo determined that it is appropriate to rely commodity. Removing this current review. restriction is desirable because many on the experience and expertise of commercial enterprises may prefer to iv. Summary of Comments exchanges to process these exemptions. hedge cash market exposure for more The Commission believes that the Several commenters said that the exchanges will be better placed to than one year. rule’s definition of bona fide hedging The Commission understands that position should be expanded in various 1237 some activity that may have been CL–Working Group–59693at 23–26. ways that would extend the scope of the 1238 CL–AMG–60946 at 2–3. definition to include the hedging of a 1239 1236 CL–CME–59718 at 47. 17 CFR 1.3(z) (2010). As discussed above, a 1240 district court generally vacated the Commission’s wider variety of risks, in addition to CL–NGFA–60941 at 2–3 part 151 rulemaking, that would have amended price risk. For example, one commenter 1241 See, e.g., CL–EEI–EPSA–59602 at 14. The § 1.3(z) to apply only to excluded commodities. claimed that hedging some of the risks commenter believes that the Commission evaluated only correlation during the spot month, but not the However, the Commission has not instructed the and costs associated with building Federal Register to roll back those vacated closer correlation that typically exists in the non- amendments. Thus, the current version of § 1.3(z) energy infrastructure may not satisfy the spot months. Id. is found in the 2010 or earlier version of the CFR. bona fide hedging position definition, 1242 CL–NRG at 5

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determine which activities qualify for conditions.1244 Another commenter period. The costs and benefits of the bona fide hedging position exemptions asserted that hedging on a gross basis is forms are considered in the discussion based on the applicable facts and economically appropriate in a variety of of Part 19 and rule 150.7. circumstances. The Commission circumstances and the Commission’s c. Core Referenced Futures Contract and anticipates that the exchanges’ role in proposal would limit market Referenced Contract administering bona fide hedging participants’ ability to hedge the risks position exemptions will help to associated with their commercial i. Summary of Changes mitigate the potential adverse effects activities, potentially resulting in The Commission proposes to define that commenters attributed to an overly increased costs and volatility that could the term ‘‘core referenced futures narrow application of such detrimentally impact the market contract’’ and amend the list of exemptions.1243 participants and lead to higher prices contracts in § 150.2. The effect of this is Regarding commenters’ suggestions 1245 for consumers. that the federal positon limits in that the definition of bona fide hedging The Commission believes that it is position be expanded to encompass § 150.2(d) will apply to the following fundamental to the definition of bona additional contracts: Rough Rice, Live hedges of risks other than risks related fide hedging position to require that to prices in physical marketing Cattle, Cocoa, Coffee, Frozen Orange such hedging reduce the overall risk of Juice, U.S. Sugar No. 11, U.S. Sugar No. channels, the Commission notes that the commercial enterprise. Consistent many risks come into play outside the 16, Light Sweet Crude Oil, NY Harbor with that focus on overall risk, it should ULSD, RBOB Gasoline, Henry Hub physical marketing channel to which be noted that the Commission does referenced contracts relate. The Natural Gas, Gold, Silver, Copper, recognize certain gross hedges, e.g., the Palladium, and Platinum. Commission has preliminarily use of a calendar month spread position determined that hedging of these other ii. Baseline to hedge the price risk of a soybean The baseline for the definition of the risks should not be covered by the bona crush processor, because those gross fide hedging position definition, term ‘‘core referenced futures contract’’ hedges reduce overall risk. That is, in is that the term encompasses the legacy because the Commission views the applying the definition one must statutory standards in CEA section agricultural futures contracts that are consider whether a hedge reduces the subject to existing federal position 4a(c)(2), largely mirroring those of the overall risk of the commercial general definition of a bona fide hedging limits, namely: Corn (and Mini-Corn), enterprise, and overall risks must be Oats, Soybeans (and Mini-Soybeans), position in § 1.3(z)(1), to be reasonably determined on a net basis.1246 In this certain as limited to hedges of price Wheat (Mini-Wheat), Soybean Oil, Hard aspect, too, the Commission believes Winter Wheat, Hard Red Spring Wheat, risks. Further, as explained above, the that the involvement of exchanges in the statutory standard of CEA section 4a(c) and Cotton No. 2. The baseline for the bona fide hedge exemption process will definition of the term ‘‘referenced requires bona fide hedging positions to be valuable, and the Commission would be a substitute for a transaction taken or contract’’ is the same as that of the term expect to consider the determinations of ‘‘core referenced futures contract.’’ to be taken in the cash market. exchanges in this regard with an open Generally, this precludes application of mind. iii. Benefits and Costs the bona fide hedging exemption to Four commenters expressed hedging of purely financial risks that are The definitions of the terms ‘‘core opposition to an aspect of the proposal referenced futures contract’’ and not price risks related to the physical in the supplemental notice that would marketing channel. For example, ‘‘referenced contract’’ set the scope of not allow hedge exemptions for spread commodity index contracts are not contracts to which federal position transactions to be applied during the eligible for recognition as the basis of a limits apply. As noted above, the last five days of trading of a futures bona fide hedging position exemption Commission has preliminarily decided contract, saying that spread exemptions because these contracts are not used to to proceed in stages when imposing should be allowed into the spot month hedge price risks in physical marketing federal position limits. Among other to avoid negative effects on liquidity channels, as required in CEA section things, this will allow the Commission and potential disruptions of 4a(c)(2)(A)(i), and, as well, would not to observe how futures markets respond convergence, potentially resulting in meet the requirements for a bona fide to an initial set of position limits before additional risk for market participants hedging position as a pass-through swap applying position limits more widely, which ultimately gets passed to including to contracts with less offset under CEA section 4a(c)(2)(B). 1247 Commenters also addressed the consumers. liquidity. All other things being equal, element of the bona fide hedging The Commission agrees with markets for contracts that are more position definition that generally commenters that allowing spread illiquid tend to be more concentrated, so requires that hedges be considered on a exemptions to be applied in the spot that a position limit on such contracts net basis in determining whether the month might improve liquidity and might significantly reduce trading definition is satisfied. One commenter lower risks for market participants. interest on one side of the market, argued that hedging on a net basis Thus, the Reproposal would permit because a large trader would face the would be unworkable and require costly exchanges to grant § 150.10 spread potential of being capped out by a new technology systems to be built exemptions into the five day/spot position limit. For this reason, among around more rigid, commercially others, the contracts to which the impractical hedging protocols that 1244 See, e.g., CL–EEI–EPSA–59602 at 15, CL– position limits in § 150.2(d) apply EEI–Sup–60386 at 7. See also CL–Calpine–59663 at prevent dynamic risk management in 7. include some of the most liquid response to rapidly changing market 1245 CL–Olam–59946 at 1. physical-delivery futures contracts. 1246 See the Commission determination regarding Following the application of position 1243 For example, the Commission believes that comments on specific, identifiable risks, above, for limits to these contracts, the the exchanges’ involvement in this process is more an explanation of why it would be inappropriate to Commission would be able to study the flexible and far superior to setting out regulatory apply the bona fide hedging definition on an item safe harbors for factors such as a linear correlation by item basis. effects of position limits more readily in the spot month that may demonstrate a position 1247 See CL–NCGA–ASA–60917 at 7; CL– and, it is anticipated, consider how to qualifies for the exemption. IECAssn–60949 at 25; and CL–FIA–60937 at 18–19. apply position limits more broadly in a

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way that would not unduly restrain or futures contract that is ‘‘indirectly could increase exposure to a referenced liquidity in less liquid markets. linked’’ to a physical-delivery futures contract by netting down, using such a The Commission has also contract. The ‘‘indirectly linked’’ location basis contract, the position that preliminarily determined not to apply contract could be a cash-settled swap or would otherwise be restricted by a position limits to cash-settled core cash-settled futures contract that settles position limit on the referenced referenced futures contracts (that are not to the price of another cash-settled contract. linked to physical-delivery futures derivative that, in turn settles to the contracts) at this time. For these price of a physical-delivery futures iv. Summary of Comments contracts, the possibility of corners and contract. A contract that settles based on Commenters said that trade options squeezes is reduced, because there is no the level of a commodity price index, should not be included in the definition link to a physical-delivery futures comprised of commodities that are not of ‘‘referenced contract.’’ One contract that may be distorted, and the same or substantially the same, commenter said there is significant therefore there is less of a need for would not be an ‘‘indirectly linked’’ uncertainty about the distinction position limits. Of course, there may be contract, even if the index uses futures between forward contracts and trade other concerns about manipulation of prices as components. A contract based options, so costs associated with cash-settled futures contracts that are on such a commodity price index is imposing position limits on trade not linked to physical-delivery futures excluded because the index represents a options would greatly exceed any contracts, however. For instance, there blend of the prices of various benefits.1249 Another argued that may be an incentive to manipulate a commodities. because trade options have never been commodity price index in a manner that The Reproposal’s definition of the subject to position limits, commercial would benefit particular cash-settled term ‘‘referenced contract’’ does not parties do not have any systems in place futures or swap positions. Such include a swap or futures contract that to: Distinguish between trade options manipulative conduct includes fixes its closing price on the prices of that are referenced contracts and those cornering or squeezing the underlying the same commodity at different that are not; monitor the number and cash market on which a cash-settlement delivery locations than specified in the quantity of referenced-contract trade index is based. The Commission notes core referenced futures contract, or on option positions across delivery points that these manipulation concerns may the prices of commodities with different and trading venues; and integrate them be addressed, in part, through the commodity specifications than those of with other position tracking Commission’s authority to regulate the core referenced futures contract. systems.1250 futures and swaps (including the terms This approach is also in accord with The Commission took the difficulties of these contracts set by exchanges) and market practice, in that a core explained by commenters in complying take enforcement actions, until such referenced futures contract specifies with position limits on trade options time as the Commission adopts position location(s) and grade(s) of a commodity into account when preliminarily limits on cash-settled core referenced in the relevant contract specification. determining not to include trade options futures contracts. Further, exchanges in Thus, a contract on one grade of in the definition of referenced contract. their SRO function may also constrain commodity is treated by the market as To provide flexibility, the reproposed and discipline traders who are trading different from a contract on a different rule permits trade options to be taken in a disruptive fashion. Indeed, it is grade of the same commodity. into consideration as a cash position, on reasonable to expect that, given the A location basis contract—a contract a futures-equivalent basis, as the basis of exchanges’ deep familiarity with their which reflects the difference between a bona fide hedging position. own markets and their ability to tailor two delivery locations of the same Another commenter discussed the a response to a particular market commodity—is also excluded from the exclusion of commodity index swaps disruption, such exchange action is definition of referenced contract.1248 A from the definition of swaps that are likely to be more effective than a location basis contract may be used to position limit in such circumstances. economically equivalent to core hedge price risks relating to delivery at referenced futures contracts. This However, the Commission notes the a location other than that of the core exchanges do not have authority over commenter said this disparate treatment referenced futures contract. For will shift trading activity to index those persons who only transact in OTC instance, a location basis contract can be swaps. swaps, drain liquidity from exchange- used in combination with a referenced listed products, harm pre-trade The Commission has preliminarily contract to create a synthetic derivative determined to exclude trade options transparency and the price discovery contract on a commodity at a different process, and further depress open from the rule’s definition of ‘‘referenced delivery location, with a resulting zero contract,’’ for several reasons. The interest (as volumes shift to index swap net position in the referenced contract. positions that do not count toward open Commission believes that many trade However, a location basis contract that interest calculations).1251 options would qualify for bona fide had a relatively small difference in hedging position exemptions, since location with that of the core referenced trade options are generally used to 1249 CL–FIA–59595 at 20. futures contract likely would not expose 1250 hedge risks. The Commission also See, e.g., CL–NGSA–59674 at 33; CL–NGSA– a speculator to significant price risk. 59900 at 9. Another commenter made a more believes that not including trade options Absent the exclusion of location basis general assertion that the costs of monitoring in the scope of position limits will contracts from the definition of positions subject to a limit, including reporting costs, would drive commercial market participants relieve many market participants of referenced contract, such a speculator significant compliance costs that would to the spot markets and cause them to restrict the variability provided to customers, if trade options be required to apply position limits to 1248 The defined term ‘‘location basis contract’’ or forward contracts with optionality were subject trade options. Last, this approach will generally means a derivative that is cash-settled to position limits. CL–Calpine–59663 at 5. allow the market to continue to innovate based on the difference in price, directly or 1251 CL–Citadel–59933 at 1–3. The commenter in the use of trade options to hedge a indirectly, of (1) a core referenced future contract; also made two recommendations relevant to the and (2) the same commodity underlying a particular definition of core referenced futures contract: That variety of risks. core referenced futures contract at a different position limits for cash-settled contracts are not The rule’s definition of the term delivery location than that of the core referenced warranted and that commodity index swaps should ‘‘referenced contract’’ includes a swap futures contract. Continued

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The Commission acknowledges the proposal, there are no cost or benefit administer spread exemptions. The uncertainty about whether there will be implications to these further definitions and § 150.10, together, will a loss in liquidity due to the imposition clarifications. enable market participants to obtain of federal position limits. The relief from position limits for these iv. Summary of Comments Commission will monitor this issue types of spreads, among others. going forward. The Commission requested comment Another commenter suggested that on the revisions to the definition of the iv. Summary of Comments the definition of bona fide hedging term ‘‘futures equivalent,’’ but did not Citadel recommended that cross- position should include the hedging of receive any substantive comments. commodity netting should be a binding and irrevocable bid, because Consequently, the Commission is permitted.1253 The Commission a failure to do so could increase the reproposing the definition in the preliminarily declines to permit cross- costs incurred by utilities and special Supplemental 2016 position limit commodity netting within a particular entities to provide power or gas by proposal. referenced contract. However, the Commission addresses cross-commodity forcing bidders to incorporate into their e. Intermarket Spread Position and netting in the context of authorizing bids or offers the cost associated with Intramarket Spread Position the risk that no exemption for such a exchanges to recognize spread hedge would be permitted.1252 In i. Summary of Changes exemptions under reproposed § 150.10. response, the Commission points out Current part 150 does not contain 4. Section 150.2—Speculative Position that, under reproposed § 150.9, a bidder definitions for the terms ‘‘intermarket Limits may seek recognition of a non- spread position’’ or ‘‘intramarket spread enumerated bona fide hedging position, position.’’ In the Supplemental 2016 a. Rule Summary under which an exchange may consider Position Limits Proposal the As previously discussed, the the facts and circumstances on a case- Commission proposed to expand the Commission interprets CEA section by-case basis. scope of definitions of these terms that 4a(a)(2) to mandate that it establish d. Futures Equivalent had been included in the December speculative position limits for all 2013 Position Limits Proposal. The agricultural and exempt physical i. Summary of Changes expanded definitions of ‘‘intermarket commodity derivative contracts and, as The Commission is reproposing two spread position’’ or ‘‘intramarket spread a separate and independent basis for further revisions to the definition of position’’ include positions in multiple this rulemaking, has made a preliminary ‘‘futures-equivalent’’ in the rule. The commodity derivative contracts. This finding that position limits are first revision clarifies that the term expansion would allow market necessary as a prophylactic measure to ‘‘futures-equivalent’’ includes a futures participants to establish an intermarket carry out the purposes of section contract which has been converted to an spread position or an intramarket spread 4a(a).1254 The Commission currently economically equivalent amount of an position that would be taken into sets and enforces speculative position open position in a core referenced account under the position limits limits for futures and futures-equivalent futures contract. Second, the regime and exemption processes. The options contracts on nine agricultural Commission clarifies that, for purposes expanded definitions also cover spread products. Specifically, current § 150.2 of calculating futures equivalents, the positions established by taking positions provides ‘‘[n]o person may hold or size of an open position represented by in derivative contracts in the same control positions, separately or in an option contract must be determined commodity, in similar commodities, or combination, net long or net short, for as the economically-equivalent amount in the products or by-products of the the purchase or sale of a commodity for of an open position in a core referenced same or similar commodities. future delivery or, on a futures- futures contract. ii. Baseline equivalent basis, options thereon, in excess of [enumerated spot, single- ii. Baseline Current § 150.1 does not include month, and all-month levels for nine The baseline for this change to the definitions for the terms ‘‘intermarket specified contracts].’’ 1255 The rule’s definition of ‘‘futures equivalent’’ spread position’’ and ‘‘intramarket Commission proposed to amend § 150.2 is the current § 150.1(f) definition of spread position.’’ Therefore, the to expand the scope of federal position baseline is a market where ‘‘futures-equivalent’’. limits regulation in three chief ways: (1) ‘‘intermarket’’ and ‘‘intramarket’’ spread Specify limits on 16 contracts in iii. Benefits and Costs positions are not explicitly included in addition to the nine existing legacy the definition of contracts that are The Commission has preliminarily contracts (i.e., a total of 25); (2) extend exempt from federal position limits. determined that the definition of the application of these limits beyond ‘‘futures-equivalent’’ in current iii. Benefits and Costs futures and futures-equivalent options § 150.1(f) is too narrow in light of the to all commodity derivative interests, Dodd-Frank Act amendments to CEA The changes to the definitions of the terms ‘‘intermarket spread position’’ and including swaps; and (3) extend the section 4a. To conform to the statutory application of these limits across trading changes and to make the definition ‘‘intermarket spread positions’’ broaden the scope of the two terms in venues to all economically equivalent more amenable to application within contracts that are based on the same the broader position limits regime, the comparison to the definitions proposed in the December 2013 Position Limits Commission is reproposing a more 1253 Proposal. In the Commission’s view, the CL–Citadel–59933 at 4. descriptive definition of the term 1254 See supra discussion of the Commission’s ‘‘futures-equivalent’’ by adding more changes are only operative in the interpretation of this mandate and the alternative explanatory text. The Commission application of §§ 150.3, 150.5 and necessity finding. continues to believe that, as it stated in 150.10, which address exemptions from 1255 These contracts are Chicago Board of Trade position limits for certain spread corn and mini-corn, oats, soybeans and mini- soybeans, wheat and mini-wheat, soybean oil, and not be treated differently than other cash-settled positions. The two definitions operate soybean meal; Minneapolis Grain Exchange hard contracts: Id. in conjunction with § 150.10, which sets red spring wheat; ICE Futures U.S. cotton No. 2; 1252 See, e.g., CL–EEI–EPSA–59602 at 18. forth a process for exchanges to and Kansas City Board of Trade hard winter wheat.

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underlying commodity. In addition, the currently in § 150.2; 1261 (2) a newly for each. As a result, a trader could hold Commission’s proposed rule included defined category of ‘‘referenced positions up to the applicable spot methods and procedures for contracts’’ (as defined in § 150.1); 1262 month limit in the physical-delivery implementing and applying the and (3) across all trading venues to all contracts, as well as positions up to the expanded limits. economically equivalent contracts that applicable spot month limit in linked The Commission is reproposing are based on the same underlying cash-settled contracts (i.e., cash-settled amendments to § 150.2 to impose commodity. futures and swaps), but would not be speculative position limits as mandated able to net across physical-delivery and b. § 150.2(a) Spot-Month Speculative by Congress in accordance with the cash-settled contracts in the spot month. statutory bounds that define the Position Limits Commission’s discretion in doing so i. Summary of Changes ii. Baseline To the extent the Commission has and, as a separate and independent In order to implement CEA section correctly interpreted that CEA section basis for the Reproposal, because the 4a(a)(3)(A), reproposed rule § 150.2(a) 4a(a)(2) mandates position limits, the speculative position limits are necessary prohibits any person from holding or 1256 costs and benefits of whether to require to achieve their statutory purposes. controlling positions in referenced position limits have been balanced by First, pursuant to CEA section 4a(a)(5) contracts in the spot month in excess of Congress and the Commission is not the Commission must concurrently the level specified by the Commission tasked with revisiting those costs and impose position limits on swaps that are for referenced contracts.1263 benefits on that specific question.1264 economically equivalent to the Additionally, § 150.2(a) requires that a To agricultural and exempt commodity trader’s positions, net long or net short, the extent the Reproposal rests on the derivatives for which position limits are in the physical-delivery referenced preliminary alternative necessity mandated in CEA section 4a(a)(2), and contract and linked cash-settled finding, the baseline is the current for which the Commission separately referenced contract be calculated § 150.2 of the Commission’s regulations. finds position limits are necessary. separately under the spot month iii. Benefits and Costs Second, CEA section 4a(a)(3) requires position limits fixed by the Commission that the Commission appropriately set As discussed above, CEA section 4a(a)(3)(A) directs the Commission, each limit levels mandated and/or found 1261 Specifically, in addition to the existing 9 necessary under section 4a(a)(2) that ‘‘to legacy agricultural contracts now within § 150.2— time it establishes limits, to set limits on the maximum extent practicable, in its i.e., Chicago Board of Trade corn (C), oats (O), speculative positions during the spot- discretion,’’ accomplish four specific soybeans (S), soybean oil (SO), soybean meal (SM), month.1265 It is during the spot-month and wheat (W); Minneapolis Grain Exchange hard 1257 period that concerns regarding certain objectives. Third, CEA section red spring wheat (MWE); ICE Futures U.S. cotton 4a(a)(2)(C) requires that in setting limits No. 2 (CT); and Kansas City Board of Trade hard manipulative behaviors, such as corners mandated (or adopted as necessary) winter wheat (KW)—proposed § 150.2 would and squeezes, become most urgent.1266 under section 4a(a)(2)(A), the expand the list of core referenced futures contracts The Commission has for decades to capture the following additional agricultural, applied guidance that spot-month ‘‘Commission shall strive to ensure that energy, and metal contracts: Chicago Board of Trade trading on foreign boards of trade in the Rough Rice (RR); ICE Futures U.S. Cocoa (CC), position limits for physical-delivery same commodity will be subject to Coffee C (KC), FCOJ–A (OJ), Sugar No. 11 (SB) and futures contracts should be equal to no comparable limits and that any Sugar No. 16 (SF); Chicago Mercantile Exchange more than one-quarter of the estimated Live Cattle (LC); Commodity Exchange, Inc., Gold deliverable supply for that commodity. limits. . . imposed. . .will not cause (GC), Silver (SI) and Copper (HG); and New York price discovery in the commodity to Mercantile Exchange Palladium (PA), Platinum Spot-month position limits provide shift to trading on the foreign boards of (PL), Light Sweet Crude Oil (CL), NY Harbor ULSD benefits to the market by restricting trade.’’ Key elements of the reproposed (HO), RBOB Gasoline (RB) and Henry Hub Natural speculators’ ability to amass market Gas (NG). The Commission originally proposed in 1258 power, regardless of whether there is rule are summarized below. its 2013 to set position limits on 28 core referenced Generally, § 150.2 will limit the size contracts, including the 25 contracts noted above intent to manipulate or distort the of speculative positions,1259 i.e., prohibit plus CME Feeder Cattle, Lean Hog and Class III market. In so doing, spot-month any person from holding or controlling Milk. Those three contracts will not be included in position limits restrict the ability of net long/short positions above certain the Reproposal for the reasons discussed above. speculators to engage in corners and 1262 This would result in the application of specified spot month, single month, and prescribed position limits to a number of contract squeezes and other forms of all-months-combined position limits. types with prices that are or should be closely manipulation. They also prevent the These position limits will reach: (1) 25 correlated to the prices of the 25 core referenced potential adverse impacts of unduly ‘‘core referenced futures contracts,’’ 1260 futures contracts—i.e., economically equivalent large positions even in the absence of contracts—including: (1) ‘‘look-alike’’ contracts representing an expansion of 16 (i.e., those that settle off of the core referenced manipulation, thereby promoting a more contracts beyond the 9 legacy futures contract and contracts that are based on the orderly liquidation process for each agricultural contracts identified same commodity for the same delivery location as contract and fostering convergence the core referenced futures contract); (2) contracts between the expiring core referenced based on an index comprised of one or more prices 1256 See supra discussion of the Commission’s for the same delivery location and in the same or futures contract and its underlying cash necessity finding. substantially the same commodity underlying a market. This makes the core referenced 1257 These objectives are to: (1) ‘‘diminish, core referenced futures contract; and (3) inter- futures contract more useful for hedging eliminate, or prevent excessive speculation;’’ (2) commodity spreads with two components, one or ‘‘deter and prevent market manipulation, squeezes, cash market positions. both of which are referenced contracts. For example, as discussed above, the and corners;’’ (3) ‘‘ensure sufficient market liquidity 1263 As discussed supra, the Commission is for bona fide hedgers;’’ and (4) ‘‘ensure that the reproposing to adopt a streamlined, amended absence of manipulative intent behind price discovery function of the underlying market definition of ‘‘spot month’’ in § 150.1. The term is excessive speculation does not preclude is not disrupted.’’ 7 U.S.C. 6a(a)(3). defined as the trading period immediately the risk that accumulation of very large 1258 For a more detailed description, see preceding the delivery period for a physical- positions will cause the negative discussion above. delivery futures contract and cash-settled swaps 1259 § 150.1 includes a definition of the term and futures contracts that are linked to the physical- ‘‘speculative position limits.’’ delivery contract. The definition provides that the 1264 See Nat’l Ass’n of Mfrs. v. SEC, 748 F.3d 359, 1260 § 150.1 defines the term ‘‘core referenced spot month for cash-settled contracts is that same 369–70 (D.C. Cir. 2014). futures contract’’ by reference to ‘‘a futures contract period as that of the core referenced futures 1265 7 U.S.C. 6a(a)(3)(A). that is listed in § 150.2(d).’’ contract. For more details, see discussion above. 1266 See discussion above.

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consequences of the types observed in exemption from the exchange if their section 4a(a)(3)(B)(ii); that is, to prevent the Hunt and Amaranth incidents. hedging positons are above the lower or deter market manipulation, including Moreover, it is often difficult to discern limit set by the exchange. Otherwise, a corners and squeezes. For example, the manipulative intent. That is one reason market participant who wants Commission proposes to use its position limits are valuable as a speculative exposure above the lower discretion under CEA section 4a(a)(1) to prophylactic measure for, in the limit, but who does not qualify for an set limits that are equal in the spot- language of Section 4a(a)(1), exemption, would have to take month for physical-delivery and linked ‘‘preventing’’ burdens on interstate speculative positions in other cash-settled referenced contracts commerce. The Hunt brothers and instruments not subject to exchange or respectively. By setting separate limits Amaranth examples illustrate the Federal position limits, which as noted for physical-delivery and cash-settled burdens on interstate commerce of above may involve higher transaction referenced contracts, the Reproposal excessive speculation that occurred in costs. restricts the size of the position a trader the absence of position limits, and The Commission also recognizes that may hold or control in cash-settled position limits would have restricted there are costs to setting federal spot- referenced contracts, thus reducing the those traders’ ability to cause month limits too high or too low. If the incentive of a trader to manipulate the unwarranted price movement and Federal spot-month limit is too high, the settlement of the physical-delivery market volatility. This would be so even exchanges and the Commission lose contract in order to benefit positions in had their motivations been innocent. visibility into market activity because the cash-settled referenced contract. Both episodes involved extraordinarily the number of exemption applications Thus, the separate limits further large speculative positions, which the from market participants will be enhance the prevention of market Commission has historically associated reduced because of the higher limit. In manipulation provided by spot-month with excessive speculation.1267 addition, if limits are too high, market position limits by reducing the potential Exchanges and market participants participants could obtain positions that for incentives to engage in manipulative also benefit from spot-month position would impact the price of the action. limits because market participants who commodity, possibly manipulating or seek exemptions to the spot-month limit distorting the futures price, thus iv. Summary of Comments will have to justify why their positions impairing the price discovery process of One commenter urged the qualify for the exemption, which fosters the core referenced futures contract. Commission to ensure that a final rule visibility into the market for the Furthermore, if a market participant does not compromise predictable exchanges and fosters better risk establishes a very large position and convergence in the market, or risk management practices for the market then has to unwind its position, there threatening the utility of contracts for participant seeking the exemption. could be an adverse impact on the price risk management purposes, noting the In its determination of the appropriate of the core referenced futures contract importance of risk management to the spot month levels for the core (e.g., as occurred with Amaranth). general health of the economy.1269 referenced futures contracts, the Conversely, if the Federal spot-month Another commenter noted the Commission took into account exchange limit is too low, market participants and requirement that the Commission estimates of deliverable supply, which exchanges would incur larger costs to consider alternatives and said that the were verified by the Commission staff, apply for and process, respectively, Commission should consider not and exchange spot-month limit level more exemption applications. In adopting non-spot-month limits, limits recommendations. A more detailed addition, as noted above, transactions that are set arbitrarily, or limits on discussion of the costs and benefits for costs for market participants who are financially settled contracts; consider the actual limits can be found below in near or above the limit would rise as recognizing cross-commodity netting; the discussion of 150.2(d). However, they transact in other instruments with consider a plan for cross-border more generally, the Commission higher transaction costs to obtain their application of position limits; and recognizes federal spot month position desired level of speculative positions. consider new data sources, including limits do impose costs to exchanges and Additionally, limits that are too low SDRs (although such data’s reliability is market participants. Federal spot month could incentivize speculators to leave still in development).1270 limits will require hedgers to apply for the market and not be available to The Commission agrees that the exemptions if they hold positions in provide liquidity for hedgers, resulting federal position limit regime should not excess of the federal limits. These costs in ‘‘choppy’’ prices and reduced market unnecessarily impede convergence are considered in the discussion of efficiency.1268 Further, option between the futures and cash markets, 150.3. In addition, speculators who premiums would likely increase to which would impede the price want exposure beyond the federal limit account for the more volatile prices of discovery process of the core referenced for a referenced contract will incur costs the underlying core referenced futures contract. As discussed below, the to trade in instruments that are not contract. Moreover, if confidence in the Commission endeavors to take into subject to federal limits, such as trade price of the core referenced futures account how the position limit levels options and bespoke swaps, which contract erodes, market participants would impact the number of market typically incur more expensive may move to another DCM or FBOT. participants in all of the referenced transactions costs than exchange traded The Commission proposes to use its contracts to reduce undesirable impact futures and swaps. discretion in the manner in which it on those markets. Furthermore, as discussed above, implements the statutorily-required The Commission has preliminarily exchanges may choose to adopt spot- spot-month position limits so as to exercised its discretion in determining month limits below the federal limit. achieve Congress’s objectives in CEA how to adopt position limits and has Market participants who are hedging chosen to start with the 25 core their cash market positions would incur 1268 ‘‘Choppy’’ prices often refers to illiquidity in referenced futures contracts which were a market where transacted prices bounce between selected on the basis that such contracts: costs of having to apply for an the bid and the ask prices. Market efficiency may be harmed in the sense that transacted prices might 1267 December 2013 Position Limits Proposal, 78 need to be adjusted for bid-ask bounce to determine 1269 CL–ADM–60300 at 3. FR 75685 n. 60. the fundamental value of the underlying contract. 1270 CL–ISDA/SIFMA–59611 at 26.

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(1) Have high levels of open interest and position limits and not federal iii. Benefits and Costs significant notional value; or (2) serve as speculative position limits.1273 CEA section 4a(a)(3)(A) directs the a reference price for a significant The Commission has preliminarily Commission, each time it establishes number of cash market transactions. The considered how the limits would impact limits, to set limits on speculative specific levels are not set arbitrarily. traders. In that regard the Commission positions for months other than the Rather, as discussed more below, the sought not to impede the liquidity of the spot-month.1275 While market Commission takes into account the markets for both hedgers and disruptions arising from the expertise of the exchanges that list the speculators by setting the spot month concentration of positions remain a core referenced futures contracts. In that position limit at a level that would not possibility outside the spot month, the regard, the Commission received and deter hedgers or speculators from above-mentioned concerns about verified estimates of deliverable participating in the market. The corners and squeezes and other forms of supplies for core referenced futures Commission is mindful of the beneficial manipulation are reduced outside the contracts and considered spot-month effects that speculators have on the spot-month. Accordingly, the limit levels those exchanges suggested. commodity markets. As a consequence, Reproposal requires netting of physical- Regarding the data considered in setting the Commission takes into delivery and cash-settled referenced the levels of non-spot month limits, consideration the risk of deterring contracts for purposes of determining Commission staff has worked with appropriate speculation when setting compliance with non-spot-month limits. industry to improve the reliability of the federal limits. The Commission also The Commission has preliminarily swap data collected pursuant to part 20 preliminarily considered the exchange- determined it is appropriate to permit of Commission regulations. As suggested spot-month limits when the additional flexibility in complying discussed below in more detail, the setting the federal spot-month limit. As with the non-spot-months limits that Commission’s confidence in the data discussed below, in most cases the netting allows, given the decreased risk has improved such that it relied on part exchange-suggested limit levels of corners and squeezes outside the 20 swap position data, to propose initial reproposed by the Commission are the spot-month. Because this additional levels of federal non-spot month limits federal spot-month limit. Therefore, the flexibility means market participants are on futures and swaps in the Reproposal. Commission preliminarily believes that able to retain offsetting positions The Commission addresses cross- the federal limits are in line with the outside of the spot-month, liquidity commodity netting in the spread exchanges’ expectations and therefore should not be significantly impaired exemptions covered in reproposed the exchanges would be unlikely, at and disruptions to price discovery § 150.10. least initially, to adopt a smaller should be reduced. A commenter was concerned that the exchange-set spot-month limit for the However, more generally, the proposed position limits will cause core referenced futures contracts. The Commission recognizes that federal market participants to transact in less- Commission will also review the federal non-spot month position limits do transparent and non-cleared markets limits in the future to determine if they impose costs to exchanges and market due to a lack of liquidity on futures are effective and not unduly restrictive. participants. These costs are generally markets, and undermine efforts to c. § 150.2(b) Single-Month and All- the same as discussed above with encourage market transparency and Months-Combined Speculative Position respect to § 150.2(a). The consideration reduce systemic risks through Limits of the costs to exchanges and market centralized clearing.1271 Another participants of § 150.2(a) is also i. Summary of Changes commenter pointed out that applicable to § 150.2(b). constraining speculation would Reproposed § 150.2(b) provides that iv. Summary of Comments constrain hedging, and that more no person may hold or control financial involvement in commodity positions, net long or net short, in Comments on this section are markets has lowered risk premia and referenced contracts in a single-month addressed in the discussion of 150.2(e) made hedging cheaper, making it or in all-months-combined in excess of below. economical to hold larger inventories the levels specified by the Commission. d. § 150.2(c) Purpose of This Part that help reduce the frequency and In that regard, § 150.2(b) would require severity of large price increases.1272 A netting all positions in referenced i. Summary of Changes third commenter questioned whether contracts (regardless of whether such Reproposed § 150.2(c)(1) and (2) the Supplemental Proposal’s cost- referenced contracts are physical- specify that for purposes of part 150, the benefit analysis includes the costs of delivery or cash-settled) when spot month and any single month shall processing bona fide hedging and calculating a person’s positions for be those of the core referenced futures spread exemptions for contracts subject purposes of the proposed single-month contract and that an eligible affiliate is only to exchange-set speculative or all-months-combined position limits not required to comply separately with (collectively ‘‘non-spot-month’’ position speculative position limits. 1271 See CL–MFA–60385 at 4. Citing testimony of limits).1274 Erik Haas (Director of Market Regulation, ICE ii. Baseline Futures U.S.) at the EEMAC public meeting on ii. Baseline February 26, 2105, the commenter asserted that the The baseline is the current § 150.2 of volume of over-the-counter transactions is already The baseline is the current § 150.2 of the Commission’s regulations. increasing because futures contracts have become the Commission’s regulations. too costly the further out the curve one goes. Id. iii. Benefits and Costs 1272 See CL–ISDA/SIFMA–59611 at Annex B at 5. This commenter referenced, but did not include, 1273 CL–Working Group–60947 at 14. The Commission believes these are two papers as follows. James Hamilton and Jing Wu, 1274 The Commission is reproposing to adopt the conforming amendments to effectuate Risk Premia in Crude Oil Futures Prices, NBER same level for single-month and all-months- the rule and do not have cost or benefit Working Paper (2013). Peter Christoffersen, Kris combined limits, and refers to those limits as the implications. Jacobs, and Bingxin Li, Dynamic Jump Intensities ‘‘non-spot-month limits.’’ The spot month and any and Risk Premiums in Crude Oil Futures and single month refer to those periods of the core Options Markets, working paper (2013). referenced futures contract. 1275 7 U.S.C. 6a(a)(3)(A).

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iv. Summary of Comments established. Reproposed § 150.2(d) lists in cash-settled referenced contracts that No commenter addressed any cost or 16 core referenced futures contracts for would potentially benefit from a trader’s benefit considerations relating to agricultural commodities, four core potential distortion of the price of the proposed rules § 150.2(c)(1) or (2). referenced futures contracts for energy underlying core referenced futures commodities, and five core referenced contract. e. § 150.2(d) Core Referenced Futures futures contracts for metals Accordingly, each DCM is required to Contracts commodities.1279 supply the Commission with an i. Summary of Changes estimated spot-month deliverable ii. Baseline supply figure that the Commission will As defined in proposed § 150.1, The baseline is the current § 150.2 of use to recalibrate spot-month position referenced contracts are futures, the Commission’s regulations. limits unless the Commission decides to options, or swaps contracts that are iii. Benefits and Costs rely on its own estimate of deliverable directly or indirectly linked to a core supply instead.1281 referenced futures contract or the The benefits and costs are considered In contrast to spot-month limits, commodity underlying a core referenced in the discussion of the definition of which will be set as a function of futures contract.1276 core referenced futures contract and deliverable supply, the formula for the New rule § 150.2(d) lists the 25 core referenced contract in § 150.1. non-spot-month position limits is based referenced futures contracts on which iv. Summary of Comments on total open interest for all referenced the Commission has preliminarily contracts that are aggregated with a determined to establish federal Comments on this section are particular core referenced futures speculative position limits. The list considered in the discussion of the contract. In that regard, § 150.2(e)(4) reflects a significant expansion of definition of core referenced futures explains that the Commission will federal speculative position limits from contract and referenced contract in calculate non-spot-month position limit the list of nine agricultural contracts § 150.1. levels based on the following formula: under current part 150.1277 The f. § 150.2(e) Levels of Speculative 10 percent of the largest annual average Commission has selected these Position Limits open interest for the first 25,000 important food, energy, and metals contracts and 2.5 percent of the open i. Summary of Changes contracts on the basis that such interest thereafter.1282 As is the case contracts (i) have high levels of open The list of initial spot month, single with spot month limits, the Commission interest and significant notional value month and all-months combined will adjust single month and all- and/or (ii) serve as a reference price for position limit levels adopted by the months-combined limits no less a significant number of cash market Commission for referenced contracts frequently than every two calendar transactions. Thus, the Commission is can be found in Appendix D to this part. years. reproposing position limits on these Under reproposed § 150.2(e)(3), the The Commission’s average open contracts in order to commence the Commission will recalibrate spot month interest calculation will be computed expansion of its federal position limit position limit levels no less frequently for each of the past two calendar years, regime with those commodity derivative than every two calendar years, with any using either month-end open contracts contracts that it believes have the such recalibration to result in limits no or open contracts for each business day greatest impact on interstate commerce. greater than one-quarter (25 percent) of in the time period, as practical and in The Commission will be reviewing the estimated spot-month deliverable the Commission’s discretion. Initially, other contracts going forward. supply 1280 in the relevant core the Commission is reproposing initial As discussed in the 2013 Position referenced futures contract. This non-spot-month limits using the larger Limit Proposal,1278 the Commission formula is consistent with the open interest level from two 12-month calculated the notional value of open acceptable practices in current § 150.5, periods (July 1, 2104 to June 30, 2015; interest (delta-adjusted) and open as well as the Commission’s and July 1, 2015 to June 30, 2016), for interest (delta-adjusted) for all futures, longstanding practice of using this futures contracts and options thereon futures options, and significant price measure of deliverable supply to reported under part 16, and for swaps discovery contracts as of December 31, evaluate whether DCM-set spot-month reported under part 20. 2012 in all agricultural and exempt limits are in compliance with DCM core In the future, the Commission expects commodities as part of its selection of principles 3 and 5. The Reproposal to use the data reported pursuant to the 25 core referenced futures contracts separately restricts the size of positions parts 16, 20, and/or 45 of the in § 150.2(d). The Commission selected Commission’s regulations to estimate commodities in which the derivative 1279 The Commission originally proposed in its average open interest in referenced 2013 to set position limits on 28 core referenced contracts.1283 contracts had largest notional value of contracts, including the 25 contracts noted above open interest and open interest for three plus CME Feeder Cattle, Lean Hog and Class III categories: Agricultural, energy, and Milk. Those three contracts will not be included in 1281 § 150.2(e)(3)(ii)(A) would require DCMs to metals. The Commission then the Reproposal for the reasons discussed above. submit estimates of deliverable supply. DCM 1280 The guidance for meeting DCM core principle estimates of deliverable supplies (and the designated the benchmark futures 3 (as listed in 17 CFR part 38 app. C) specifies that, supporting data and analysis) would continue to be contracts for each commodity as the ‘‘[t]he specified terms and conditions [of a futures subject to Commission review. § 150.2(e)(3)(ii)(A) core referenced futures contract for contract], considered as a whole, should result in would allow a DCM to petition the Commission no which position limits would be a ‘deliverable supply’ that is sufficient to ensure less than two calendar months before the due date that the contract is not susceptible to price for submission of an estimate of deliverable supply manipulation or distortion. In general, the term to recommend that the Commission not change the 1276 As discussed above, the definition of ‘deliverable supply’ means the quantity of the spot-month limit. referenced contract excludes any guarantee of a commodity meeting the contract’s delivery 1282 Since 1999, the same 10 percent/2.5 percent swap, location basis contracts, commodity index specifications that reasonably can be expected to be methodology, now incorporated in current contracts and trade option that meets the readily available to short traders and salable by long § 150.5(c)(2), has been used to determine futures all- requirements of § 32.3 of this chapter. traders at its market value in normal cash marketing months position limits for referenced contracts. 1277 17 CFR 150.2. channels . . .’’ See Core Principles and Other 1283 Options listed on DCMs would be adjusted 1278 December 2013 Position Limits Proposal, 78 Requirements for Designated Contract Markets, 77 using an option delta reported to the Commission FR 75725. FR 36612, 36722 (Jun. 19, 2012). pursuant to 17 CFR part 16; swaps would be

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ii. Baseline alternative, the Commission stated that reasonable discretion in establishing the The baseline is the current § 150.2 of it was considering setting initial spot manner in which it complies with core 1287 the Commission’s regulations. month position limit levels at a principle 5 regarding position limits. recommended level, if any, submitted As the Commission observed in the iii. Benefits and Costs by a DCM (if lower than 25 percent of December 2013 Position Limits Method for Setting Spot-Month Position estimated deliverable supply).1286 Proposal, ‘‘there may be a range of spot Limit Levels In preliminarily determining the month limits, including limits set below levels at which to set the initial 25 percent of deliverable supply, which The method for determining the levels speculative position limits, the may serve as practicable to maximize at which the limits are set is consistent Commission considered, among other . . . [the] policy objectives [set forth in with the Commission’s longstanding things, the recommendations of the section 4a(a)(3)(B) of the CEA].’’ 1288 The acceptable practices for DCM-set exchanges as well as data to which the Commission must also consider the speculative position limits. In the competitiveness of futures markets.1289 December 2013 Position Limits exchanges do not have access. In considering these and other factors, a Thus, the Commission preliminarily Proposal, the Commission proposed to determined to accept the set the initial spot month speculative significant concern of the Commission became the effect of alternative limit recommendations of the exchanges to position limit levels for referenced set federal limits below 25 percent of contracts at the existing DCM-set levels levels on traders in the cash-settled referenced contracts. A DCM has deliverable supply, where setting a limit for the core referenced futures level at less than 25 percent of contracts.1284 As an alternative, the determining spot month position limits’’ and deliverable supply did not appear to Commission stated that it was opined that the ‘‘real test’’ should be whether limits restrict unduly positions in the cash- considering using 25 percent of an ‘‘allow convergence of cash and futures so that settled referenced contracts. The exchange’s estimate of deliverable futures markets can still perform their price discovery and risk management functions.’’ CL– exchanges retain the ability to adopt supply if the Commission verified the lower exchange-set limit levels than the 1285 NGFA–60941 at 2. Another commenter stated, estimate as reasonable. As a further ‘‘While 25% may be a reasonable threshold, it is initial speculative position limit levels based on historical practice rather than set by the Commission in this counted on a futures equivalent basis, equal to the contemporary analysis, and it should only be used economically equivalent amount of core referenced as a guideline, rather than formally adopted as a rulemaking. futures contracts reported pursuant to 17 CFR part hard rule. Deliverable supply is subject to As discussed in more detail above, the 20 or as calculated by the Commission using swap numerous environmental and economic factors, and process of determining appropriate spot- data collected pursuant to 17 CFR part 45. is inherently not susceptible to formulaic month limit levels included the 1284 December 2013 Position Limit Proposal, 78 calculation on a yearly basis.’’ CL–MGEX–60301 at Commission receiving updated FR 75727. One commenter urged the Commission 1. Another commenter expressed the view that the to retain the legacy speculative limits for 25 percent formula is not ‘‘appropriately calibrated estimates of deliverable supply from the enumerated agricultural products. The to achieve the statutory objective’’ set forth in DCMs listing the 25 core referenced ‘‘enumerated’’ agricultural products refer to the list section 4a(a)(3)(B)(i) of the CEA, 7 U.S.C. contracts, which Commission staff of commodities contained in the definition of 6a(a)(3)(B)(i). CL–CME–60926 at 3. Another verified as reasonable after conducting ‘‘commodity’’ in CEA section 1a; 7 U.S.C. 1a. This commenter opined that because the Commission list of agricultural contracts includes nine currently ‘‘has not established a relationship between its own independent review of traded contracts: Corn (and Mini-Corn), Oats, ‘estimated deliverable supply’ and spot-month estimated deliverable supply for the Soybeans (and Mini-Soybeans), Wheat (and Mini- potential for manipulation or excessive subject core referenced contracts. wheat), Soybean Oil, Soybean Meal, Hard Red speculation,’’ the 25 percent formula is arbitrary. Furthermore, the DCMs provided Spring Wheat, Hard Winter Wheat, and Cotton No. CL–ISDA and SIFMA–59611 at 31. 2. See 17 CFR 150.2. The position limits on these Several commenters opined that a limit at 25 recommended spot-month limit levels agricultural contracts are referred to as ‘‘legacy’’ percent of deliverable supply is too high. E.g., CL– for some of the 25 core referenced limits because these contracts on agricultural Americans for Financial Reform–59685 at 2; CL– contracts which the Commission commodities have been subject to federal positions Tri–State Coalition for Responsible Investment– considered while determining the limits for decades. This commenter stated, ‘‘There 59682 at 1; CL–CMOC–59720 at 3; CL–WEED– is no appreciable support within our industry or, 59628 (‘‘Only a lower limit would ensure market appropriate level of spot-month limits as far as we know, from the relevant exchanges to stability and prevent market manipulation.’’); CL- for the 25 core referenced futures move beyond current levels.... Changing current Public Citizen-60313 at 1 (‘‘There is no good reason contracts.1290 In addition, the limits, as proposed in the rule, will have a negative for a single firm to take 25% of a market.’’); CL– Commission then conducted an impact impact on futures-cash market convergence and IECA–59964 at 3 (25 percent of deliverable supply will compromise contract performance.’’ CL– ‘‘is a lot of market power in the hands of analysis of different spot-month limit American Farm Bureau Federation–59730 at 3). speculators’’). One commenter stated that ‘‘position levels to discern how many market Contra CL–ISDA and SIFMA–59611 at 32 (setting limits should be set low enough to restore a participants would be affected by the initial spot-month limits at the existing exchange- commercial hedger majority in open interest in each different limit levels. set levels would be arbitrary because the exchange- core referenced contract,’’ CL–Institute for As part of reproposing § 150.2(e)(3)(i), set levels have not been calibrated to apply as ‘‘a Agriculture and Trade Policy (‘‘IATP’’)–60323 at 5, ceiling on the spot-month positions that a trader suggesting in a later submission that position limits the Commission has considered can hold across all exchanges for futures, options at 5–10 percent of estimated deliverable supply in scenarios where exchanges may or may and swaps’’); CL–ICE–59966 at 6 (‘‘the Proposed each covered contract applied on an aggregated not update deliverable supply. This may Rule . . . effectively halves the present position basis might ‘‘enable commercial hedgers to regain result in the Commission reviewing and limit in the spot month by aggregating across for all covered contracts their pre-2000 average trading venues and uncleared OTC swaps’’). See share of 70 percent of agricultural contracts,’’ CL– re-establishing position limits in the also CL–ISDA and SIFMA–59611 at 3 (the spot IATP–60394 at 2. One commenter supported spot month. Exchanges may elect not to month limit methodology is ‘‘both arbitrary and expanding position limits ‘‘to ensure rough or undertake this expense of re-estimating unjustified’’). approximate convergence of futures and underlying the deliverable supply of the underlying 1285 December 2013 Position Limit Proposal, 78 cash at expiration.’’ CL–Pamela D. Thornton FR 75727. The Commission also stated that if the (‘‘Thornton’’)–59702 at 1. Commission could not verify an exchange’s Several commenters supported setting limits 1287 CEA section 5(d)(1)(B), 7 U.S.C. 7(d)(1)(B). estimate of deliverable supply for any commodity based on updated estimates of deliverable supply 1288 December 2013 Position Limits Proposal, 78 as reasonable, the Commission might adopt the which reflect current market conditions. E.g., CL– FR at 75729. existing DCM-set level or a higher level based on ICE–59966 at 5; CL–FIA–59595 at 8; CL–EEI–EPSA– 1289 CEA section 15(a)(2)(B), 7 U.S.C. 19(a)(2)(B). the Commission’s own estimate, but not greater 59602 at 9; CL–MFA–59606 at 5; CL–CMC–59634 1290 The Commission notes that the CME did not than would result from the exchange’s estimated at 14; CL–Olam–59658 at 3; CL–CCMC–59684 at 6– provide a recommended spot month limit for its deliverable supply for a commodity. 7. Live Cattle Contract. The Commission ultimately One commenter was unconvinced that estimated 1286 December 2013 Position Limits Proposal, 78 kept the current spot month limit of 450 contracts deliverable supply is ‘‘the appropriate metric for FR at 75728. in place for the Live Cattle contract.

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commodity. Among many reasons, this reasonable after conducting its own conform their practices accordingly.1297 might be because the deliverable supply independent review of estimated The Commission continues to believe has not changed much during the time deliverable supply for the subject core this approach is consistent with the that the last estimate was made. In these referenced futures contracts.1293 In regulatory objectives of the Dodd-Frank cases, the Commission has the option to addition, the Commission then Act amendments to the CEA. maintain the current spot month conducted an impact analysis of The Commission has also position limit level or use the formula different spot-month limit levels to preliminarily determined to set the based on the outdated deliverable discern how many market participants initial speculative spot month position supply estimate if different, or use the would be affected by the different limit limit level for MWE at 1,000 contracts, exchange’s recommendation for the levels. To determine the non-spot which is the level requested by 1298 level of the spot month position limit. month position limits, the Commission MGEX and approximately equal to Sparing the exchanges of the cost of re- used futures daily open interest data. In 25 percent of estimated deliverable estimating the deliverable supply may addition, it worked with market supply. This is an increase from the proposed level of 600 contracts and is be beneficial if the estimation costs are participants to improve the swap data greater than the initial speculative spot high or if the anticipated difference in collected pursuant to part 20 of the month position limit levels for W and the estimates is small. The Commission Commission’s regulations, so that data must also be mindful that exchanges KW.1299 As stated in the December 2013 could be used in determining open might want the federal position limit to Position Limits Proposal, the 25 percent interest levels in the swap markets for be set lower, because a lower limit formula is consistent with the referenced contracts. The Commission might prevent liquidity in the longstanding acceptable practices for exchange’s core reference contract from deems both the estimated deliverable DCM core principle 5.1300 The developing on another exchange. supply data and exchange Commission continues to believe, based Exchanges may elect to re-estimate recommended spot-month limits along on its experience and expertise, that the deliverable supply. This would allow with the open interest data to be current 25 percent formula is a reasonable the Commission to maintain the current and reliable for basing federal spot ‘‘prophylactic tool to reduce the threat spot month level, replace it with the month and non-spot month limits, of corners and squeezes, and promote formula based on 25% of updated respectively. convergence without compromising 1301 deliverable supply, or accept the g. Initial Speculative Spot Month market liquidity.’’ The Commission’s impact analysis exchange’s recommendation for a Position Limit Levels different level. It is prudent to revise the reveals no traders in cash settled spot month position limit if the i. CME and MGEX Agricultural contracts in any of C, O, S, SM, SO, W, deliverable supply has changed Contracts MWE, KW, or RR, and no traders in appreciably, because setting the limit physical delivery contracts for O and too low might harm liquidity or setting For the CME and MGEX Agricultural RR, above the initial speculative limit it too high might make it easier for (Legacy) contracts, which were levels for those contracts. The someone to engage in market previously subject to federal position Commission found varying numbers of manipulation such as perfecting a limits, the Commission has traders in the C, S, SM, SO, W, MWE, corner and squeeze. preliminarily determined to set the KW physical delivery contracts over the initial speculative spot month position initial levels, but the numbers were very iv. Summary of Comments limit levels for C, O, RR, S, SM, SO, W small for MWE and KW. Because the One commenter cautioned the and KW at the recommended levels levels that the Commission is adopting Commission not to rely on inaccurate or submitted by CME,1294 all of which are for C, O, S, SM, SO, W, KW, and RR unreliable data or apply a one-size-fits- lower than 25 percent of estimated maintain the status quo for those all approach in setting the levels of deliverable supply.1295 As is evident contracts, the Commission assumes that position limits, in order to avoid from the table set forth in the discussion some or possibly all of such traders over potential harms to market liquidity and above, this also means that the the initial levels are hedgers. Hedgers increased costs.1291 Another commenter Commission is reproposing the initial may have to file for an applicable suggested that, in light of the speculative position limit levels for exemption, but hedgers with bona fide complexities and costs of implementing these eight contracts as proposed. These hedging positions should not have to federal and exchange-set limits, the initial levels track the existing DCM-set reduce their positions as a result of Commission should not implement final levels for the core referenced futures speculative position limits per se. Thus, rules until at least nine months after the contracts; 1296 therefore, as noted in the the number of traders in the C, S, SM, final rule is issued.1292 December 2013 Position Limits SO, W and KW physical delivery The Commission has preliminarily Proposal, many market participants are contracts who would need to reduce determined to ease the transition to the already used to these levels and speculative positions below the initial initial speculative position limits by limit levels should be lower than the setting a compliance date of January 3, 1293 The Commission notes that the CME did not numbers indicated by the impact 2018 in § 150.3(e)(1). As for the process provide a recommended spot month limit for its of determining appropriate spot-month Live Cattle Contract. The Commission ultimately 1297 December 2013 Position Limit Proposal, 78 position limit levels, the Commission kept the current spot month limit of 450 contracts FR 75727. 1298 endeavored to use accurate and reliable in place for the Live Cattle contract. CL–MGEX–60938 at 2. 1294 CL–CME–61007 at 5. 1299 Most commenters who supported data. For example, the Commission 1295 The Commission noted in the December 2013 establishing the same level of speculative limits for looked to updated estimates of Position Limits Proposal ‘‘that DCMs historically each of the three wheat core referenced futures deliverable supply from the DCMs have set or maintained exchange spot month limits contracts focused on parity in the non-spot months. listing the 25 core referenced contracts, at levels below 25 percent of deliverable supply.’’ However, some commenters did support wheat December 2013 Position Limits Proposal, 78 FR party in the spot month, e.g., CL–CMC–59634 at 15; which Commission staff verified as 75729. CL–NCFC–59942 at 6. 1296 See CL–CME–61007 (specifying lower 1300 December 2013 Position Limits Proposal, 78 1291 CL–Chamber–59684 at 4 and 5–6. exchange-set limit levels for W and RR in certain FR 75729. 1292 CL–FIA at 6 and 44. circumstances). 1301 Id.

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analysis. And, while setting initial The Commission took concerns about speculative position limit levels that are speculative levels at 25 percent of wheat contract parity into account when significantly higher than the levels for deliverable supply would, based upon preliminarily setting the spot month and these six contracts as proposed. As logic and the Commission’s impact non-spot month levels for the CBOT stated in the December 2013 Position analysis, affect fewer traders in the C, S, Wheat, KCBT Hard Winter Wheat and Limits Proposal, the 25 percent formula SM, SO, W and KW physical delivery MGEX Hard Red Spring Wheat is consistent with the longstanding contracts, consistent with its statement contracts. In that regard, as discussed acceptable practices for DCM core in the December 2013 Position Limits below, the Commission is reproposing principle 5.1312 The Commission Proposal, the Commission believes that to maintaining the status quo for the continues to believe, based on its setting these lower levels of initial spot non-spot month position limit levels for experience and expertise, that the 25 month limits will serve the objectives of the KW and MWE core referenced percent formula is a reasonable preventing excessive speculation, futures contracts so that there will be ‘‘prophylactic tool to reduce the threat manipulation, squeezes and corners,1302 partial wheat parity.1307 The of corners and squeezes, and promote while ensuring sufficient (in the view of Commission has preliminarily convergence without compromising the listing DCM) market liquidity for determined not to raise the limit levels market liquidity.’’ 1313 bona fide hedgers and ensuring that the for KW and MWE to the limit level for The Commission did not receive any price discovery function of the market is W, as 32,800 contracts appears to be estimate of deliverable supply for the 1303 not disrupted. extraordinarily large in comparison to CME (LC) core referenced futures open interest in the KW and MWE Summary of Comments contract from CME, nor did CME markets, and the limit level for KW and recommend any change in the limit MGEX contended that the proposed MWE is already larger than a limit level level for LC. In the absence of any such wheat position limit disparity based on the ‘‘10, 2.5 percent’’ formula. update, the Commission is reproposing (particularly in non-spot months) may Even when relying on a single criterion, the initial speculative position limit inject significant instability into the such as percentage of open interest, the level of 450 contracts as proposed. Of market, as market participants will be Commission has historically recognized unable to utilize time-tested risk 616 reportable persons, the that there can ‘‘result . . . a range of Commission’s impact analysis did not management practices equally across acceptable position limit levels.’’ 1308 the three contracts and have unintended reveal any unique person trading cash negative market consequences resulting ii. Softs settled or physical delivery spot month from hedgers and speculators limiting For the ‘‘Softs’’—agricultural contracts who would have held their activity (particularly spread contracts on cocoa, coffee, cotton, positions above this level for LC. trading) in markets with the lowest orange juice, sugar and live cattle—the With respect to the IFUS CC, KC, CT, limits—or ceasing to trade in the lower- Commission has preliminarily OJ, SB, and SF core referenced futures limit markets altogether.1304 determined to set the initial speculative contracts, the Commission’s impact MGEX was concerned that the spot month position limit levels for the analysis did not reveal any unique proposed method inhibits growth in CC, KC, CT, OJ, SB, and SF 1309 core person trading cash settled spot month rapidly changing and expanding referenced futures contracts, based on contracts who would have held derivatives markets and will limit the estimates of deliverable supply positions above the initial levels that the growth in the HRSW contract at a time submitted by ICE,1310 at 25 percent of Commission is adopting; as illustrated when participation is increasing.1305 estimated deliverable supply.1311 As is above. Rather, adopting lower levels MGEX asserted that the Proposed Rule evident from the table set forth in the would mostly have affected small has a disproportionate impact on HRSW discussion above, this also means that numbers of traders in physical delivery market participants, given that MGEX the Commission is reproposing initial contracts. Therefore, the Commission HRSW has more large traders has preliminarily determined to accept approaching the single month and all and bringing no value to the price discovery ICE’s recommendations. months combined limits than CBOT process.’’ Id. iii. Metals Wheat and KCBT Hard Winter Wheat 1307 Several commenters supported adopting equivalent non-spot month position limits for the For the metals contracts, the despite the fact that the number of large three existing wheat referenced contracts traders. traders approaching the Proposed Rule E.g., CL–FIA–59595 at 4, 15; CL–CMC–60391 at 8; Commission has preliminarily single month and all months combined CL–CMC–60950 at 11; CL–CME–59718 at 44; CL– determined to set the initial speculative limit levels stayed relatively constant American Farm Bureau–59730 at 4; CL–MGEX– spot month position limit levels for GC, 59932 at 2; CL–MGEX–60301 at 1; CL–MGEX– among the three U.S. wheat contracts; SI, and HG at the recommended levels 59610 at 2–3; CL–MGEX–60936 at 2–3; CL–NCFC– 1314 MGEX also contended that price 59942 at 6; CL–NGFA–59956 at 3. submitted by CME, all of which are volatility or concentration in one 1308 Revision of Speculative Position Limits, 57 lower than 25 percent of estimated contract may unduly affect the price of FR 12766, 12770 (Apr. 13, 1992). See also Revision deliverable supply.1315 In the case of GC the others.1306 of Speculative Position Limits and Associated and SI, this is a doubling of the current Rules, 63 FR 38525, 38527 (July 17, 1998). Cf. 1316 December 2013 Position Limits Proposal, 78 FR exchange-set limit levels. In the case 1302 Contra CL–ISDA and SIFMA–59611 at 55 75729, Dec. 12, 2013 (there may be range of spot (proposed spot month limits ‘‘are almost certainly month limits that maximize policy objectives). 1312 Id. far smaller than necessary to prevent corners or 1309 One commenter supported considering 1313 Id. squeezes’’). ‘‘tropicals (sugar/coffee/cocoa) . . . separately from 1314 CL–CME–61007 at 5. 1303 December 2013 Position Limits Proposal, 78 those agricultural crops produced in the US 1315 The Commission noted in the December 2013 FR 75729, Dec. 12, 2013. domestic market.’’ CL–Thornton–59702 at 1; see Position Limits Proposal ‘‘that DCMs historically 1304 CL–MGEX–59932 at 2. also CL–Armajaro Asset Management–59729 at 1. have set or maintained exchange spot month limits 1305 CL–MGEX–60380 at 5. 1310 CL–CME–61007 at 5. at levels below 25 percent of deliverable supply.’’ 1306 CL–MGEX–59932 at 2. MGEX asserted that 1311 The Commission noted in the December 2013 December 2013 Position Limits Proposal, 78 FR ‘‘[w]ithout wheat contract parity—proven Position Limits Proposal ‘‘that DCMs historically 75729, Dec. 12, 2013. historically effective and efficient—inequities have set or maintained exchange spot month limits 1316 One commenter cautioned against raising would be introduced into the marketplace that at levels below 25 percent of deliverable supply.’’ limit levels for GC to 25 percent of deliverable could well result in artificial market disruption December 2013 Position Limits Proposal, 78 FR supply, and expressed concern that higher federal through a lack of convergence, distorting the market 75729, Dec. 12, 2013. Continued

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of HG, the initial level is the same as the Based on the Commission’s impact principle 5.1320 The Commission existing DCM-set level for the core analysis, preliminarily setting the initial continues to believe, based on its referenced futures contract, and lower federal spot month limit levels for PL experience and expertise, that the 25 than the level proposed. The and PA at the lower levels percent formula is a reasonable Commission has also preliminarily recommended by CME impact a few ‘‘prophylactic tool to reduce the threat determined to set the initial speculative traders in PL and PA cash settled of corners and squeezes, and promote spot month position limit level for PL at contracts. convergence without compromising 100 contracts and PA at 500 contracts, The Commission has considered the market liquidity.’’ 1321 which are the levels recommended by numbers of unique persons that would The levels that CME recommended for CME. In the case of PL and PA, the have been impacted by each of the cash- NG, CL, HO, and RB are twice the initial level is the same as the existing settled and physical-delivery spot existing exchange-set spot month limit DCM-set level for the core referenced month limits in the PL and PA levels. Nevertheless, the Commission is futures contract, and a decrease from the referenced contracts. The Commission proposing to set the initial speculative proposed levels of 500 and 650 notes those limits would have impacted spot month limit levels at 25 percent of contracts, respectively. more traders in the physical-delivery PA deliverable supply for CL, HO, and RB The Commission found varying contract than in the cash-settled PA because the higher levels will lessen the numbers of traders in the GC, SI, PL, contract, while fewer traders would impact on a number of traders in both PA, and HG physical delivery contracts have been impacted in the physical- cash settled and physical delivery over the initial levels, but the numbers delivery PL contract than in the cash- contracts. For NG, the Commission is were very small except for PA. Because settled PL contract, albeit in any event proposing to set the physical delivery the levels that the Commission is few traders would have been limit at 25 percent of deliverable adopting for PL, PA, and HG maintain impacted.1318 The Commission also supply, as recommended by CME; the the status quo for those contracts, the considered the distribution of those Commission is also proposing to set a Commission assumes that some or cash-settled traders over time; as conditional spot month limit exemption possibly all of such traders over the 1322 reflected in the open interest table of 10,000 for NG only. This initial levels are hedgers. The discussed above regarding setting non- exemption would to some degree Commission reiterates the discussion spot month limits, it can be readily maintain the status quo in natural gas above regarding agricultural contracts: observed that open interest in each of because each of the NYMEX and ICE hedgers may have to file for an the cash-settled PL and PA referenced cash settled natural gas contracts, which applicable exemption, but hedgers with contracts was markedly lower in the settle to the final settlement price of the bona fide hedging positions should not second 12-month period (year 2) than in physical delivery contract, include a have to reduce their positions as a result the prior 12-month period (year 1). conditional spot month limit exemption of speculative position limits per se. Accordingly, the Commission of 5,000 contracts (for a total of 10,000 Thus, the number of traders in the contracts).1323 However, neither metals physical delivery contracts who preliminarily concludes that the CME would need to reduce speculative recommended levels in PL and PA referenced contracts are acceptable. 1320 December 2013 Position Limits Proposal, 78 positions below the initial limit levels FR at 75729. should be lower than the numbers iv. Energy 1321 Id. indicated by the impact analysis. And, 1322 This exemption for up to 10,000 contracts while setting initial speculative levels at For the energy contracts, the would be five times the spot month limit of 2,000 25 percent of deliverable supply would, Commission has preliminarily contracts, consistent with the December 2013 determined to set the initial speculative Position Limits Proposal. See December 2013 based upon logic and the Commission’s Position Limits Proposal, 78 FR at 75736–8. Under impact analysis, affect fewer traders in spot month position limit levels for the vacated § 151.4, the Commission would have the metals physical delivery contracts, NG, CL, HO, and RB core referenced applied a spot-month position limit for cash-settled consistent with its statement in the futures contracts at 25 percent of contracts in natural gas at a level of five times the estimated deliverable supply which, in level of the limit for the physical delivery core December 2013 Position Limits referenced futures contract. See Position Limits for Proposal, the Commission believes that the case of CL, HO, and RB is higher Futures and Swaps, 76 FR 71626, 71687 (Nov. 18, setting these lower levels of initial spot than the levels recommended by 2011). month limits will serve the objectives of CME.1319 As is evident from the table 1323 Some commenters supported retaining a set forth above, this also means that the conditional spot month limit in natural gas. E.g., preventing excessive speculation, CL–ICE–60929 at 12 (‘‘Any changes to the current 1317 manipulation, squeezes and corners, Commission is adopting initial terms of the Conditional Limit would disrupt while ensuring sufficient market speculative position limit levels that are present market practice for no apparent reason. liquidity for bona fide hedgers in the significantly higher than the proposed Furthermore, changing the limits for cash-settled levels for these four contracts. As stated contracts would be a significant departure from view of the listing DCM and ensuring current rules, which have wide support from the that the price discovery function of the in the December 2013 Position Limits broader market as evidenced by multiple public market is not disrupted. Proposal, the 25 percent formula is comments supporting no or higher cash-settled The Commission’s impact analysis consistent with the longstanding limits.’’). Contra CL–Levin–59637 at 7 (‘‘The reveals no unique persons in the SI and acceptable practices for DCM core proposed higher limit for cash settled contracts is ill-advised. It would not only raise the affected HG cash settled referenced contracts, position limits to levels where they would be and very few unique persons in the cash 1318 In this regard, the Commission notes that effectively meaningless, it would also introduce settled GC referenced contract, whose CME did not have access to the Commission’s market distortions favoring certain contracts and positions would have exceeded the impact analysis when CME recommended levels for certain exchanges over others, and potentially its physical-delivery core referenced futures disrupt important markets, including the U.S. initial limit levels for those contracts. contracts. natural gas market that is key to U.S. 1319 CL–CME–61007 at 5. One commenter opined manufacturing.’’); CL–Public Citizen–59648 at 5 limits would incentivize exchanges to raise their that 25 percent of deliverable supply would result (‘‘Congress, in allowing an exemption for bona fide own limits. CL–WGC–59558 at 2–4. in a limit level that is too high for natural gas, and hedgers but not pure speculators, could not 1317 Contra CL–ISDA and SIFMA–59611 at 55 suggest 5 percent as an alternative that ‘‘would possibly have intended for the Commission to (proposed spot month limits ‘‘are almost certainly provide ample liquidity and significantly reduce implement position limits that allow market far smaller than necessary to prevent corners or the potential for excessive speculation.’’ CL–IECA– speculators to hold 125 percent of the estimated squeezes’’). 59964 at 3. deliverable supply. Once again, while this

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NYMEX and ICE penultimate contracts, the costs of drilling associated with the participant’s position or deter it from which settle to the daily settlement regulations and discourage market attempting to manipulate the market, price on the next to last trading day of entry.1326 the Commission considered these points the physical delivery contract, nor OTC The Commission believes that positon when preliminarily setting the federal swaps, are currently subject to any spot limits are unlikely to deter passive position limits at levels that may be month position limit. In addition, the investors because they have the higher than the Commission would Commission’s impact analysis suggests opportunity to invest in commodities otherwise consider, and in some cases that a conditional spot month limit through collective investment vehicles higher than the levels suggested by the exemption greater than 25 percent of such as exchange traded funds (ETFs) or exchanges. commodity pools. For example, if a deliverable supply for cash settled h. Method for Setting Single-Month and contracts in CL, HO, and RB would position limit would become binding on a particular ETF, market demand would All-Months Combined Position Limit potentially benefit only a few traders, Levels while a conditional spot month limit be expected to encourage another party exemption for cash settled contracts in to create a new ETF that could replicate As discussed in more detail above, the NG would potentially benefit many a similar strategy to the previous one, Commission has preliminarily traders. which would allow the passive determined to use the futures position investment to continue. limits formula, 10 percent of the open Summary of Comments Regarding the forms and application interest for the first 25,000 contracts and One economist estimated, using process to obtain a § 150.11 exemption, 2.5 percent of the open interest various stated assumptions but not an the Commission believes that the thereafter (i.e., the ‘‘10, 2.5 percent’’ empirical model, that position limits at requirements are not as onerous as the formula), to set non-spot month the proposed level would cost American commenter fears. In this regard, an oil speculative position limits for consumers roughly $100 billion, based exploration firm would likely be able to referenced contracts. This was the on an increase of $15 per barrel of oil qualify for an anticipatory hedge method proposed in the December 2013 in 2013.1324 This economist also exemption. The Commission believes Position Limits Proposal. The asserted that position limits (or the mere the costs of this process will have a Commission used a combination of data possibility that such limits may be negligible impact on the oil exploration on open interest in physical commodity tightened) would discourage passive firm’s costs of hedging. futures and options from the relevant investors from the commodity Another commenter was concerned exchanges and adjusted part 20 swaps derivative sector and, thus, would that position limits set so low as to data covering a total of 24 months, adversely affect investment in the oil diminish speculative capacity in U.S. rather than two calendar years of data in and gas industry by raising the cost of energy markets will distort prices, setting the initial non-spot month 1329 hedging for exploration firms.1325 This increase volatility, increase option position limit levels. The premiums and increase the cost of Commission continues to believe that economist believes that position limits 1327 would increase costs whether or not the hedging. ‘‘the non-spot month position limits The Commission agrees with the position limits actually restrict a market would restrict the market power of a commenter that setting position limits participant’s trading, because speculator that could otherwise be used too low could distort prices, increase compliance costs such as recordkeeping to cause unwarranted price volatility, increase option premiums 1330 and reporting would modestly increase movements.’’ In preliminarily and increase the cost of hedging. The determining the appropriate non-spot exception for cash-settled contracts would avoid Commission believes it has month limit levels the Commission market manipulations such as corners and squeezes preliminarily set the limit levels considered the results of its impact (since cash-settled contracts give no direct control sufficiently high so that they will not analysis of different non-spot month over a commodity), it does not address the problem have a significant adverse impact on the limit levels to discern how many market of undue speculative influence on futures prices.’’). One commenter urged the Commission ‘‘to efficiency and price discovery functions participants would be affected by eliminate the requirement that traders hold no of the core referenced futures contracts. different limit levels. physical-delivery position in order to qualify for the In response to 2016 Supplemental In addition, the Commission believes conditional spot-month limit exemption’’ in order Position Limits Proposal RFC 55, a that it is beneficial to update the non- to maintain liquidity in the NYMEX natural gas commenter pointed out that the spot month position limits based on futures contract. CL–BG–59656 at 6–7. See also CL– APGA at 8 (the Commission should condition the Commission’s Division of Enforcement recent position data, such as Part 20 spot month limit exemption for cash settled natural has numerous tools at its disposal, and data. The Commission also proposes to gas contracts by precluding a trader from holding the exchanges have position step-down retain the option to maintain the more than one quarter of the deliverable supply in and exemption revocation authorization existing position limit levels if it physical inventory). Cf. CL–CME–59971 at 3 (eliminate the five times natural gas limit because at their disposal, to enforce market believes there is good reason to deviate it ‘‘encourages participants to depart from, or manipulation prohibitions.1328 from the formulas. This could be the refrain from establishing positions in, the primary The Commission agrees with the case if, for example, the Commission physical delivery contract market and instead opt commenter, but notes that the Division has experience at a level higher the for the cash-settled derivative contract market, especially during the last three trading days when of Enforcement’s tools can be used only amount given in the formula and the five times limit applies. By encouraging after market manipulation or other believes that the higher level is departure from the primary contract market, the five adverse consequences have already appropriate, because the Commission times limit encourages a process of de-liquefying occurred. As for the tools at the disposal has not observed any problems at the the benchmark physically delivered futures market and directly affects the determination of the final of the exchanges to reduce a market higher level. Furthermore, the settlement price for the NYMEX NG contract- the very same price that a position representing five 1326 Id. at 10. 1329 Commission staff analyzed and evaluated the times the physical limit will settle against.’’). 1327 CL–Vectra–60369 at 1–2. The commenter was quality of part 20 data for the period from July 1, 1324 CL–ISDA/SIFMA–59611 at Annex A at 3. The particularly concerned that given the ‘‘dearth of 2014 through June 30, 2015 (‘‘Year 1’’), and the economist noted that he used a ‘‘methodology for speculative capacity’’ in many energy contracts, period from July 1, 2015 through June 30, 2016 predicting changes in crude oil prices linked to hedging costs would increase and be passed on to (‘‘Year 2’’). global inventory levels.’’ Id. consumers. Id. 1330 December 2013 Position Limits Proposal, 78 1325 Id. at 9. 1328 CL–IECAssn–60949 at 23. FR 75730, Dec. 12, 2013.

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Commission has preliminarily historically recognized that there can Summary of Comments determined that it will fix subsequent ‘‘result . . . a range of acceptable levels no less frequently than every two position limit levels.’’ 1334 A commenter claimed that the calendar years. This conclusion is proposed rule did not address the price ii. Softs reproposed in § 150.2(e)(2). impact of speculative money flows into commodities, and that if the i. CME and MGEX Agricultural The Commission is reproposing non- Commission is concerned with the types Contracts spot month speculative position limit of manipulative activities shown by the levels for the CC, KC, CT, OJ, SB, SF and Hunt Brothers and Amaranth cases, The Commission is reproposing non- LC 1335 core referenced futures contracts spot month speculative position limit there are ‘‘targeted and less burdensome based on the 10, 2.5 percent open and complex ways to prevent such a levels for the Corn (C), Oats (O), Rough interest formula. Rice (RR), Soybeans (S), Soybean Meal manipulative harm’’ and the inclusion (SM), Soybean Oil (SO), and Wheat (W) iii. Metals of position limits on swaps is invalid core referenced futures contracts based because swaps cannot be used to cause The Commission is reproposing non- 1338 on the 10, 2.5 percent open interest this detrimental impact. spot month speculative position limit formula.1331 Based on the Commission’s The Commission disagrees, and notes levels for the GC, SI, PL, PA, and HG experience since 2011 with non-spot that swaps can be used to cause core referenced futures contracts based month speculative position limit levels detrimental impact, as occurred in the on the 10, 2.5 percent open interest for the Hard Red Winter Wheat (KW) Amaranth case. Amaranth entered into formula.1336 and Hard Red Spring Wheat (MWE) core swaps on an exempt commercial market referenced futures contracts, the iv. Energy that were directly linked to a core Commission is proposing to maintain reference futures contract. So to ignore the limit levels for those two The Commission is reproposing non- swaps would not adequately address the commodities at the current level of spot month speculative position limit issue that position limits are intended to 12,000 contracts rather than reducing levels for the NG, CL, HO, and RB core address. them to the lower levels that would referenced futures contracts based on i. § 150.2(f)–(g) Pre-Existing Positions result from applying the 10, 2.5 percent the 10, 2.5 percent open interest 1337 and Positions on Foreign Boards of formula.1332 formula. Maintaining the status quo for the Trade non-spot month limit levels for the KW 1334 Revision of Speculative Position Limits, 57 i. Summary of Changes and MWE core referenced futures FR 12770, 12766, Apr. 13, 1992. See also Revision of Speculative Position Limits and Associated contracts means there will be partial The Commission is reproposing new Rules, 63 FR 38525, 38527, Jul. 17, 1998. Cf. § 150.2(f)(2) to exempt from federal non- wheat parity.1333 The Commission has December 2013 Position Limits Proposal (there may preliminarily determined not to raise be range of spot month limits that maximize policy spot-month speculative position limits the limit levels for KW and MWE to the objectives), 78 FR 75729, Dec. 12, 2013. any referenced contract position 1335 One commenter expressed concern that too acquired by a person in good faith prior limit level for W, as 32,800 contracts high non-spot month limit levels could lead to a appears to be extraordinarily large in to the effective date of such limit, repeat of convergence problems experienced by provided that the pre-existing position comparison to open interest in the KW certain contracts and that ‘‘the imposition of all and MWE markets, and the limit level months combined limits in continuously produced is attributed to the person if such for KW and MWE is already larger than non-storable commodities such as livestock . . . person’s position is increased after the will reduce the liquidity needed by hedgers in effective date of such limit.1339 a limit level based on the 10, 2.5 percent deferred months who often manage their risk using formula. Even when relying on a single strips comprised of multiple contract months.’’ CL– Finally, reproposed § 150.2(g) will criterion, such as percentage of open American Farm Bureau Federation–59730 at 3–4. apply position limits to positions on One commenter requested that the Commission FBOTs provided that positions are held interest, the Commission has withdraw its proposal regarding non-spot month limits, citing, among other things, the Commission’s in referenced contracts that settle to a 1331 One commenter expressed concern ‘‘that previous approval of exchange rules lifting all- referenced contract and the FBOT proposed all-months-combined speculative position months-combined limits for live cattle contracts ‘‘to allows direct access to its trading system limits based on open interest levels is not ensure necessary deferred month liquidity.’’ CL– for participants located in the United necessarily the appropriate methodology and could CME–59718 at 4. Another commenter expressed lead to contract performance problems.’’ This concern that non-spot month limits would have a States. commenter urged ‘‘that all-months-combined limits negative impact on live cattle market liquidity. CL– be structured to ‘telescope’ smoothly down to ‘‘CMC’’)–59634 at 12–13. See also CL–CME–59718 1338 CL–COPE–59662 at 5. The commenter legacy spot-month limits in order to ensure at 41. asserted that the Commission’s position limits continued convergence.’’ CL–National Grain and 1336 One commenter was concerned that applying proposal was based solely on concerns about Feed Association–60312 at 4. the 10, 2.5 percent formula to open interest for gold attempts to manipulate the price discovery contract 1332 One commenter supported a higher limit for would result in a lower non-spot month limit level or hoard physical inventory because the KW than proposed to promote growth and to enable than the spot month limit level, and urged the Commission highlighted only the Amaranth and liquidity for Kansas City hedgers who often use the Commission to ‘‘apply a consistent methodology to Hunt Brothers cases. Id. Chicago market. CL–Citadel–59717 at 8. Another both spot and non-spot months.’’ CL–WGC–59558 1339 See also the definition of the term ‘‘Pre- commenter supported setting ‘‘a non-spot month at 5. existing position’’ adopted in § 150.1. Such pre- and combined position limit of no less than 12,000 1337 One commenter suggested deriving non-spot existing positions that are in excess of the position for all three wheat contracts.’’ CL–MGEX–60301 at month limit levels for the CL, HO, and RB limits will not cause the trader to be in violation 1. Contra CL–Occupy the SEC–59972 at 7–8 referenced contracts from the usage ratios for US based solely on those positions. To the extent a (commending ‘‘the somewhat more restrictive crude oil and oil products rather than open interest trader’s pre-existing positions would cause the limitations . . . on wheat trading’’). and expressed concern that ‘‘unnecessarily low trader to exceed the non-spot-month limit, the 1333 Several commenters supported adopting limits will hamper legitimate hedging activity.’’ CL– trader could not increase the directional position equivalent non-spot month position limits for the Citadel–59717 at 7–8. Another commenter that caused the positions to exceed the limit until three existing wheat referenced contracts traders. suggested setting limit levels based on customary the trader reduces the positions to below the See, e.g., CL–FIA–59595 at 4, 15; CL–CMC–60391 position size. CL–APGA–59722 at 6. This position limit. As such, persons who established a at 8; CL–CMC–60950 at 11; CL–CME–59718 at 44; commenter also supported setting the single month net position below the speculative limit prior to the CL–American Farm Bureau–59730 at 4; CL–MGEX– limit at two-thirds of the all months combined limit enactment of a regulation would be permitted to 59932 at 2; CL–MGEX–60301 at 1; CL–MGEX– in order to relieve market congestion as traders exit acquire new positions, but the total size of the pre- 59610 at 2–3; CL–MGEX–60936 at 2–3; CL–NCFC– or roll out of the next to expire month into the spot existing and new positions may not exceed the 59942 at 6; CL–NGFA–59956 at 3. month. CL–APGA–59722 at 7. applicable limit.

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ii. Baseline 5. Section 150.3—Exemptions From relief from applicable position limits Federal Position Limits during certain financial distress The baseline is the current § 150.2 of circumstances, including the default of the Commission’s regulations. As discussed above, the Commission has provided a general discussion of a customer, affiliate, or acquisition iii. Benefits and Costs reproposed § 150.3 and highlighted the target of the requesting entity, that may rule-text changes that it has made after require an entity to assume in short The Commission exempted certain order the positions of another entity. pre-existing positions from position several rounds of proposed rulemakings limits under new § 150.2(f) as part of its and responsive comments. In this iii. Section 150.3(c)—Conditional Spot- release, the Commission has reproposed grandfathering provisions.1340 Month Position Limit Exemption paragraphs (a), (b), (d), (e), (g) and (h) as Essentially, this means only futures proposed in December 2013.1342 The Reproposed § 150.3(c) provides a contracts initially will be subject to non- Commission has amended the text in conditional spot-month limit exemption spot month position limits, as well as proposed § 150.3(c) and (f). In the that permits traders to acquire positions swaps entered after the compliance December 2013 proposal, the for natural gas up to 10,000 contracts if date. The Commission notes that a pre- Commission also discussed the costs such positions are exclusively in cash- existing position in a futures contract and benefits of these two paragraphs, as settled contracts. The natural-gas also would not be a violation of a non- well as, paragraphs (a), (b), (d), (e), (g) conditional exemption would not be spot month limit, but, rather, would be and (h).1343 available to traders who hold or control grandfathered, as discussed under In the June 2016 Supplemental positions in the spot-month physical- § 150.2(f)(2). Therefore, market Position Limits Proposal, the delivery referenced contract in order to participants can more easily adjust their Commission changed proposed reduce the risk that traders with large existing positions to the new federal paragraph (a). The Commission also positions in cash-settled contracts position limit regime. Market explained in the 2016 cost-benefit would attempt to distort the physical- participants will however incur costs for section that the changes it was making delivery price to benefit such positions. newly established positions in the to proposed § 150.3(a)(1) should be read relevant swaps after the compliance iv. Section 150.3(d)—Pre-Enactment and in conjunction with proposed §§ 150.9, Transition Period Swaps Exemption date, such as those discussed above 150.10, and 150.11.1344 Between the such as the costs of monitoring their June 2016 changes to §§ 150.9, 150.10, Reproposed § 150.3(d) provides an positions with respect to any applicable and 150.11 and now, the Commission exemption from federal position limits federal position limit and applying for has not made additional changes to for swaps entered into before July 21, exemptions should they need to exceed § 150.3(a)(1). In general, the proposed 2010 (the date of the enactment of the those limits. changes made in the June 2016 Dodd-Frank Act), the terms of which New § 150.2(g), extends the federal Supplemental Position Limits Proposal have not expired as of that date, and for position limits to a person who holds detailed processes that exchanges could swaps entered into during the period positions in referenced contracts on an offer to market participants who seek commencing July 22, 2010, the terms of FBOT that settle against any price of one exemptions for positions to exchange- which have not expired as of that date, or more contracts listed for trading on set and federal position limits. and ending 60 days after the publication a DCM or SEF that is a trading facility, In this section, the Commission of final rule § 150.3—that is, its effective if the FBOT makes available such summarizes reproposed § 150.3, and, date. referenced contracts to its members or thereafter, discusses the related benefits v. Section 150.3(e)—Other Exemptions other participants located in the United and costs of the final rules. Reproposed § 150.3(e) explains that a States through direct access to its a. Section 150.3 Rule Summaries market participant engaged in risk- electronic trading and ordering reducing practices that are not matching system. In that regard, i. Section 150.3(a)—Bona Fide Hedging enumerated in the revised definition of § 150.2(g) is consistent with CEA section Exemption bona fide hedging in reproposed § 150.1 4a(a)(6)(B), which directs the Among other things, reproposed may use two different methods to apply Commission to apply aggregate position § 150.3(a)(1)(i) codifies the statutory to the Commission for relief from limits to FBOT linked, direct-access requirement that bona fide hedging federal position limits. The market contracts.1341 positions be exempt from federal participant may request an position limits. Reproposed § 150.3(a)(2) Regulations 150.2(f) and (g) interpretative letter from Commission authorizes other exemptions from implement statutory directives in CEA staff pursuant to § 140.9 concerning the position limits for financial-distress section 4a(b)(2) and CEA section applicability of the bona fide hedging positions, conditional spot-month limit 4a(a)(6)(B), respectively, and are not acts position exemption, or may seek positions, spread positions, and other of the Commission’s discretion. Thus, a exemptive relief from the Commission risk-reduction practices. consideration of costs and benefits of under CEA section 4a(a)(7) of the Act. these provisions is not required under ii. Section 150.3(b)—Financial Distress vi. Section 150.3(f)—Previously Granted CEA section 15(a). Exemption Exemptions iv. Summary of Comments Reproposed § 150.3(b) provides the After reviewing comments, the means for market participants to request No commenter addressed the costs or Commission has preliminarily benefits of § 150.2(f) and (g). 1342 December 2013 Proposal, 78 FR 75828, Dec. determined it is best to change the 12, 2013. § 150.3(f) text proposed in December 1340 The Commission excluded from position 1343 Reproposed § 150.3 has ten paragraphs: (a) 2013. The amended text broadens limits ‘‘pre-enactment swaps’’ and ‘‘transition through (j). Reproposed § 150.3(i) (aggregation of exemption relief to pre-existing period swaps,’’ in its grandfathering provisions, as accounts) and (j) (delegation of authority to DMO financial instruments that are within discussed above. Director) do not have cost-benefit implications, and 1341 See supra discussion of CEA section 4a(a)(6) are not discussed in this section. current § 1.47’s scope, and to exchange- concerning aggregate position limits and the 1344 For a fuller discussion of all the changes to granted non-enumerated exemptions in treatment of FBOT contracts. reproposed § 150.3, see Section III.C., above. non-legacy commodity derivatives

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outside of the spot month with other price-discovery function of markets will unexpected liquidations. In other conditions. be harmed. words, the Commission believes that reproposed § 150.3(f) will support vii. Section 150.3(g) and (h)— iii. Section 150.3(c)—Conditional Spot market stability. Recordkeeping Month Limit Exemption vii. Section 150.3(g) and (h)— Reproposed § 150.3(g)(1) specifies In the December 2013 proposal, the Recordkeeping and Special Calls recordkeeping requirements for market Commission proposed § 150.3(c) that participants who claim any exemption provided speculators with an The Commission believes that the in final § 150.3. Market participants opportunity to maintain relatively large reproposed § 150.3(g)’s recordkeeping claiming exemptions under reproposed positions in cash-settled contracts up to requirements are critical to the § 150.3 would need to maintain but no greater than 125 percent of the Commission’s ability to effectively complete books and records concerning spot-month limit. The Commission monitor compliance with exemption all details of their related cash, forward, explained that by prohibiting eligibility standards. Because the futures, options and swap positions and speculators using the exemption in the Commission will have access to records transactions. Reproposed § 150.3(g)(2) cash-settled contract from trading in the under § 150.3(h), it will be able to assess requires market participants seeking to spot-month of the physical-delivery whether exemptions are susceptible to rely upon the pass-through swap offset contract, the final rules should further abuse and to support the position-limits exemption to obtain a representation protect the delivery and settlement regime, which, among other things, aims from its counterparty and keep that process, and reduce the ability for a to prevent excessive speculation and/or representation on file. Similarly, trader with a large cash settled contract market manipulation. reproposed § 150.3(g)(3) requires a position to attempt to manipulate the d. Costs and Discussion of Comments market participant who makes such a physical-delivery contract price in order As the Commission expressed in the representation to maintain records to benefit his position. The Commission December 2013 Supplemental Position supporting the representation. Under invited comment on this general Limits Proposal, the exemptions under reproposed § 150.3(h), all market exemption. Upon review of the reproposed § 150.3 do not increase the participants would need to make such comment letters, the Commission has preliminarily determined to restrict the costs of complying with position limits. books and records available to the The Commission continues to believe Commission upon request, which would conditional-spot-month-limit exemption to natural gas cash-settled referenced that many costs will likely decrease by preserve the ‘‘call for information’’ rule the Commission providing for relief set forth in current § 150.3(b). contracts. The reasons for this change are explained above. from position limits in certain b. Baseline situations. The reproposed § 150.3 iv. Section 150.3(d)—Pre-Enactment and exemptions are elective, so no entity is The baseline is the current § 150.3 of Transition Period Swaps Exemption required to assert an exemption if it the Commission’s regulations. The pre-existing swaps exemption in determines the costs of doing so do not c. Benefits and Discussion of Comments reproposed§ 150.3(d) is consistent with justify the potential benefit resulting from the exemption. While the i. Section 150.3(a)—Positions Which CEA section 4a(b)(2). The exemption Commission appreciates that there will May Exceed Limits promotes the smooth transition for previously unregulated swaps markets be compliance duties connected to the As explained in the December 2013 to swaps markets that will be subjected reproposed § 150.3, the Commission Supplemental Position Limits Proposal, to position limits compliance. In does not anticipate the costs of § 150.3 works with §§ 150.9, 150.10, and addition, allowing netting with pre- obtaining any of the exemptions to be 1345 § 150.11. All of these rules operate enactment and transition swaps overly burdensome. together within the broader position- provides flexibility where possible in i. Section 150.3(a)—Positions Which limits regulatory regime and provide order to lessen the impact of the regime May Exceed Limits significant benefits, such as regulatory on entities with swap positions. certainty, consistency, and Because of the proposed changes in transparency. As such, the benefits of v. Section 150.3(e)—Other Exemptions the June 2016 Supplemental Position reproposed § 150.3 are discussed in the Reproposed § 150.3(e) is essentially Limits Proposal, reproposed § 150.3(a) cost-benefit sections related to clarifying and organizational in nature. must be read with reproposed §§ 150.9, reproposed §§ 150.9, 150.10, and For the most part, the Reproposal 150.10, and § 150.11. Moreover, the 150.11. provides the benefit of regulatory costs of reproposed § 150.3 are linked to certainty for those granted exemptions. reproposed §§ 150.9, 150.10, and ii. Section 150.3(b)—Financial Distress § 150.11, and are discussed more fully Exemption vi. Section 150.3(f)—Other Exemptions below. and Previously Granted Exemptions The Commission continues to believe ii. Section 150.3(b)—Financial Distress that by codifying historical practices of As explained above, the Commission Exemption temporarily lifting position limit has expanded the scope of reproposed restrictions several benefits will ensue. § 150.3(f) exemptive relief. In December The Commission’s view on the costs Reproposed § 150.3 ensures the orderly 2013, the Commission discussed the related to the financial distress transfers of positions from financially benefits of proposed § 150.3(f), and exemption under reproposed § 150.3(b) distressed firms to financially secure believed that the benefits centered on remains unchanged. The costs are likely firms or facilitating other necessary regulatory certainty. Now that the to be minimal. Market participants who remediation measures during times of Commission has increased the types of voluntarily employ these exemptions market stress. Because of this financial instruments that may be will incur filing and recordkeeping Reproposal, the Commission believes it exempted from position limits under 1345 this rule, the Commission believes that See, e.g., the discussion of costs related to is less likely that positions will be non-enumerated bona fide hedging position prematurely or unnecessarily it has reduced the likelihood of market determinations, anticipatory bona fide hedge liquidated, and it is less likely that the disruption because of forced and filings, and spread exemptions below.

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costs. As explained in the 2013 purposes of complying with a non-spot- vii. Section 150.3(g) and (h)— proposal, the Commission cannot month position limit. The Commission Recordkeeping and Special Calls accurately estimate how often this believes these costs will not be overly Under reproposed § 150.3(g) and (h), exemption may be invoked because burdensome, and notes that market the costs related to maintaining and emergency or distressed market participants who assume such costs do producing records will be minimal situations are unpredictable and so voluntarily. because, under most circumstances, dependent on a variety of firm- and market participants already maintain market-specific factors as well as v. Section 150.3(e)—Other Exemptions and Previously Granted Exemptions books and records in compliance with general macroeconomic indicators. The Commission regulations and as part of Commission, nevertheless, believes that Under the reproposed § 150.3(e), prudent accounting and risk emergency or distressed market market participants electing to seek an management policies and procedures. situations that might trigger the need for exemption other than those specifically The Commission has estimated the costs this exemption will be infrequent. The enumerated, will incur certain direct entities might incur and discussed those Commission continues to assume that costs to do so. The Commission costs in the PRA section of this release. reproposed § 150.3(b) will add discussed the expected costs in the transparency to the process. Finally, the December 2013 proposal and continues 6. Section 150.5—Exemptions From Commission believes that in the case to believe that the same costs will arise Exchange-Set Position Limits that one firm is assuming the positions should market participants elect The Dodd-Frank Act scaled back the of a financially distressed firm, the costs exemptive relief under reproposed discretion afforded DCMs for of claiming the exemption would be § 150.3(e). As explained in the establishing position limits under the incidental to the costs of assuming the December 2013 proposal, market earlier CFMA amendments. Specifically, position. participants will incur costs related to among other things, the Dodd-Frank iii. Section 150.3(c)—Conditional Spot petitioning the Commission under Act: (1) Amended DCM core principle 5 Month Limit Exemption § 140.99 of the Commission’s to require that, with respect to contracts regulations or under CEA section subject to a position limit set by the A natural gas market participant that 4a(a)(7). There also will be Commission under CEA section 4a, a elects to exercise this exemption will recordkeeping costs for those market DCM must set limits no higher than incur certain direct costs to do so. The participants who elect to pursue a those prescribed by the natural gas market participant must file Commission; 1348 and (2) added parallel Form 504 in accordance with § 150.3(e) exemption. The Commission believes that these costs will be core principle obligations on newly- requirements listed in reproposed authorized SEFs, including SEF core § 19.01. The Commission does not minimal, as participants already maintain books and records under a principle 6 regarding the establishment believe that there will be additional of position limits.1349 costs, or at least not significant costs, variety of other Commission regulations because exchanges already have the and as the information required in these a. Rule Summary sections is likely already being exemption. Given that there has been In light of these Dodd-Frank Act maintained. The Commission has experience with this type of exemption statutory amendments, the Commission estimated the costs entities might incur for natural gas market participants,1346 has adopted § 150.5 to specify certain and discussed those costs in the PRA the Commission does not believe that requirements and guidance for DCMs section of this release. liquidity, in the aggregate (across the and SEFs establishing exchange-set core referenced futures contract and vi. Section 150.3(f)—Previously Granted limits. referenced contracts) will be adversely Exemptions Specifically, § 150.5(a)(1) requires that impacted.1347 By retaining the DCMs and SEFs set position limits for exemption for natural gas contracts, the Market participants who had commodity derivative contracts, subject Commission has heeded commenters previously relied upon the exemptions to federal position limits, at a level not concerns about disrupting market granted under current § 1.47 will be able higher than the Commission’s levels practices and harming liquidity in the to continue to rely on such exemptions specified in § 150.2. In addition, cash market, thus increasing the cost of for existing positions under reproposed exchanges with cash-settled contracts hedging and possibly preventing § 150.3(f). Between the December 2013 price-linked to contracts subject to convergence between the physical- proposal and now, the Commission has federal limits must also adopt limit delivery futures and cash markets. determined to expand the relief in levels not higher than federal position reproposed § 150.3(f). As more fully iv. Section 150.3(d)—Pre-Enactment and limits. discussed above, the Commission Further, § 150.5(a)(5) requires for all Transition Period Swaps Exemption amended the regulatory text so that contracts subject to federal speculative The exemption offered in reproposed previously-granted exemptions may limits, and §§ 150.5(b)(8) and 150.5(c)(8) § 150.3(d) is self-executing and will not apply to pre-existing financial suggest for other contracts not subject to require a market participant to file for instruments, rather than only to pre- federal speculative limits, that relief. Nevertheless, as explained in the existing swaps, and to exchange- designated contract markets and swap December 2013 proposal, a market granted, non-enumerated exemptions in execution facilities adopt aggregation participant may incur costs to identify non-legacy commodity derivatives rules that conform to § 150.4. Regulation positions eligible for the exemption and outside of the spot month, with other § 150.5(a)(2)(i) requires for all contracts to determine if that position is to be conditions. The Commission believes subject to federal speculative limits, and netted with post-enactment swaps for that there will be recordkeeping costs but there also will be cost-savings in the 1348 Dodd-Frank Act section 735(b). CEA section 1346 CL–ICE–59962 at 6–7 (commenter argued that form of market stability because market 4a(e), effective prior to, and not amended by, the the conditional limit for natural gas ‘‘has had no participants will not be required to Dodd-Frank Act, likewise provides that position adverse consequences with supply constraints and limits fixed by a board of trade not exceed federal underlying physical delivery contracts.’’) liquidate positions prematurely, and the limits. 7 U.S.C. 6a(e). 1347 CL–ICE–59966 at 4–5, CL–ICE–59962 at 5, relief covers financial instruments not 1349 Dodd-Frank Act section 733 (adding CEA and CL–IECAssn–59679 at 30. just swaps. section 5h; 7 U.S.C. 7b–3).

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regulations §§ 150.5(b)(5)(i)(A) and exchange-set speculative position limits. an application requirement that the (c)(5)(1) suggest for other contracts not For contracts subject to federal Commission has reason to understand subject to federal speculative limits, that speculative position limits under most if not all active DCMs already exchanges conform their bona fide § 150.2, the Commission anticipates that follow, the impact of the potential costs hedging exemption rules to the § 150.1 a harmonized approach to aggregation has been reduced because the nature of definition of bona fide hedging position. will prevent confusion that otherwise the exemption process is similar to what Regulation § 150.5(a)(2)(ii) requires, might result from allowing divergent DCMs already have in place. For SEFs, and §§ 150.5(b)(5)(iii) and (c)(5)(iii) standards between federal and the rules necessitate a compliant suggest that exchanges condition any exchange-set limits on the same application regime, which will require exemptive relief from federal or contracts. Further, the harmonized an initial investment similar to that exchange-set position limits on an approach to aggregation policies for which DCMs have likely already made application from the trader. And, if limits on all levels eliminates the and need not duplicate. As noted above, granted an exemption, such trader must potential for exchanges to use the Commission considers it highly reapply for such exemption at least on permissiveness in aggregation policies likely that, in accordance with industry an annual basis. As noted supra, the as a competitive advantage, which best practices, to comply with core Commission understands that requiring would impair the effectiveness of the principles and due to the utility of traders to apply for exemptive relief Commission’s aggregation policy. In application information in comports with existing DCM practice; addition, DCMs and SEFs are required demonstrating compliance with core thus, the Commission anticipates that to set position limits at a level not principles, SEFs may incur such costs the codification of this requirement will higher than that set by the Commission. with or without the adopted rules. have the practical effect of Differing aggregation standards may Again, due to the new existence of these incrementally increasing, rather than have the practical effect of increasing a entities, the Commission is unable to creating, the burden of applying for DCM- or SEF-set limit to a level that is estimate what costs may be associated such exemptive relief. higher than that set by the Commission. with the requirement to impose an Finally, under § 150.5(b) and Accordingly, harmonizing aggregation application regime for exemptive relief § 150.5(c) for commodity derivative standards reinforces the efficacy and on the exchange level. contracts not subject to federal position intended purpose of §§ 150.5(a)(2)(ii), Also, with respect to phasing, limits, the Commission provides (b)(5)(iii) and (c)(5)(iii) by foreclosing an exchanges are not required to use the guidance for exchanges to use their avenue to circumvent applicable limits. Commission’s definition of bona fide reasonable discretion to set exchange Moreover, by extending this harmonized hedging position when setting positon position limits and exempt market approach to contracts not included in limits on commodity derivative participants from exchange-set limits. § 150.2, the Commission encourages a contracts in a physical commodity that This includes, under § 150.5(b), common standard for all federal and are not subject to federal position limits commodity derivative contracts in a exchange-set limits. The adopted rule (and when exchanges grant an physical commodity as defined in provides uniformity, consistency, and exemption from exchange-set limits if § 150.1, and, under § 150.5(c), excluded certainty for traders who are active on such exemption does not exceed the commodity derivative contracts as multiple trading venues, and thus federal limit) or excluded commodity defined in section 1a(19) of the Act. should reduce the administrative derivative contracts. Nevertheless, burden on traders as well as the burden exchanges are free to use the b. Baseline on the Commission in monitoring the Commission’s bona fide hedging The baseline is the current reasonable markets under its jurisdiction. position definition if they so choose. discretion afforded to exchanges to With respect to exchange-set limits, Relative to the status quo baseline, exempt market participant from their DCM and SEF core principles already this rulemaking imposes a ceiling on exchange-set position limits. address the costs associated with the exchange-set position limits for requirement that exchanges set position referenced contracts in 25 commodities. c. Benefits and Costs limits no higher than federal limits. The core principals already require such Functioning as an integrated Further, for commodity derivatives ceiling, and such costs are addressed in component within the broader position contracts subject to federal position the part 37 and 38 rulemakings. As limits regulatory regime, the limits, exchanges are provided the mandated and necessary, this rule Commission expects the proposed discretion to decide whether or not to adopts limits for 16 additional changes to § 150.5 will further the four set position-limits that are lower than commodities. In addition, market objectives outlined in CEA section the federal position limit. Finally, when participants may be facing hard position 4a(a)(3).1350 The Commission has an exchange grants an exemption from limits on some contract that previously endeavored to preserve the status quo a lower exchange-set limit, it is not only had accountability levels. As such, baseline within the framework of required to use the Commission’s bona this rulemaking will confer any benefits establishing new federal position limits. fide hedging position definition so long that hard position limits have over The reproposed regulations require as the exempted position does not accountability levels. This may include that exchange-set limits employ exceed the federal position limit. information gleaned from exemption aggregation policies that conform to the To the extent that a DCM or SEF applications that will better inform the Commission’s aggregation policy for grants exemptions, the Commission supervisory functions of DCMs or SEFs contracts that are subject to federal anticipates that exchanges and market as well as to protect markets from any limits under § 150.2, thus harmonizing participants will incur minimal costs to adverse effects from market participants aggregation rules for all federal and administer the application process for that hold positions in excess of an exemption relief in accordance with exchange set position limit. In addition, 1350 CEA section 4a(a)(3)(B) applies for purposes standards set forth in the proposed rule. exchanges retain the ability to set of setting federal limit levels. 7 U.S.C. 6a(a)(3)(B). The Commission understands that accountability levels lower than the The Commission considers the four factors set out in the section relevant for purposes of considering requiring traders to apply for exemptive levels of the position limits; if an the benefits and costs of these amendments relief comports with existing DCM exchanges chooses to adopt such addressed to exchange-set position limits as well. practice. Accordingly, by incorporating accountability levels, they would

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provide exchanges with additional limits. Therefore, there are no costs and b. Baseline information regarding positions of benefits resulting from this rulemaking The baseline is current § 1.48. various market participants. on the processing of such exemptions. Exchanges and market participants c. Benefits and Costs 7. Section 150.7—Reporting will have to adapt to new federal The Commission remains concerned position limits. Position limits will alter Requirements for Anticipatory Hedging Positions that distinguishing whether an over-the- the way that swap and futures trading limit position is entered into in order to is conducted. For many contracts that a. Rule Summary reduce risk arising from anticipatory did not have federal limits, participants The revised definition of bona fide needs, or whether it is excess will be facing new exchange set position hedging position reproposed in § 150.1 speculation, may be exceedingly limits in the spot, single month, and all of this rule incorporates hedges of five difficult if anticipatory transactions are months combined. Such limits may specific types of anticipated not well defined. The Commission is, impose new compliance costs on transactions: Unfilled anticipated therefore, reproposing the collection of exchanges and market participants. requirements, unsold anticipated Form 704 to collect information that is These compliance costs may consists of production, anticipated royalties, vital in performing this distinction. adapting the method of aggregating anticipated service contract payments or While there will be costs associated contracts and filing for exchange receipts, and anticipatory cross- with fulfilling obligations related to exemptions to position limits. The hedges.1352 The Commission is anticipatory hedging, the Commission Commission anticipates that these costs reproposing new requirements in believes that advance notice of a trader’s will be higher for contracts that have § 150.7 for traders seeking an exemption intended maximum position in only had accountability levels and not from position limits for any of these five commodity derivative contracts to offset hard exchange-set position limits. enumerated anticipated hedging anticipatory risks would identify—in Exchange-set position limits may also advance—a position as a bona fide deter some speculators from fully transactions that were designed to build hedging position, avoiding unnecessary participating and affecting the price of on, and replace, the special reporting contact during the trading day with some futures contracts. The Commission requirements for hedging of unsold surveillance staff to verify whether a expects that for the most part, exchange- anticipated production and unfilled hedge exemption application is in set position limits will not have much anticipated requirements in current 1353 process, the appropriate level for the effect except for rare circumstances § 1.48. when exemptions to exchange set limits The Commission proposed to add a exemption and whether the exemption do not apply or other derivative new series ’04 reporting form, Form 704, is being used in a manner that is contracts such as swap contracts (below to effectuate these additional and consistent with the requirements. the federal limit), forwards, or trade updated reporting requirements for Market participants can anticipate options are not adequate to meet a anticipatory hedges. Persons wishing to hedging needs well in advance of market participant’s needs. avail themselves of an exemption for assuming positions in derivatives any of the anticipatory hedging markets and in many cases need to d. Response to Commenter transactions enumerated in the updated supply the same information after the A commenter asked whether the definition of bona fide hedging position fact; in such cases, providing the Supplemental Proposal’s cost-benefit in § 150.1 would be required to file an information in advance allows the analysis assesses the appropriateness of initial statement on Form 704 with the Commission to better direct its efforts such requirement on exchange-set Commission at least ten days in advance towards deterring and detecting speculative position limits or includes of the date that such positions would be manipulation. The annual updates in the costs of processing non-enumerated in excess of limits established in § 150.7(d) similarly allow the bona fide hedging positions and Spread § 150.2. Commission to verify on an ongoing Exemptions for contracts subject only to Reproposed § 150.7(f) adds a basis that the person’s anticipated cash exchange-set speculative position limits requirement for any person who files an market transactions, estimated in good and not federal speculative position initial statement on Form 704 to provide faith, closely track that person’s real limits.1351 annual updates that detail the person’s cash market activities. Absent monthly The Commission notes that if an actual cash market activities related to filing pursuant to § 150.7(e), the exchange elects to set a position limit the anticipated exemption. Reproposed Commission would need to issue a lower than a federal limit, the costs § 150.7(g) enables the Commission to special call to determine why a person’s resulting from such choices are not review and compare the actual cash commodity derivative contract position imposed by § 150.5, because the activities and the remaining unused is, for example, larger than the pro rata exchange has made the choice not the anticipated hedge transactions by balance of her annually reported Commission. The costs on market requiring monthly reporting on Form anticipated production. The participants to apply for exchange set 204. Commission believes it is reproposing a limits below the federal level are also As is the case under current § 1.48, low cost method of obtaining the discussed in § 150.2. The Commission is reproposed § 150.7(h) required that a necessary information to ensure that unable to forecast these costs, because it trader’s maximum sales and purchases anticipatory hedges are valid.1354 must not exceed the lesser of the does not know when an exchange will d. Summary of Comments set its limits lower than the federal approved exemption amount or the limit; nor does it know how low any trader’s current actual anticipated One commenter asserted that the such exchange-set position limit level transaction. reporting requirements for anticipatory may be. hedges of an operational or commercial This rulemaking maintains the status 1352 See paragraphs 3(iii), 4(i), 4(iii), 4(iv) and (5), quo for exchange-set speculative limits respectively, of the Commission’s definition of bona 1354 The Commission understands that there will fide hedging position in § 150.1 as discussed supra. be costs associated with the filing of Form 704. for contracts not subject to federal 1353 See 17 CFR 1.48. See also definition of bona Costs of filing that form are discussed in the context fide hedging transactions in current 17 CFR of the part 19 requirements as well as in the 1351 CL–Working Group–60947 at 14. 1.3(z)(2)(i)(B) and (ii)(C), respectively. Paperwork Reduction Act section of this release.

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risk comprising an initial, transaction.1360 A third commenter alternatives to the annual and monthly supplementary and annual report are stated that Form 704 is ‘‘commercially filings, the Commission believes these unduly burdensome. The commenter impracticable and unduly burdensome’’ filings are critical to the Commission’s recommended that the Commission because it would require filers to Surveillance program. Anticipatory require either an initial and annual ‘‘analyze each transaction to see if it fits hedges, because they are by definition report or an initial and supplementary into an enumerated hedge category.’’ forward-looking, require additional report.1355 Another commenter agreed The commenter is concerned that such detail regarding the firm’s commercial that the proposed requirements to file ‘‘piecemeal review’’ would require a practices in order to ensure that a firm Forms 204, 704 and/or 604 ‘‘are unduly legal memorandum and the is not using the provisions in proposed burdensome and commercially development of new software to track § 150.7 to evade position limits. In impracticable,’’ and stated that the positions and, since the Commission contrast, special calls are backward- Commission should ‘‘scale back both proposed that Form 704 to be used in looking and would not provide the the frequency and the content of the proposed § 150.11, the burden Commission’s Surveillance program filings required to maintain bona fide associated with the form has with the information needed to prevent hedge positions.’’ 1356 increased.1361 markets from being susceptible to Finally, a commenter stated that the Another commenter suggested excessive speculation. However, the Commission significantly deleting Form 704 because it believes Commission expects the new filing underestimated costs associated with that no matter how extensive the requirements to be an improvement over reporting, and provided revised Commission makes reporting current practice under § 1.48 because as estimates of start-up and ongoing requirements, the Commission will still facts and circumstances change, the compliance costs for filing Form need to request additional information Commission’s Surveillance program 704.1362 will have a more timely understanding on a case-by-case basis to ensure hedge As discussed in the December 2013 of the market participant’s hedging transactions are legitimate.1357 The Position Limits Proposal, the needs. commenter suggested that the Commission remains concerned about The Commission notes in response to Commission should be able to achieve distinguishing between anticipatory the commenter that there is no its goal of obtaining enough information reduction of risk and speculation.1363 requirement to analyze individual to determine whether to request Therefore, the Commission is retaining transactions or submit a memorandum. additional information using Form 204 the requirement to file Form 704 for Finally, while costs of filing Form 704 along with currently collected data anticipatory hedges. The Commission are discussed below in the context of sources and so the additional burden of notes that most of the information part 19, the Commission notes that the new series ’04 reports outweighs the required on Form 704 is currently changes made to the frequency of the 1358 benefit to the Commission. required under § 1.48, and that such forms should help alleviate some of the Several commenters remarked on the information is not found in any other cost burdens associated with filing Form cost associated with Form 704. One Commission data source, including 704. commenter stated that the additional Form 204. reporting requirements, including new The Commission is adopting the 8. Part 19—Reports Form 704 to replace the reporting commenters’ suggestions, however, to CEA Section 4i authorizes the requirements under current rule 1.48, reduce the frequency of filings by Commission to require the filing of and annual and monthly reporting maintaining the requirement for the reports, as described in CEA section 4g, requirements under rules 150.7(f) and initial statement and annual update but when positions equal or exceed position 150.7(g) ‘‘will impose significant eliminating the supplemental filing as limits. Current part 19 of the additional regulatory and compliance proposed in § 150.7(e). After Commission’s regulations sets forth burdens on commercials;’’ the considering the commenter’s concerns, these reporting requirements for persons commenter believes that the the Commission believes the monthly holding or controlling reportable futures Commission should consider reporting on Form 204 and annual and option positions that constitute alternatives, including targeted special updates on Form 704 will provide bona fide hedging positions as defined calls when appropriate.1359 Another sufficient updates to the initial in § 1.3(z) and in markets with federal commenter stated the reporting statement and is deleting the speculative position limits—namely requirements for the series 04 forms is supplemental filing provision in those for grains, the soy complex, and overly burdensome and would impose a proposed § 150.7(e) to reduce the cotton. Since having a bona fide hedging substantial cost to market participants burden on filers. The Commission has position exemption affords a because while the proposal would made several burden-reducing changes commercial market participant the require the Commission to respond to Form 704 and § 150.7(d), including opportunity to hold positions that fairly quickly, it does not provide an merging the initial statement and annual exceed a position limit level, it is indication of whether the Commission update sections of Form 704, clarifying important for the Commission to be able will deem the requirement accepted if and amending the instructions to Form to verify that, when an exemption is the Commission does not respond 704, and eliminating redundant invoked, that it is done so for legitimate within a stated time frame. The information.1364 purposes. As such, commercial entities commenter is concerned that a market In response to the commenter who that hold positions in excess of those participant may have to refuse business suggested the Commission consider limits must file information on a if it does not receive an approved targeted special calls and other monthly basis pertaining to owned exemption in advance of a stocks and purchase and sales 1360 CL–EDF–59961 at 6. commitments for entities that claim a 1361 CL–EEI–EPSA–60925 at 9. 1355 bona fide hedging position exemption. CL–IECAssn–59679 at 11. 1362 CL–FIA at 35–36. 1356 In order to help ensure that the CL–BG Group–59656 at 11. 1363 See December 2013 Position Limits Proposal, 1357 CL–NGFA–60941 at 7–8. 78 FR at 75746. additional exemptions described in 1358 Id. 1364 See, supra, discussion of changes to Form § 150.3 are used in accordance with the 1359 CL–APGA–59722 at 10. 704 and § 150.7. requirements of the exemption

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employed, as well as obtain information b. Baseline regarding ‘‘best effort’’ estimates of the necessary to verify that any futures, The baseline is current part 19. data when verifying the accuracy of options and swaps positions established Form 204 submissions.1372 in referenced contracts are justified, the c. Summary of Comments The Commission is reproposing the Commission is making conforming and The Commission received several amendments to part 19. The substantive amendments to part 19. comments regarding the general nature Commission agrees with the First, the Commission is amending part of series ’04 reports and/or the manner commenters that the forms should be 19 by adding new and modified cross- in which such reports are required to be clear and workable, and offers several references to proposed part 150, filed. One commenter stated that the clarifications and amendments in other including the new definition of bona various forms required by the regime, sections of this release in response to fide hedging position in reproposed comments about particular aspects of while not lengthy, represent significant 1373 § 150.1.1365 Second, the Commission is data collection and categorization that the series ’04 reports. The Commission notes that the amending § 19.00(a) by extending will require a non-trivial amount of information required on the series ’04 reporting requirements to any person work to accurately prepare and file. The reports represents a trader’s most basic commenter claimed that a claiming any exemption from federal position data, including the number of comprehensive position limits regime position limits pursuant to reproposed units of the cash commodity that the could be implemented with a ‘‘far less § 150.3. The Commission is adding three firm has purchased or sold, or the size burdensome’’ set of filings and new series ’04 reporting forms to of a swap position that is being offset in requested that the Commission review effectuate these additional reporting the futures market. The Commission requirements. Third, the Commission is the proposed forms and ensure they are believes this information is readily updating the manner of part 19 ‘‘as clear, limited, and workable’’ as available to traders, who routinely make reporting. Lastly, the Commission is possible to reduce burden. The trading decisions based on the same updating both the type of data that commenter stated that it is not aware of data that is required on the series ’04 would be required in series ’04 reports, any software vendors that currently reports. The Commission is moving to as well as the time allotted for filing provide solutions that can support a an entirely electronic filing system, such reports. commercial firm’s ability to file the 1368 allowing for efficiencies in populating proposed forms. Another commenter and submitting forms that require the Below, the Commission describes supports the Commission’s decision to each of the proposed changes; responds same information every month. Most require applications for risk traders who are required to file the to commenters; and considers the costs management exemptions but requests and benefits of such changes.1366 series ’04 reports must do so for only the Commission to reevaluate the cost one day out of the month, further a. Amendments to Part 19 the forms will impose such as new lowering the burden for filers. In short, compliance programs, training of staff, the Commission believes potential In the December 2013 Position Limits and purchasing or modifying data burdens have been reduced while still Proposal, the Commission proposed to management systems in order to meet providing adequate information for the amend part 19 so that it would conform and maintain the compliance 1369 Commission’s Surveillance program. to the Commission’s proposed changes requirements. For market participants who may 1367 to part 150. The proposed Several commenters requested that require assistance in monitoring for conforming amendments included: the Commission create user-friendly speculative position limits and Amending part 19 by adding new and guidebooks for the forms so that all gathering the information required for modified cross-references to proposed entities can clearly understand any the series ’04 reports, the Commission is part 150, including the new definition required forms and build the aware of several software companies of bona fide hedging position in appropriate systems to file such forms, who, prior to the vacation of the Part proposed § 150.1; updating § 19.00(a) by including providing workshops and/or 1370 151 Rulemaking, produced tools that extending reporting requirements to any hot lines to improve the forms. could be useful to market participants in Finally, two commenters person claiming any exemption from fulfilling their compliance obligations recommended modifying or removing federal position limits pursuant to under the new position limits regime. proposed § 150.3; adding new series ’04 the requirement to certify series ’04 In response to the commenters that reporting forms to effectuate these reports as ‘‘true and correct.’’ One requested guidebooks for the series ’04 additional reporting requirements; commenter suggested that the reporting forms, the Commission has updating the manner of part 19 requirement be removed due to the revised the series ’04 forms and the reporting; and updating both the type of difficulty of making such a certification instructions to such forms as discussed data that would be required in series ’04 and the fact that CEA section 6(c)(2) supra in this release. The Commission reports as well as the timeframe for already prohibits the submission of false 1371 believes that it is less confusing to filing such reports. or misleading information. Another ensure that form instructions are clear noted that the requirement to report and detailed than it is to provide very specific information relating to 1365 These amendments are non-substantive generalized guidebooks that may not conforming amendments and do not have hedges and cash market activity respond to specific issues. The implications for the Commission’s consideration of involves data that may change over Commission’s longstanding experience costs and benefits. time. The commenter suggested the with collecting and reviewing Form 204 1366 The Commission notes that comments related Commission adopt a good-faith standard to costs and benefits are described in this section, and Form 304 has shown that many and other comments regarding these provisions are questions about the series ’04 reports are 1368 discussed in the section supra that describes the CL–COPE–59662 at 24, CL–COPE–60932 at specific to the circumstances and reproposed rules for part 19. For a complete picture 10. See also CL–EEI–EPSA–60925 at 9. of the comments received, the Commission’s 1369 CL–EDF–59961 at 6–7. trading strategies of an individual response to comments, and the reproposed rules, all 1370 See CL–COPE–59662 at 24, CL–COPE–60932 sections of this preamble should be read together. at 10; CL–ASR–60933 at 4; CL–Working Group– 1372 CL–Working Group–59693 at 65. 1367 See December 2013 Position Limits Proposal, 60947 at 17–18; CL–EEI–EPSA–60925 at 3. 1373 See, supra, discussion of reproposed rules 78 FR at 75741–46. 1371 See, CL–CMC–59634 at 17. regarding series ’04 reports and part 19.

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market participant, and do not lend under part 19 and on Form 204 and veracity of claimed bona fide hedging themselves to generalization that would limit that information only to what will positions. The Commission has in some be helpful to many market participants. assist Commission staff in assessing the cases accepted commenter suggestions The Commission notes that, should a validity of claimed hedge to reduce or amend the information market participant have questions exemptions.1375 required in order to reduce confusion regarding how to file a particular form, One commenter stated that CFTC and alleviate burden on filers.1380 they are encouraged to contact should reduce the complexity and Where the Commission has retained Commission staff directly to get answers compliance burden of bona fide hedging required information fields, the tailored to their particular record keeping and reporting by using a Commission believes, based on its circumstances. model similar to the current exchange- longstanding experience conducting Finally, the Commission is amending based exemption process.1376 The surveillance in the markets it oversees, the certification language found at the commenter also stated that the that such fields are necessary to end of each form to clarify that the requirement to keep records and file determine the legitimacy of claimed certification requires nothing more than reports, in futures equivalents, regarding bona fide hedging position exemptions. is already required of market the commercial entity’s cash market The Commission notes that, while the participants in CEA section 6(c)(2). The contracts and derivative market exchange referred to by the commenter Commission believes the certification positions on a real-time basis globally, does not have a reporting process language is an important reminder to will be complex and impose a analogous to Form 204, it does require reporting traders of their responsibilities significant compliance burden. The an application prior to the to file accurate information under commenter noted such records are not establishment of a position that exceeds several sections of the Act, including needed for commercial purposes.1377 a position limit. In contrast, advance but not limited to CEA section 6(c)(2). Another commenter recommended notice is not required for most federal d. Information Required on Series ’04 that the Commission should require a enumerated bona fide hedging Reports market participant with a position in positions.1381 In the Commission’s excess of a spot-month position limit to experience, the series ’04 reports have i. Bona Fide Hedgers Reporting on Form report on Form 204 only the cash- 204—§ 19.01(a)(3) been useful and beneficial to the market activity related to that particular Commission’s Surveillance program and Current § 19.01(a) sets forth the data spot-month derivative position, and not the Commission finds no compelling that must be provided by bona fide to require it to report cash-market reason to change the forms to conform hedgers (on Form 204) and by activity related to non-spot-month to the exchange’s process. Further, the merchants and dealers in cotton (on positions where it did not exceed a non- Commission notes that Form 204 is filed Form 304). The Commission proposed spot-month position limit; the once a month as of the close of business to continue using Forms 204 and 304, commenter stated that the burden of the last Friday of the month; it is not which will feature only minor changes associated with such a reporting and has never been required to be filed to the types of data to be reported under obligation would increase on a real-time basis globally. A market 1374 1378 § 19.01(a)(3). These changes include significantly. participant only has to file Form 204 if removing the modifier ‘‘fixed price’’ One commenter recommended that it is over the limit at any point during from ‘‘fixed price cash position;’’ reporting rules require traders to the month, and the form requires only requiring cash market position identify the specific risk being hedged at cash market activity (not derivatives information to be submitted in both the the time a trade is initiated, to maintain market positions). cash market unit of measurement (e.g., records of termination or unwinding of barrels or bushels) and futures a hedge when the underlying risk has The Commission has never equivalents; and adding a specific been sold or otherwise resolved, and to distinguished between spot-month request for data concerning open price create a practical audit trail for limits and non-spot-month limits with contracts to accommodate open price individual trades, to discourage traders respect to the filing of Form 204. The pairs. In addition, the monthly reporting from attempting to mask speculative Commission notes that, as discussed in requirements for cotton, including the trades under the guise of hedges.1379 the December 2013 Position Limits granularity of equity, certificated and The Commission recognizes that Proposal, Form 204 is used to review non-certificated cotton stocks, would be market participants will incur costs to positions that exceed speculative limits file Form 204; these costs are described in general, not just in the spot- moved to Form 204, while weekly 1382 reporting for cotton would be retained in detail below. However, the month. Because of this, the as a separate report made on Form 304 Commission believes that the costs of Commission is proposing not to adopt in order to maintain the collection of filing Form 204 are not overly the commenter’s recommendation to data required by the Commission to burdensome for market participants, publish its weekly public cotton ‘‘on most of whom currently file similar 1380 See supra the Commission’s determinations information with either the Commission regarding part 19 call’’ report. 1381 The Commission notes that advance notice is One commenter suggested that the or the exchanges in order to obtain and required for recognition of anticipatory hedging costs to industry participants in maintain exemptions from speculative positions by the Commission. See supra for more collecting and submitting Form 204 data position limits. The Commission discussion of anticipatory hedging reporting and to the Commission in reviewing it believes it is reproposing requirements requirements. 1382 The Commission stated that the Form 204 ‘‘greatly outweigh’’ the regulatory for Form 204 that provide the ‘‘must show the trader’s positions in the cash benefit. The commenter recommended Commission with the most basic market and are used by the Commission to that the Commission undertake a cost- information possible to ascertain the determine whether a trader has sufficient cash benefit analysis to reconsider what positions that justify futures and option positions above the speculative limits’’ because the 1375 CL–Working Group–60396 at 17–18. information is required to be provided Commission is seeking to ‘‘ensure that any person 1376 CL–ASR–59668 at 3. who claims any exemption from federal speculative 1374 The list of data required for persons filing on 1377 Id. at 7. See also CL–ASR–60933 at 5. position limits can demonstrate a legitimate Forms 204 and 304 has been relocated from current 1378 CL–FIA–59595 at 38. purpose for doing so.’’ See December 2013 Position § 19.01(a) to reproposed § 19.01(a)(3). 1379 CL–Sen. Levin–59637 at 8. Limits Proposal, 78 FR at 75741–42.

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only require Form 204 when a market conditional spot-month limit Commission expects that, at least participant exceeds a spot-month limit. exemptions in the natural gas initially, market participants will In response to the commenter who commodity derivative contracts only, require additional time and effort to suggested the Commission require a until the Commission gains additional become familiar with new and amended ‘‘practical audit trail’’ for bona fide experience with the limits in proposed series ’04 forms, to gather the necessary hedgers, the Commission notes that § 150.2 in other commodities as well. information in the required format, and other sections of the Commission’s Benefits and Costs to file reports in the proposed regulations provide rules regarding timeframes. As described above, the detailed individual transaction The reporting requirements allow the Commission has attempted to mitigate recordkeeping as suggested by the Commission to obtain the information the cost impacts of these reports. commenter. necessary to verify whether the relevant exemption requirements are fulfilled in Actual costs incurred by market ii. Conditional Spot-Month Limit a timely manner. This is needed for the participants will vary depending on the Exemption Reporting on Form 504— Commission to help ensure that any diversity of their cash market positions § 19.01(a)(1) person who claims any exemption from and the experience that the participants As proposed, § 19.01(a)(1) would federal speculative position limits can currently have regarding filing Form 204 require persons availing themselves of demonstrate a legitimate purpose for and Form 304 as well as a variety of the conditional spot-month limit doing so. In the absence of the reporting other organizational factors. However, exemption (pursuant to proposed requirements detailed in part 19, the the Commission has estimated average § 150.3(c)) to report certain detailed Commission would lack critical tools to incremental burdens associated with the information concerning their cash identify abuses related to the proposed rules in order to fulfill its market activities for any commodity exemptions afforded in § 150.3 in a obligations under the Paperwork 1383 specially designated by the Commission timely manner. As such, the reporting Reduction Act (‘‘PRA’’). for reporting under § 19.03 of this part. requirements are necessary for the For Form 204, the Commission In the December 2013 Position Limits Commission to be able to perform its estimates that approximately 425 market Proposal, the Commission noted its essential surveillance functions. These participants will file an average of 12 concern about the cash market trading reporting requirements therefore reports annually at an estimated labor of those availing themselves of the promote the Commission’s ability to burden of 3 hours per response for a conditional spot-month limit exemption achieve, to the maximum extent total per-entity hour burden of and so proposed to require that persons practicable, the statutory factors approximately 36 hours, which claiming a conditional spot-month limit outlined by Congress in CEA section computes to a total annual burden of exemption must report on new Form 4a(a)(3). 15,300 hours for all affected entities. 504 daily, by 9 a.m. Eastern Time on the The Commission recognizes there will Using an estimated hourly wage of $122 next business day, for each day that a be costs associated with the changes and per hour,1384 the Commission estimates person is over the spot-month limit in additions to the report filing an annual per-entity cost of certain special commodity contracts requirements under part 19. Though the approximately $4,392 and a total annual specified by the Commission. Commission anticipates that market cost of $1,866,600 for all affected The Commission proposed to require participants should have ready access to entities. These estimates are reporting on new Form 504 for much of the required information, the summarized below in Table IV–A–1.

TABLE IV–A–1—BURDEN ESTIMATES FOR FORM 204

Annual num- Total number Burden hours ber of re- Hourly wage Per-entity Required record or report of respondents per response sponses per estimate labor cost respondent

Form 204 ...... 425 3 12 $122.00 $4,392

For Form 304, the Commission per-entity hour burden of approximately Commission estimates an annual per- estimates that approximately 200 market 52hours, which computes to a total entity cost of approximately $6,344 and participants will file an average of 52 annual burden of 10,400 hours for all a total annual cost of $1,268,800 for all reports annually at an estimated labor affected entities. Using an estimated affected entities. These estimates are burden of 1 hour per response for a total hourly wage of $122 per hour, the summarized below in Table IV–A–2.

1383 See supra for discussion of the Commission’s Report on Management & Professional Earnings in and an associate general counsel. Thus, the wage Paperwork Reduction Act estimates and the Securities Industry 2013, modified to account rate is a weighted national average of salary for explanation. for an 1800-hour work-year, adjusted to account for professionals with the following titles (and their 1384 The Commission’s estimates concerning the the average rate of inflation since 2013, and relative weight); ‘‘programmer (senior)’’ and wage rates are based on 2011 salary information for multiplied by 1.33 to account for benefits and 1.5 ‘‘programmer (non-senior)’’ (15% weight), ‘‘senior the securities industry compiled by the Securities to account for overhead and administrative accountant’’ (15%) ‘‘compliance manager’’ (30%), Industry and Financial Markets Association expenses. The Commission anticipates that (‘‘SIFMA’’). The Commission is using $122 per compliance with the provisions would require the and ‘‘assistant/associate general counsel’’ (40%). hour, which is derived from a weighted average of work of an information technology professional; a All monetary estimates have been rounded to the salaries across different professions from the SIFMA compliance manager; an accounting professional; nearest hundred dollars.

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TABLE IV–A–2—BURDEN ESTIMATES FOR FORM 304

Annual num- Total number Burden hours ber of re- Hourly wage Per-entity Required record or report of respondents per response sponses per estimate labor cost respondent

Form 304 ...... 200 1 52 $122.00 $6,344

For Form 504, the Commission approximately 180 hours, which $21,960 and a total annual cost of estimates that approximately 40 market computes to a total annual burden of $878,400 for all affected entities. These participants will file an average of 12 7,200 hours for all affected entities. estimates are summarized below in reports annually at an estimated labor Using an estimated hourly wage of $122 Table IV–A–3. burden of 15 hours per response for a per hour, the Commission estimates an total per-entity hour burden of annual per-entity cost of approximately

TABLE IV–A–3—BURDEN ESTIMATES FOR FORM 504

Annual num- Total number Burden hours ber of re- Hourly wage Per-entity Required record or report of respondents per response sponses per estimate labor cost respondent

Form 504 ...... 40 15 12 $122.00 $21,960

For Form 604 filed outside of the spot Commission estimates an annual per- 200 hours, which computes to a total month, the Commission estimates that entity cost of approximately $36,600 annual burden of 20,000 hours for all approximately 250 market participants and a total annual cost of $9,150,000 for affected entities. Using an estimated will file an average of 10 reports all affected entities. For Form 604 filed hourly wage of $122 per hour, the annually at an estimated labor burden of during of the spot month, the Commission estimates an annual per- 30 hours per response for a total per- Commission estimates that entity cost of approximately $24,400 entity hour burden of approximately approximately 100 market participants and a total annual cost of $2,440,000 for 300 hours, which computes to a total will file an average of 10 reports all affected entities. These estimates are annual burden of 75,000 hours for all annually at an estimated labor burden of summarized below in Table IV–A–4. affected entities. Using an estimated 20 hours per response for a total per- hourly wage of $122 per hour, the entity hour burden of approximately

TABLE IV–A–4—BURDEN ESTIMATES FOR FORM 604

Annual Total number Burden hours number of Hourly wage Per-entity Required record or report of respondents per response responses per estimate labor cost respondent

Form 604, Non-Spot-Month ...... 250 30 10 $122.00 $36,600 Form 604, Spot-Month ...... 100 20 10 122.00 24,400

For initial statements filed on Form of $122 per hour, the Commission burden of approximately 8 hours, which 704, the Commission estimates that estimates an annual per-entity cost of computes to a total annual burden of approximately 250 market participants approximately $1,830 and a total annual 2,000 hours for all affected entities. will file an average of 1 report annually cost of $457,500 for all affected entities. Using an estimated hourly wage of $122 at an estimated labor burden of 15 hours For annual updates filed on Form 704, per hour, the Commission estimates an per response for a total per-entity hour the Commission estimates that annual per-entity cost of approximately burden of approximately 15 hours, approximately 250 market participants $976 and a total annual cost of $244,000 which computes to a total annual will file an average of 1 report annually for all affected entities. These estimates burden of 3,750 hours for all affected at an estimated labor burden of 8 hours are summarized below in Table IV–A– entities. Using an estimated hourly wage per response for a total per-entity hour 5.

TABLE IV–A–5—BURDEN ESTIMATES FOR FORM 704

Annual Total number Burden hours number of Hourly wage Per-entity Required record or report of respondents per response responses per estimate labor cost respondent

Form 704, Initial Statement ...... 250 15 1 $122 $1,830 Form 704, Annual Update ...... 250 8 1 122 976

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(2) Summary of Comments commitments; the Commission believes approved in writing by the Commission Several commenters seemed not to it is not overly burdensome for the same or its designee. understand which market participants firm to report such similar information One commenter recommended an will be required to file Form 504, as on Form 204 and Form 504, should a annual Form 204 filing requirement, many made comments regarding the market participant ever be required to rather than a monthly filing burden on bona fide hedgers (who are file both forms. requirement. The commenter noted that not required to file Form 504). One The Commission does not believe that because the general size and nature of commenter stated its belief that the a description of a cash market position its business is relatively constant, the information required on Form 504 is is sufficient to allow Commission staff differences between each monthly redundant of information required on to administer its Surveillance program. report would be insignificant. The Form 204 and would overly burden Descriptions are not as exact as reported commenter recommended the CFTC hedgers.1385 Another commenter stated information, and the Commission ‘‘not impose additional costs of monthly that Form 504 creates a burden for believes the information gathered in reporting without a demonstration of hedgers to track their cash business and daily Form 504 reports would be more significant additional regulatory affected contracts and to create systems complete—and thus more beneficial—in benefits.’’ The commenter noted its to file multiple forms. The commenter determining compliance and detecting futures position typically exceeds the noted its belief that end-users/hedgers and deterring manipulation. The proposed position limits, but such should never be subjected to the daily Commission reiterates that Form 504 positions are bona fide hedging filing of reports.1386 Another commenter will only be required from participants positions.1392 Similarly, another requested that the Commission change in natural gas markets who seek to avail commenter suggested that if the the Proposed Rule to permit market themselves of the conditional spot- Commission does not eliminate the participants that rely on the conditional month limit exemption, limiting the forms in favor of the requirements in the limit to file monthly bona fide hedging burden to only those participants.1389 2016 Supplemental Position Limits reports rather than a daily filing of all iii. Time and Place of Filing Reports— Proposal the Commission should cash market positions because Form 504 § 19.01(b) require only an annual notice that would impose significant burdens on details its maximum cash market commercial market participants with As proposed, § 19.01(b)(1) would exposure that justifies an exemption, to require all reports, except those cash market positions, particularly be filed with the exchange.1393 submitted in response to special calls or when compared to purely speculative One commenter suggested that the traders who do not hold cash market on Form 504, Form 604 during the spot- month, or Form 704, to be filed monthly reporting date for Form 204 should be positions.1387 the close of business on the day prior to A commenter suggested that the as of the close of business on the last Friday of the month and not later than the beginning of the spot period and Commission should modify the data that it should be required to filed no requirements for Form 504 in a manner 9 a.m. Eastern Time on the third business day following the last Friday of later than the 15th day of the month similar to the approach used by ICE following a month in which a filer the month.1390 For reports submitted on Futures U.S. for natural gas contracts, exceeded a federal limit to allow the Form 504 and Form 604 during the spot- that is, requiring a description of a market participant sufficient time to month, proposed § 19.01(b)(2) would market participant’s cash-market collect and report its information.1394 require filings to be submitted as of the positions as of a specified date filed in With regards to proposed 1388 close of business for each day the advance of the spot-month. § 19.01(b)(2), one commenter The Commission notes that there is a person exceeds the limit during the spot recommended that the Commission key distinction between Form 504 and period and not later than 9 a.m. Eastern change the proposed next-day reporting Form 204. Form 504 is required of Time on the next business day following of Form 504 for the conditional spot- speculators that are relying upon the the date of the report.1391 Finally, month limit exemption and Form 604 conditional spot-month limit proposed § 19.01(b)(3) would require exemption. Form 204 is required for series ’04 reports to be transmitted using for the pass-through swap offsets during hedgers that exceed position limits. To the format, coding structure, and the spot-month, to a monthly basis, the extent a firm is hedging, there is no electronic data transmission procedures noting market participants need time to requirement to file Form 504. generate and collect data and verify the In the unlikely event that a firm is 1389 As stated in the December 2013 Position accuracy of the reported data. The both hedging and relying upon the Limits Proposal, the Commission will closely commenter further stated that the monitor the reporting requirements associated with Commission did not explain why it conditional spot-month limit conditional spot-month limit exemptions in natural exemption, the firm would be required needs the data on Form 504 or Form 604 gas to determine whether reporting on Form 504 1395 to file both forms at most one day a would be appropriate in the future for other on a next-day basis. month, given the timing of the spot- commodity derivative contracts in response to Another asserted that the daily filing month in natural gas markets (the only market developments or in order to facilitate requirement of Form 504 for surveillance efforts. See December 2013 Position market for which Form 504 will be Limits Proposal, 78 FR at 75744. However, the participants who rely on the conditional required). In that event, however, the Commission is not proposing a conditional spot- spot-month limit exemption ‘‘imposes Commission believes that requiring month limit exemption in any other commodity at significant burdens and substantial costs similar information on both forms this time. on market participants.’’ The 1390 The timeframe for filing Form 704 is included commenter urged a monthly rather than should encourage filing efficiencies as part of proposed § 150.7. See supra for rather than duplicating the burden. For discussion regarding the filing of Form 704. a daily filing of all cash market example, both forms require the filer to 1391 In proposed § 19.01(b)(2), the Commission positions, which the commenter identify fixed price purchase inadvertently failed to include reports filed under claimed is consistent with current § 19.00(a)(1)(ii)(B) (i.e. Form 604 during the spot month) in the same filing timeframe as reports filed 1385 1392 CL–Working Group–59693 at 65–66 under § 19.00(a)(1)(i) (i.e. Form 504). The correct CL–DFA–59621 at 2. 1386 CL–COPE–59662 at 24 filing timeframe was described in multiple places 1393 CL–FIA–60937 at 17. 1387 See, CL–EEI–EPSA–59602 at 10. on the forms published in the Federal Register as 1394 CL–Working Group–60947 at 17–18 1388 CL–FIA–59595 at 37 part of the December 2013 Position Limits Proposal. 1395 CL–FIA–59595 at 35.

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exchange practices.1396 Another deter manipulation during the spot- 9. Sections 150.9, 150.10, and 150.11— commenter agreed, claiming that by month, concurrent information Processes for Recognizing Positions making the reporting requirement regarding the cash positions of a Exempt From Position Limits monthly rather than daily, the speculator holding a conditional spot- The Commission is reproposing the Commission would balance the costs month limit exemption (Form 504) or process for recognizing certain market- and benefits associated with Form 504 the swap contract underlying a large participant positions as bona fide requirements on market participants offsetting position in the physical- hedges (§ 150.9), spreads (§ 150.10), and relying on the conditional spot month delivery contract (Form 604) is limit.1397 anticipatory bona fide hedges (§ 150.11), necessary during the spot-month. so that the positions may be deemed In response to the commenters’ Receiving Forms 504 or 604 before or suggestions that Form 204 be filed exempt from federal and exchange-set after the spot-month period would not position limits. The Commission invited annually, the Commission notes that help the Surveillance program to protect throughout the course of a year, most the public to comment on the the price discovery process of physical- Commission’s consideration of the costs commodities subject to federal position delivery contracts and to ensure that limits under proposed § 150.2 are and benefits of the processes in the 2016 market participants have a qualifying Supplemental Position Limits Proposal, subject to seasonality of prices as well pass-through swap contract position as less predictable imbalances in supply identify and assess any costs and underlying offsetting futures positions benefits not discussed therein, and and demand such that an annual filing held during the spot-month. would not provide the Commission’s provide possible alternative proposals. Surveillance program insight into cash The Commission notes that Form 504 The Commission received comment market trends underlying changes in the is required only for the Natural Gas letters in 2013 that helped the derivative markets. This insight is commodity, which has a 3-day spot Commission re-design the exemption- necessary for the Surveillance program period. Daily reporting on Form 504 recognition processes and then to determine whether price changes in during the spot-month allows the reproposrepropose them in the 2016 derivative markets are caused by Surveillance program to monitor a Supplemental Position Limits Proposal. fundamental factors or manipulative market participant’s cash market The Commission received more behavior. Further, the Commission activity that could impact or benefit comment letters on the June 2016 believes that an annual filing could their derivatives position. Given the proposed exemption-recognition actually be more burdensome for firms, short filing period for natural gas and processes and a number of commenters as an annual filing could lead to special the importance of accurate information remarked on the costs and benefits. calls or requests between filings for during the spot-month, the Commission The general theme of the costs-related additional information in order for the believes that requiring Form 504 to be comments is that the three, exemption- Commission’s Surveillance program to filed daily provides an important benefit recognition processes have overly fulfill its responsibility to detect and that outweighs the potential burdens for burdensome reporting requirements. deter market manipulation. In addition, filers.1399 And the majority of benefits-related the Commission notes that while one As a practical matter, the Commission comments expressed that the exchanges participant’s positions may remain notes that Form 604 is collected during are the best positioned entities to assess constant throughout a year, the same is the spot-month only under particular whether market positions fall within not true for many other market circumstances, i.e., for an offset of a one of the categories of positions participants. The Commission believes cash-settled swap position with a exempt from position limits. There also that varying the filing arrangement physical-delivery referenced contract were a few comments asserting that the depending on a particular market or during the spot-month. Because the Commission underestimated the market participant is impractical and ‘‘five-day rule’’ applies to such quantified costs, such as staff hours would lead to increased burdens for positions, the spot-month filing of Form needed to review exemption market participants due to uncertainty 604 would only occur in contracts applications. The Commission is regarding when each firm with a whose spot-month period is longer than addressing the qualitative and position in a particular commodity 5 days (excluding, for example, energy quantitative comments in the discussion derivative would be required to file. contracts, but including many that follows. Furthermore, the The Commission is retaining the last agricultural commodities). Commission will explain why it Friday of the month as the required believes, after careful consideration of reporting date in order to avoid the comments, that the reproposed experience overseeing the ‘‘dramatic instances of confusion and uncertainty, particularly disruptive trading practices in the natural gas exemption-recognition processes will, for those participants who already file markets’’ warranted enhanced reporting for that among other things, improve Form 204 and thus are accustomed to commodity during the spot month on Form 504. transparency via exchange- and that reporting date. The Commission noted its intent to wait until it Commission-reporting, and improve gained additional experience with limits in other The Commission is reproposing commodities before imposing enhanced reporting regulatory certainty by having § 19.01(b)(2) to require next-day, daily requirements for those commodities. The applicants submit materials for review filing of Forms 504 and 604 in the spot- Commission further noted that it was concerned to exchanges, and by having exchanges month. In response to the commenter, that a trader could hold an extraordinarily large assess whether positions should be position early in the spot month in the physical- the Commission notes that it described delivery contract along with an offsetting short deemed exempt from position limits. its rationale for requiring Forms 504 and position in a cash-settled contract (such as a swap), The baseline against which the 604 daily during the spot-month in the and that such a large position could disrupt the Commission considers the benefits and price discovery function of the core referenced December 2013 Position Limits costs of the exemption-recognition rules Proposal.1398 In order to detect and futures contract. 1399 Should the Commission determine in the is a combination of CEA requirements future to require Form 504 for other commodities, and Commission regulations that are 1396 CL–ICE–59669 at 7. particularly those with longer spot month periods, now in effect. That is, the general 1397 See CL–EEI–EPSA–59602 at 10. the Commission will evaluate the daily filing baseline is the Commission’s part 150 1398 December 2013 Position Limits Proposal, 78 requirement as it applies to such other FR at 75744–45. The Commission noted that its commodities. regulations and current §§ 1.47 and

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1.48.1400 For greater specificity, the Reproposed § 150.9(a)(3) describes in iii. Section 150.9(c)—Non-Enumerated Commission has identified the specific, general terms the type of information Bona Fide Hedging Positions Reporting associated baseline from which costs that exchanges should collect from Requirements and benefits are determined under each applicants. The Commission made a The Commission made a change to discussion of the reproposed exemption material change in reproposed reporting to the rule text in § 150.9(c) rules below. § 150.9(a)(3)(iv) by reducing the amount between the 2016 supplemental a. Section 150.9—Exchange Recognition of cash-market data an applicant must proposal and this Reproposal. While the of Non-Enumerated Bona Fide Hedging submit to an exchange from three years Commission is reproposing rules Positions to one year.1402 In addition, requiring weekly reporting obligations 150.9(a)(3)(ii) and (iv) were both by exchanges for positions recognized as Under Section III.G., above, the changed to provide that the exchange non-enumerated bona fide hedging Commission summarizes the changes it need require the ‘‘information’’ rather positions, the Commission changed reproposed in rule § 150.9, which than ‘‘detailed information.’’ § 150.9(c)(1)(i) and § 150.9(c)(2) for outlines the process that exchanges may purposes of clarification. In regards to employ to recognize certain commodity Reproposed § 150.9(a)(4) obliges § 150.9(c)(1)(i), the Commission is derivative positions as non-enumerated applicants and exchanges to act timely clarifying that the reports required bona fide hedging positions. The in their submissions and notifications, under (c)(1)(i) are those for each reproposed version of § 150.9 closely respectively, and that exchanges retain commodity derivatives position that had follows the regulatory text proposed in revocation authority. Reproposed been recognized that week and for any the June 2016 Supplemental Proposal. § 150.9(a)(5) provides that the position revocation or modification of a Most of the changes are clarifications. will be deemed recognized as an non- previously granted recognition. The There are, however, substantive changes enumerated bona fide hedging position change to § 150.9(c)(2) explains that between the regulatory text proposed in when an exchange recognizes it. exchanges must file monthly June 2016 and the reproposed regulatory Reproposed § 150.9(a)(6) instructs Commission reports only if the text in this Release; they are to the exchanges to determine whether there exchange has determined, in its following subsections: should be a reporting requirement for • The exchange-application non-enumerated bona fide hedging discretion, that applicants should file exchange reports. The Commission also requirements under § 150.9(a)(1)(v) and positions. The Commission changed reproposes § 150.9(c)(1)(ii), which § 150.9(a)(3)(ii), (iii), and (iv); § 150.9(a)(6) to relieve market provides that exchanges post non- • the applicant-to-exchange, reporting participants from an additional filing, enumerated bona fide hedging position requirement under § 150.9(a)(6); and and to give exchanges discretion on • summaries on their Web sites. the exchange-to-Commission, non-enumerated bona fide hedging reporting requirement under position reporting. Reproposed iv. Section 150.9(d) and (e)— § 150.9(c)(2). § 150.9(a)(7) requires an exchange to Commission Review i. Section 150.9(a)—Exchange- publish on their Web site descriptions The Commission made no changes to Administered Non-Enumerated Bona of unique types of derivative positions the rule text in §§ 150.9 (d) or (e) Fide Hedging Position Application recognized as non-enumerated bona fide between the 2016 supplemental Process hedging positions based on novel facts proposal and this Reproposal. The In paragraph (a) of reproposed § 150.9, and circumstances. Commission reproposes rules that states that market participants and exchanges the Commission identifies the process ii. Section 150.9(b)—Non-Enumerated and information required for an must respond to Commission requests, Bona Fide Hedging Position as well as liquidated positions within a exchange to assess whether it should Recordkeeping Requirements grant a market participant’s request that commercially reasonable amount of its derivative position(s) be recognized The Commission made no changes to time if required under § 150.9(d). as an non-enumerated bona fide hedging the rule text in § 150.9(b) between the v. Section 150.9(f)—Delegation to position. In the reproposed version of 2016 supplemental proposal and this Director of the Division of Market § 150.9(a), the Commission clarified a Reproposal. Under reproposed Oversight condition in § 150.9(a)(1)(v).1401 The § 150.9(b), exchanges will be required to The Commission made no changes to clarification is that an exchange offering maintain complete books and records of the rule text in § 150.9(f) between the non-enumerated bona fide hedging all activities relating to the processing 2016 supplemental proposal and this position exemptions must have at least and disposition of non-enumerated bona Reproposal. In the reproposed version of one year of experience and expertise to fide hedging position applications. As § 150.9(f), the Commission delegates administer position limits for a explained in reproposed § 150.9(b)(1) certain review authority for the non- referenced contract rather than through (b)(2), the Commission instructs enumerated bona fide hedging position experience and expertise in the exchanges to retain applicant- recognition-process to the Director of derivative contract. In reproposed submission materials, exchange notes, the Division of Market Oversight. § 150.9(a)(2), the Commission offers and determination documents. guidelines for exchanges to establish Moreover, consistent with current vi. Baseline adaptable application processes by § 1.31, the Commission expects that For the non-enumerated bona fide permitting different processes for these records will be readily accessible hedging position process, the baseline ‘‘novel’’ versus ‘‘substantially similar’’ until the termination, maturity, or for non-enumerated bona fide hedging applications for non-enumerated bona expiration date of the bona fide hedge positions subject to federal position fide hedging position recognitions. recognition and during the first two limits is current § 1.47. For non- years of the subsequent, five-year enumerated bona fide hedging position 1400 See chart listing current regulations, retention period. exemptions to exchange-set position December 2013 Position Limits Proposal, 78 FR 75712, Dec. 12, 2013. limits, the baseline is the current 1401 For a fuller discussion of the change, see 1402 For a fuller discussion of the change, see exchange regulations and practices as Section III.G.3.a.(i)–(iii). Section III.G.3.b.(iii) well as the Commission’s guidance to

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exchanges in current § 150.5(d). The understanding for why certain trading all gross positions for which the current rule provides, generally, that an strategies are pursued. The Commission application is submitted, which may be exchange may recognize bona fide received comments that were consistent a longer time period than the proposed hedging positions in accordance with with this view. one-year period. In administering the general definition of bona fide For example, in response to proposed requests for recognition of non- hedging position in current § 1.3(z)(1). § 150.9(a)(3)(iv)—the rule requiring enumerated bona fide hedging position applicants to submit detailed exemptions under § 1.47, the vii. Benefits and Discussion of information regarding the applicant’s Commission has found a maximum size Comments activity in the cash market during the statement, as required under The Commission continues to believe past three years—there were a few § 1.47(b)(4), to be useful both at the time that the non-enumerated bona fide comments. One commenter noted that of review of the filing (in determining hedging position exemption-recognition exchanges should have the discretion to whether the requested maximum size is process outlined in § 150.9 will produce determine the requisite number of years reasonable in relation to past cash significant benefits. As explained in the of data that should be collected.1404 market activity) and at the time of 2016 supplemental proposal, the Another commenter proposed that review of a filer’s position that exceeds Commission recognizes that there are exchanges have the discretion to collect the level of the position limit (reducing positions that reduce price risks up to one year of data.1405 A different the need for special calls to inquire as incidental to commercial operations. commenter remarked that proposed to the reason a position exceeds a For that reason, among others, such § 150.9(a)(3)(iii) (requiring an applicant position limit level). positions that are shown to be bona fide to identify ‘‘the maximum size of all In general, the non-enumerated bona hedging positions under CEA Section gross positions in derivative contracts to fide hedging position recognition 4a(c) are not subject to position limits. be acquired by the applicant during the process under reproposed § 150.9 And, therefore, it is beneficial for year after the application is submitted’’) should reduce duplicative efforts market participants to have several is unnecessary and unduly because applicants will be saved the options regarding bona fide hedging burdensome.’’ 1406 expense of applying to both an exchange positions. With this Reproposal, market These comments support the for relief from exchange-set position participants will have three ways in Commission’s determination to reduce limits and to the Commission for relief which they may determine that filing burdens. In reproposed from federal limits. The Commission positions are bona fide hedging § 150.9(a)(3)(ii) and (iv), the also seeks to collect relevant positions. First, market participants Commission changed the requirement information. Thus, because commenters could conclude that a commodity that the application process require an reasonably complained about the derivative position comports with the applicant submit ‘‘detailed information’’ application requirement for three years definition of bona fide hedging position in regards to certain information to of cash-market position information, the under § 150.1. Second, market ‘‘information.’’ The change provides the Commission changed the requirement to participants may request a staff exchanges with the discretion to one year.1408 Once commenter stated interpretive letter under § 140.99 or seek determine what level of detail is needed that the three-year data provided ‘‘little exemptive relief under CEA section to make their determination. The practical benefit’’ for assessing whether 4(a)(7). Third, they may file an Commission has also reduced the an non-enumerated bona fide hedging application with an exchange for minimum cash market data requirement position is appropriate.1409 recognition of an non-enumerated bona to one-year from three-years in proposed Another section where commenters fide hedging position under reproposed § 150.9(a)(3)(iv), which will reduce observed redundancy was in proposed § 150.9. market participants burden in § 150.9(a)(6) regarding requirements for While all of the aforementioned comparison to the proposed rule.1407 exchanges to require applicants to file 1410 options are viable, the Commission Furthermore, the Commission continues reports. One commenter stated that continues to believe that reproposed to believe, even with this change to the proposal to require reports ‘‘is § 150.9 outlines a framework similar to § 150.9(a)(3)(iv), that given the particularly problematic due to its existing exchange practices that availability of the exchange’s analysis vagueness in terms of the frequency that recognize non-enumerated bona fide and the Commission’s macro-view of a cash market report must be 1411 hedge exemptions to exchange-set the markets, the Commission will be provided.’’ Another commenter limits. These practices are familiar to well-informed should it become explained further that proposed many market participants. Moreover, a necessary for the Commission to review § 150.9(a)(6) had no ‘‘incremental number of commenters agreed that a determination under reproposed market surveillance or other regulatory exchanges should oversee the benefit’’ because other rules provide for 1403 § 150.9(d), and determine whether a exemption-recognition process. commodity derivative position should applicants to reapply for exemptions The Commission believes that under be recognized as an non-enumerated reproposed § 150.9, the Commission 1408 For a fuller discussion, see Section III.G.1.b. bona fide hedging position. The will be able to leverage exchanges’ See also the following comment letters: CL–AGA– Commission also has clarified in existing practices and expertise in 60943 at p. 6 (requirement is vague and restrictive); reproposed § 150.9(a)(3)(iii) that the CL–CCI–60935 at p. 7 (one year of data suggested); administering exemptions. Thus, filing must include the maximum size of CL–EEI–EPSA–60925 at p. 10 (requirement is reproposed § 150.9 should reduce the ‘‘unduly burdensome and unnecessary’’); CL– need to invent new procedures to NCGA/NGSA–60919 at p. 10 (same); CL–COPE– 1404 CL–AGA–60943 at 6. 60932 at p. 9 (criticized the three-year data recognize non-enumerated bona fide 1405 CL–NCGA/NGSA–60919 at 10. requirement); CL–Commercial Energy Working hedging positions. As explained in the 1406 CL–Commercial Energy Working Group– Group–60932 at p. 11 (the requirement is 2016 supplemental proposal, exchanges 60932 at 10. unnecessary). also may be familiar with the applicant- 1407 It should be noted that this one-year cash- 1409 CL–Commercial Energy Working Group– market participant’s needs and practices market history is less than the three-year cash- 60932 at 11. market history required under reproposed 1410 See also CL–Commercial Energy Working so there will be an advanced § 150.7(d)(1)(iv) for initial statements regarding Group–60932 at 12 (the same conclusion applies to enumerated anticipatory bona fide hedging proposed 105.10(a)(6), and § 150.11(a)(5)). 1403 See, e.g., CL–CME–60926; CL–Nodal–60948. positions. 1411 CL–AGA–60943 at 6.

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annually, real-time market surveillance, ensuring that a market participant’s ‘‘break out the costs for submitting an the exchanges’ abilities to make one-off activities conform to the exchange’s initial application and filing subsequent requests for information, and the terms of recognition and to the Act. updates every time information in the Commission’s special call authority.1412 While there are great benefits, in application changes.’’ 1415 Another There also was a commenter who stated reproposed § 150.9(c)(1)(i) and commenter stated that the 2016 that ‘‘neither exchanges nor the § 150.9(c)(2), the Commission made Supplemental Proposal has ‘‘highly Commission are likely to have resources clarifications that, as noted above, eased unrealistic estimates of the time and available to meaningfully review such the burden on exchanges and cost that will be required to implement reports’’ as those under § 150.9(a)(6), as applicants. Asreproposed, and maintain compliance well as those reports under § 150.9(c)(1)(i) clarifies that the reports programs.’’ 1416 § 105.10(a)(6).1413 As explained above, required are only for those for each One exchange commenter declared the Commission changed the regulatory commodity derivatives position that had that the Commission ‘‘significantly text so that exchanges may decide been recognized that week and for any underestimates the number of whether non-enumerated bona fide revocation or modification of a exemptions that the Exchange will be hedging position applicants should previously granted recognition. In required to review,’’ and offered provide additional reports to exchanges. addition, reproposed § 150.9(c)(2) defers different numbers.1417 For example, the As a result of this change, market to the exchanges by clarifying that they exchange commenter stated that it participants may have less reporting have the discretion to determine reviewed as many as 500 exemption requirements but that assessment will whether a market participant must requests annually as opposed to the 285 depend on whether the exchanges— report under reproposed § 150.9(a)(6); exemption requests that the based on their experiences and expertise however, if an exchange requires reports Commission estimated.1418 In addition, in position limits in general and in non- of a market participant, that exchange the exchange commenter stated that the enumerated bona fide hedging positions must forward any such report to the Commission underestimated the specifically—decide to grant a non- Commission under reproposed number of staff-review hours, and that enumerated bona fide hedging position § 150.9(c)(2). This gives the exchanges the number should be two additional exemption without establishing a flexibility and defers to their expertise. hours for a total of seven hours per reporting requirement. The web-posting of summaries also will exemption review.1419 The exchange As expressed in the 2016 benefit market participants in general by commenter also provided different supplemental proposal, the creation and providing transparency and open access hours for different exercises: (a) Seven retention of records under § 150.9 may to the non-enumerated bona fide hours for preparing quarterly Web site be used as reference material in the hedging position recognition process. In postings; (b) six hours for preparation future for similar bona fide hedge addition, reporting and posting gives for weekly reports; and (c) six hours for recognition requests either by relevant market participants seeking recognition preparing monthly reports.1420 The exchanges or the Commission. This will of a non-enumerated bona fide hedging exchange commenter also explained be beneficial because retained records position an understanding of the types that it believed it would need to hire a will help the Commission to ensure that of commodity derivative positions an seasoned, senior level employee to help an exchange’s determinations are exchange may recognize as an non- comply with the proposed rules and internally consistent and consistent enumerated bona fide hedging position, three regulatory analysts.1421 Finally, with the Act and the Commission’s thereby providing greater administrative the exchange commenter noted that the regulations thereunder. There is also the and legal certainty. Commission failed to consider start-up additional benefit that records will be viii. Costs and Discussion of Comments costs associated with complying with 1422 accessible if they are needed for a In the June 2016 Supplemental reporting requirements. potential enforcement action. Proposal, the Commission explained In response, the Commission is The Commission continues to believe that to a large extent, exchanges and persuaded by commenters, and is that the exchange-to-Commission market participants have incurred adjusting its estimated staff-review reporting under § 150.9(c) will have already many of the compliance costs hours and costs that it believes surveillance benefits. The reports will associated with the proposed exchanges and market participants will provide the Commission with notice exemptions. The Commission, however, incur to comply with exemption- that an applicant may take a commodity detailed a number of the readily- recognition processes in this derivative position that the exchange quantifiable costs for exchanges and Reproposal. These estimates are has recognized as an non-enumerated market participants associated with reflected in the tables below. bona fide hedging position, and also processing non-enumerated bona fide Even though the Commission has will show the applicant’s underlying hedging position recognitions, as well as outlined three different exemption- cash commodity and expected spreads and anticipatory bona fide application processes in this release, the maximum size in the cash markets. hedges. The Commission invited public Commission believes that aspects of the Reports will facilitate the tracking of comment on the estimated financial processes will become standardized and non-enumerated bona fide hedging numbers, which were detailed in tables. the data collected for one exemption positions recognized by the exchanges, Several commenters remarked on the will be the same as data collected for and will assist the Commission in costs the Commission quantitatively another exemption. As a result, it is estimated in the June 2016 likely that over time some costs will 1412 CL–CCI–60935 at 7–8 (the same argument Supplemental Proposal. One group applies to proposed §§ 150.10(a)(6) and 1415 Id. 150.11(a)(5)). See also CL–Commercial Energy commenter stated that the Commission 1416 CL–ISDA–60931 at 5. Working Group–60932 at 12 (the same argument underestimated costs to market 1417 CL–ICE–60929 at p 17. applies to proposed § 105.10(a)(6), and participants.1414 The same commenter 1418 § 150.11(a)(5). See also CL–FIA–60937 at 16 Id. (criticism of requirement to produce enhanced explained that the Commission failed to 1419 Id. information regarding cash market activity and size 1420 Id. of cash market exposure. 1414 CL–Commercial Energy Working Group– 1421 Id. 1413 CL–ISDA–60931 at 10. 60932 at 13. 1422 CL–ICE–60929 at 17.

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decrease. Some commenters, however, The Commission acknowledges that engage in risk mitigation.1428 The expressed different views. One there may also be other costs to market commenter also added that market commenter stressed that the participants if the Commission disagrees participants might restrict trading to Commission’s proposed exemption with an exchange’s decision to some exchanges and concentrate market processes triggered greater oversight, recognize an non-enumerated bona fide risk on a single exchange.1429 increased scope of monitoring, and need hedging position under reproposed The Commission recognizes that costs for additional staff; whereas a § 150.9 or under an independent may result if the Commission disagrees standardized application might reduce Commission request or review under 1423 with an exchange’s disposition of a non- market-entry barriers. The same reproposed § 150.9(d) or (e). These costs enumerated bona fide hedging position will include time and effort spent by commenter remarked that increased application under reproposed § 150.9 compliance costs and capital market participants associated with a (or other exempt position under investments might lead to decreased Commission review, which the §§ 150.10 or 150.11). The Commission, market participation and liquidity.1424 Commission addresses in the tables however, believes such situations will The commenter then suggested the below. There also is the possibility that be limited based on the history of development of a standardized hedge market participants will lose amounts exchanges approving similar exemption application to minimize that the Commission can neither predict applications for exemptions to monitoring and compliance costs.1425 nor quantify if it became necessary to exchange-set limits. Moreover, as Finally, the same commenter asserted unwind trades or reduce positions were explained in the 2016 supplemental that a standardized application might the Commission to conclude that an proposal, exchanges have incentives to drive efficiency and minimize exchange’s disposition of an non- regulatory risk exposure via innovation. enumerated bona fide hedging position protect market participants from the The Commission continues to believe application is inconsistent with section harms that position limits are intended that there are costs that are not easily 4a(c) of the Act and the general to prevent, such as manipulation, quantified. These are qualitative costs definition of bona fide hedging position corners, and squeezes. In addition, an that are related to the specific attributes in § 150.1. exchange that recognizes a market and needs of individual market A few commenters remarked on this participant’s non-enumerated bona fide participants that are hedging. Given that concern and pointed to the term that the hedging position (or other exempt qualitative costs are highly specific, the Commission would provide applicants a position) that enables the participant to Commission continues to believe that ‘‘commercially reasonable amount of exceed position limits must then deter market participants will choose to incur time’’ to unwind positions that the the same market participant from § 150.9-related costs only if doing so is Commission determined did not fall trading in a manner that causes adverse less costly than complying with position within the categories of exempted price impacts on the market; such limits and not executing the desired positions under § 150.9(d)(4), adverse price impacts may cause hedge position. Thus, by providing 150.10(d)(4), and 150.11(d)(3).1426 One financial harm to market participants, or market participants with an option to commenter explained that if a market even reputational risk or economic apply for relief from speculative participant is required to unwind a disadvantage to the exchange.1430 position limits under reproposed position in the middle of its green-lit ix. Costs To Create or Amend Exchange § 150.9, the Commission continues to hedging activity, the unwind could Rules for Non-Enumerated Bona Fide believe it is offering market participants cause ‘‘significant harm to the Hedging Position Application Programs a way to ease overall compliance costs participant,’’ and the ‘‘rapid because it is reasonable to assume that unanticipated liquidation of positions The Commission believes that entities will seek recognition of non- could result in market disruption’’.1427 exchanges electing to process non- enumerated bona fide hedging positions The commenter also highlighted that the enumerated bona fide hedging position only if the outcome of doing so justifies less-than-24-hours, commercially- applications under reproposed the costs. This is because the reasonable period compels market § 150.9(a) are likely to already Commission appreciates that the costs participants to seek pre-approval of administer similar processes and will of not trading might be substantially positions by the Commission or not need to file with the Commission higher. The Commission also believes amendments to existing exchange rules that market participants will consider 1426 CL–MGEX–90936 at 8; CL–EEI–EPSA–60925 rather than create new rules. The at 10 (one business to unwind is ‘‘unreasonable’’ in how the costs of applying for energy products); CL–NCGA/NGSA–60919 at 13 exchanges will only have to file recognition of an non-enumerated bona (concerned about Commission’s suggestion that amendments once. As discussed in the fide hedging position under reproposed positions can be unwound in less than one business Paperwork Reduction Act discussion § 150.9 will compare to the costs of day); CL–NGFA–60941 at 3; CL–NCFC–60930 at 5 below, the Commission forecasts an (dislikes the one-day unwind period for dairy requesting a staff interpretive letter market). average annual filing cost of $1,220 per under § 140.99, or seeking exemptive 1427 CL–MGEX–90936 at 8. See also CL–NCGA/ exchange that files new rules or relief under CEA section 4a(a)(7). NGSA–60919 at 13 (‘‘Unwinding a position quickly modifications per final process that an Likewise, exchanges must consider in an illiquid market, such as in many non-spot exchange adopts. Under the Paperwork month contracts, could create a significant market qualitative costs in their decision to disruption.’’); CL–NGFA–60941 at 3 (commented Reduction Act, these costs are reported create an non-enumerated bona fide that a one-day liquidation ‘‘in thinly traded as an average annual cost over a five- hedging position application process or contracts without broad liquidity’’ could be year period. revise an existing program. extremely disruptive); CL–NCFC–60930 at 5 (‘‘Requiring the same time period and the same 1428 CL–MGEX–90936 at 8. process to unwind the dairy transactions could lead 1429 1423 CL–EDF–60944 at 2. to a market disruption, disorderly trading and Id. 1424 Id. regulatory-influence and unnecessary price 1430 See 2016 Supplemental Position Limits 1425 Id. volatility.’’). Proposal, 81 FR at 38488–89.

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TABLE IV–A–6—BURDEN ESTIMATES FOR FILING NEW OR AMENDED RULES

Annual Total Burden hours number of Hourly wage Per-entity Required record or report number of per response responses per estimate labor cost respondents respondent

New or amended rule filings under part 40 per § 150.9(a)(1), (a)(6) ...... 6 5 2 $122.00 $1,220

x. Costs To Review Applications Under determine whether the application have processes for the review and Reproposed Processes meets the standards established by the disposition of such applications An exchange that elects to process Commission. Exchanges also will need currently in place. The Commission has applications also will incur costs related to expend effort in notifying applicants adjusted the costs in Table IV–A–7 to the review and disposition of such of the exchanges’ disposition of based on information submitted by applications pursuant to reproposed recognition or exemption requests. The commenters. Thus, the Commission has § 150.9(a). For example, exchanges will Commission believes that exchanges forecast that the average annual cost for need to expend resources on reviewing electing to process non-enumerated each exchange to process applications and analyzing the facts and bona fide hedging position applications for non-enumerated bona fide hedging circumstances of each application to under reproposed § 150.9(a) are likely to position recognitions is $277,500.

TABLE IV–A–7—BURDEN ESTIMATES FOR REVIEWING APPLICATIONS

Annual Total number Burden hours number of Hourly wage Per-entity Required record or report of respondents per response responses per estimate labor cost respondent

Collection, review, and disposition of applica- tion per § 150.9(a) ...... 6 7 325 $122.00 $277,550

will incur costs to publish on their Web $25,620 for the web-posting of non- xi. Costs To Post Summaries for Non- sites summaries of the unique types of enumerated bona fide hedging position Enumerated Bona Fide Hedging Position non-enumerated bona fide hedging summaries. Recognitions position positions. The Commission has Exchanges that elect to process the estimated an average annual cost of applications under reproposed § 150.9 TABLE IV–A–8—BURDEN ESTIMATES FOR POSTING SUMMARIES

Annual Total number Burden hours number of Hourly wage Per-entity Required record or report of respondents per response responses per estimate labor cost respondent

Summaries Posted Online per § 150.9(a) ...... 6 7 30 $122.00 $25,620

xii. Costs To Market Participants Who determine, and the Commission to holds, or controls a derivative position Will Seek Non-Enumerated Bona Fide verify, whether it is appropriate to that has been recognized as an non- Hedging Position Relief From Position recognize such position as an non- enumerated bona fide hedging position. Limits enumerated bona fide hedging position. The Commission estimates that each Under reproposed § 150.9(a)(3), These applications will be updated market participant seeking relief from market participants must submit annually. Reproposed § 150.9(a)(6) will position limits under reproposed § 150.9 applications that provide sufficient require applicants to file a report with will likely incur approximately $976 information to allow the exchanges to the exchanges when an applicant owns, annually in application costs.1431

TABLE IV–A–9—BURDEN ESTIMATES FOR MARKET PARTICIPANTS TO APPLY

Annual Total number Burden hours number of Hourly wage Per-entity Required record or report of respondents per response responses per estimate labor cost respondent

§ 150.9(a)(3) Application ...... 325 4 2 $122.00 $976

1431 Assuming that exchanges administer exemptions to exchange-set limits, these costs are incrementally higher.

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xiii. Costs for Non-Enumerated Bona pursuant to other Commission fide hedging positions. The Commission Fide Hedging Position Recordkeeping regulations, including § 1.31. The estimates that each exchange electing to The Commission believes that Commission, however, also believes that administer the reproposed non- exchanges that currently process the reproposed rules may confer enumerated bona fide hedging position applications for spread exemptions and additional recordkeeping obligations on process will likely incur approximately bona fide hedging positions maintain exchanges that elect to process $3,660 annually to retain records for records of such applications as required applications for non-enumerated bona each process.

TABLE IV–A–10—BURDEN ESTIMATES FOR RECORDKEEPING

Annual Total number Burden hours number of Hourly wage Per-entity Required record or report of respondents per response responses per estimate labor cost respondent

§ 150.9(b) Recordkeeping ...... 6 30 1 $122.00 $3,660

xiv. Costs for Weekly and Monthly Non- types of reports. The Commission is information required of the reports in Enumerated Bona Fide Hedging Position aware that five exchanges currently proposed rule § 150.9(c), but the Reporting to the Commission submit reports each month, on a frequency of such required reports will voluntary basis, which provide increase under the reproposed rule. The The Commission anticipates that information regarding exchange- Commission estimates an average cost of exchanges that elect to process non- processed exemptions of all types. The approximately $38,064 per exchange for enumerated bona fide hedging position Commission believes that the content of weekly reports under reproposed applications will be required to file two such reports is similar to the § 150.9(c).

TABLE IV–A–11—BURDEN ESTIMATES FOR SUBMITTING WEEKLY REPORTS

Annual Total number Burden hours number of Hourly wage Per-entity Required record or report of respondents per response responses per estimate labor cost respondent

§ 150.9(c)(1) Weekly Report ...... 6 6 52 $122.00 $38,064

For the monthly report, the forward to the Commission notices Commission estimates an average cost of Commission anticipates a minor cost for received from applicants who own, approximately $8,784 per exchange for exchanges because the reproposed rules hold, or control the positions that have monthly reports under reproposed will require exchanges essentially to been recognized or exempted. The § 150.9(c).

TABLE IV–A–12—BURDEN ESTIMATES FOR SUBMITTING MONTHLY REPORTS

Annual Total number Burden hours number of Hourly wage Per-entity Required record or report of respondents per response responses per estimate labor cost respondent

§ 150.9(c)(2) Monthly Report ...... 6 6 12 $122.00 $8,784

xv. Costs Related to Subsequent changes for purposes of clarification, As an initial step under reproposed Monitoring substantive changes were made in § 150.10(a)(1), exchanges that subsections s of paragraphs (a) and (c) Exchanges will have additional voluntarily elect to process spread of § 150.10: §§ 150.10(a)(1)(ii); surveillance costs and duties with exemption applications are required to respect to non-enumerated bona fide 150.10(a)(3)(ii) and (iii); 150.10(a)(6); notify the Commission of their intention hedging position that the Commission 150.10(c)(2); The Commission did not to do so by filing new rules or rule believes will be integrated with their make changes to paragraphs (b), (d), (e), amendments with the Commission existing self-regulatory organization or (f) of reproposed § 150.10. under part 40 of the Commission’s regulations. The Commission clarified surveillance activities as an exchange. i. Section 150.10(a)—Exchange- Administered Spread Exemption reproposed § 150.10(a)(1)(ii) to explain b. Section 150.10—Spread Exemptions that an exchange may offer spread Since the Commission issued the June In paragraph (a) of reproposed exemptions if the contract, which is 2016 Supplemental Proposal, the § 150.10, the Commission identifies the either a component of the spread or a Commission made very few changes to process and information required for an referenced contract that is related to the the provisions authorizing exchanges to exchange to grant a market participant’s spread, in a particular commodity is exempt spread positions from federal request that its derivative position(s) be actively traded. The Commission position limits under reproposed recognized as an exempt spread reduced the burden of proposed § 150.10. In addition to non-substantive position. § 150.10(a)(1)(ii) (that would require an

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exchange to have applied position limits reproposed rule exchanges will have likely alleviate compliance burdens to for at least one year), by providing in weekly reporting obligations for spread the status quo. Exchanges will be able reproposed § 150.10(a)(1) that an exemptions. The change in subsection to build on established procedures and exchange must have at least one year of (c)(2) clarifies that exchanges have the infrastructure. As stated earlier, many experience and expertise administering discretion to determine whether exchanges already have rules in place to position limits for such referenced applicants should have monthly reports process and grant applications for contract. As explained above, the that must ultimately be sent to the spread exemptions from exchange-set exchange may gain such experience and Commission. These reporting position limits pursuant to part 38 of the expertise, for example, through obligations are similar to the reporting Commission’s regulations (in particular, employing experienced staff. obligations of exchanges for positions current § 38.300 and § 38.301) and In reproposed § 150.10(a)(2), the recognized as non-enumerated bona fide current § 150.5. In addition, exchanges Commission identifies four types of hedging positions. may be able to use the same staff and spreads that an exchange may approve. electronic resources that will be used for iv. Baseline Reproposed § 150.10(a)(3) describes in reproposed § 150.9 and § 150.11. Market general terms the type of information For the reproposed spread exemption participants also may benefit from that exchanges should collect from process for positions subject to federal spread-exemption reviews by exchanges applicants. In reproposed limits, the baseline is CEA section that are familiar with the commercial § 150.10(a)(3)(ii), similar to the change 4a(a)(1). In that statutory section, the needs and practices of market made in § 150.9(a)(3), the Commission Commission is authorized to recognize participants seeking exemptions. Market changed the requirement that the certain spread positions. That statutory participants also might gain legal and application process require an applicant provision is currently implemented in a regulatory clarity and consistency that submit ‘‘detailed information’’ in limited calendar-month spread will help in developing trading regards to certain information to exemption in § 150.3(a)(3). For strategies. Moreover, the Commission ‘‘information.’’ The change provides the exchange-set position limits, the has reduced burdens by making changes exchanges with the discretion to baseline for spreads is the guidance in to proposed §§ 150.10(a)(1) and (3). In determine what level of detail is needed current § 150.5(a), which provides the reproposed § 150.10(a)(1), the to make their determination. The generally that exchanges may recognize Commission changed the rule so that Commission clarified the reproposed exemptions for positions that are exchanges may employ experienced requirements to explain that applicant normally known to the trade as spreads. staff to satisfy the requirement that an must report its maximum size of all v. Benefits exchange have at least one year of gross positions in the commodity experience and expertise in related to the spread-exemption CEA section 4a(a)(1) authorizes the administering position limits for application. Reproposed § 150.10(a)(4) Commission to exempt certain spreads referenced contracts related to spread obliges applicants and exchanges to act from speculative position limits. In exemptions. In reproposed timely in their submissions and exercising this authority, the § 150.10(a)(3)(ii), the Commission gave notifications, respectively, and require Commission recognizes that spreads can exchanges greater discretion in exchanges to retain revocation have considerable benefits for market determining the level of detail needed authority. Reproposed § 150.10(a)(6) participants and markets. The from spread-exemption applicants. was modified and authorizes exchanges Commission now proposes a spread Reproposed § 150.10 will authorize to determine whether enhanced exemption framework that utilizes exchanges to approve spread reporting is necessary. Reproposed existing exchanges—resources and exemptions that permit market § 150.10(a)(7) requires exchanges to exchanges—expertise so that fair access participants to continue to enhance publish on its Web site a summary and liquidity are promoted at the same liquidity, rather than being restricted by describing the type of spread position time market manipulations, squeezes, a position limit. For example, by and explaining why it was exempted. corners, and any other conduct that will allowing speculators to execute disrupt markets are deterred and intermarket and intramarket spreads in ii. Section 150.10(b)—Spread prevented. Building on existing accordance with reproposed Exemption Recordkeeping exchange processes preserves the ability § 150.3(a)(1)(iv) and § 150.10, Requirements of the Commission and exchanges to speculators will be able to hold a greater The Commission made no changes to monitor markets and trading strategies amount of open interest in underlying the regulatory text in § 150.10(b) that while reducing burdens on exchanges contract(s), and, therefore, bona fide was proposed in June 2016. Under the that will administer the process, and hedgers may benefit from any increase reproposed rule, exchanges must market participants, who will utilize the in market liquidity. Spread exemptions maintain complete books and records of process. might lead to better price continuity and all activities relating to the processing In addition to these benefits, there are price discovery if market participants and disposition of spread exemption other benefits related to reproposed who seek to provide liquidity (for applications under reproposed § 150.10 that will inure to markets and example, through entry of resting orders § 150.10(b). This is similar to the record market participant. Yet, there is for spread trades between different retention obligations of exchanges for difficulty in quantifying these benefits contracts) receive a spread exemption positions recognized as non-enumerated because benefits are dependent on the and, thus, will not otherwise be bona fide hedging positionss. characteristics, such as operational size constrained by a position limit. and needs, of the market participants Here are two examples of positions iii. Section 150.10(c)—Spread that will seek spread exemptions, and that could benefit from the spread Exemption Reporting Requirements the markets in which the participants exemption in reproposed § 150.10: The Commission amended trade. Accordingly, the Commission • Reverse crush spread in soybeans § 150.10(c)(2) and kept the rest of considers the qualitative benefits of on the CBOT subject to an intermarket regulatory text in § 150.10(c) the same as reproposed § 150.10. spread exemption. In the case where the text proposed in the 2016 For both exchanges and market soybeans are processed into two supplemental proposal. Under the participants, reproposed § 150.10 will different products, soybean meal and

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soybean oil, the crush spread is the intermarket spread exemptions. Under spreads.’’ 1432 The exchange commenter difference between the combined value this example, the speculator is accepting criticized the proposed intramarket of the products and the value of basis risk between hard wheat and soft spread exemption application as soybeans. There are two actors in this wheat, reducing the risk of a position on possibly being ‘‘inefficient and time scenario: The speculator and the one exchange by establishing a position consuming thereby hindering the soybean processor. The spread’s value on another exchange, and potentially exchange from effectively supporting its approximates the profit margin from providing liquidity to a hedger. Further, bona fide hedgers.’’ 1433 And the actually crushing (or mashing) soybeans spread transactions may aid in price exchange commenter suggested that the into meal and oil. The soybean discovery regarding the relative protein Commission grant the exchanges the processor may want to lock in the content for each of the hard and soft ‘‘flexibility and discretion to establish’’ spread value as part of its hedging wheat contracts. application processes.1434 The exchange commenter further explained that strategy, establishing a long position in Finally, the Commission is allowing exchanges are best positioned to assess soybean futures and short positions in exchanges to recognize and exempt liquidity for bona fide hedgers and soybean oil futures and soybean meal spreads during the five-day spot month. perform the price discovery function for futures, as substitutes for the processor’s There may be considerable benefits that granting exemptions, which, in turn expected cash market transactions evolve from spreads exempted during protects market participants and the (purchase of the anticipated inputs for the spot month, in particular. Besides public.1435 processing and sale of the anticipated enhancing the opportunity for market The Commission recognizes that products). On the other side of the participants to use strategies involving spread-exemption application processor’s crush spread, a speculator spread trades into the spot month, this requirements and reporting takes a short position in soybean futures relief may improve price discovery in requirements are detailed. Moreover, against long positions in soybean meal the spot month for market participants. these costs will be borne by exchanges futures and soybean oil futures. The And, as in the intermarket wheat and market participants. But, the soybean processor may be able to lock example above, the spread relief in the Commission continues to believe that in a higher crush spread, because of spot month may better link prices the qualitative costs will be reasonable liquidity provided by such a speculator between two markets, e.g., the price of in view of the benefits to exchanges and who may need to rely upon a spread MGEX wheat futures and the price of market participants of being able to use exemption. It is important to understand CBOT wheat futures. Put another way, spread exemptions. Furthermore, the that the speculator is accepting basis the prices in two different but related benefits of having an application risk represented by the crush spread, markets for substitute goods may be process and reporting regime will create and the speculator is providing liquidity more highly correlated, which benefits cost-savings to the public in the form of to the soybean processor. The crush market participants with a price enhanced regulatory oversight. spread positions may result in greater exposure to the underlying protein correlation between the futures prices of The Commission, however, did content in wheat generally, rather than respond to comments about proposed soybeans and those of soybean oil and that of a particular commodity. soybean meal, which means that prices § 150.10(a)(3)(iii), which requires an for all three products may move up or vi. Costs and Discussion of Comments applicant to identify ‘‘the maximum size down together in a closer manner. of all gross positions in derivative As discussed in the 2016 • Wheat spread subject to intermarket contracts to be acquired by the applicant supplemental proposal, the Commission spread exemptions. There are two actors during the year after the application is has been able to quantify some costs, in this scenario: The speculator and the submitted.’’ The comment was that the but other costs related to reproposed wheat farmer. In this example, a farmer requirement was too broad and almost § 150.10 are not easily quantifiable. The growing hard wheat will like to reduce impossible because of the inability to Commission continues to believe that the price risk of her crop by shorting predict trading activity over the next some costs are more dependent on 1436 MGEX wheat futures. There, however, year. Another commenter described individual markets and market may be no hedger, such as a mill, that the proposed rule as ‘‘unnecessary and participants seeking a spread 1437 is immediately available to trade at a unduly burdensome.’’ The exemption, and, thus, are more readily desirable price for the farmer. There Commission, as discussed above considered qualitatively. In general, the may be a speculator willing to offer regrading reproposed § 150.9(a)(3)(iii), Commission believes that reproposed liquidity to the hedger; the speculator has clarified in reproposed § 150.10 should provide exchanges and may wish to reduce the risk of an § 150.10(a)(3)(iii) that the filing must market participants greater regulatory outright long position in MGEX wheat include the maximum size of all gross and administrative certainty and that futures through establishing a short positions for which the application is costs will be small relative to the position in CBOT wheat futures (soft submitted, which may be a longer time benefits of having an additional trading wheat). Such a speculator, who period that the proposed one-year tool under reproposed § 150.10. otherwise will have been constrained by period. As noted above, in a position limit at MGEX or CBOT, may The Commission comes to this administering requests for recognition of seek exemptions from MGEX and CBOT conclusion even though the most non-enumerated bona fide hedging for an intermarket spread, that is, for a common complaint about the spread- position exemptions under § 1.47, the long position in MGEX wheat futures exemption process is that it requires Commission has found a maximum size and a short position in CBOT wheat excessive reporting. One exchange statement, as required under futures of the same maturity. As a result commenter focused specifically on the § 1.47(b)(4), to be useful both at the time of the exchanges granting an intermarket spread-exemption-recognition process, and stated that it is ‘‘overly prescriptive 1432 CL–Nodal–60948 at 2. spread exemption to such a speculator, 1433 Id. who otherwise may be constrained by as to the information that must be 1434 provided by the applicant, especially Id. at 3. limits, the farmer might be able to 1435 Id. at 4. transact at a higher price for hard wheat when the exchange may have superior 1436 CL–ISDA–60931 at 10. than might have existed absent the information regarding intramarket 1437 CL–Working Group–60947 at 10.

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of review of the filing and at the time spread exemptions, respectively. Yet, as on commenters noting that the of review of a filer’s position that commenters have asserted, the Commission estimated staff hours, as exceeds the level of the position limit. Commission might have underestimated well as the number of exemption Finally, like the discussion about the costs. In deference to the comments, requests, were low. quantified costs related to reproposed the Commission has adjusted its Note: The activities priced in Tables § 150.9, exchanges and market estimates of quantified costs that will A2 to G2 are similar to the activities participants may have already many of arise from reproposed § 150.10 in Tables the financial outlays for administering IV–A–13 through IV–A–19, below. The discussed in the section affiliated with the application process and applying for Commission’s new estimates are based Tables A1 through G1, above.

TABLE IV–A–13—BURDEN ESTIMATES FILING NEW OR AMENDED RULES

Annual Total Burden number of Hourly wage Per-entity Required record or report number of hours per responses per estimate labor cost respondents response respondent

New or amended rule filings under part 40 per § 150.10(a)(1), (a)(6) ...... 6 5 2 $122.00 $1,220

TABLE IV–A–14—BURDEN ESTIMATES FOR REVIEWING APPLICATIONS

Annual Total Burden number of Hourly wage Per-entity Required record or report number of hours per responses per estimate labor cost respondents response respondent

Collection, review, and disposition of applica- tion per § 150.10(a) ...... 6 7 85 $122.00 $72,590

TABLE IV–A–15—BURDEN ESTIMATES FOR POSTING SUMMARIES

Annual Total Burden number of Hourly wage Per-entity Required record or report number of hours per responses per estimate labor cost respondents response respondent

Summaries Posted Online per § 150.10(a) ..... 6 7 10 $122.00 $8,540

Regarding the following Table D2, exempt spread positions under note that reports are also required to be § 150.10(a)(5). sent to the Commission in the case of

TABLE IV–A–16—BURDEN ESTIMATES FOR MARKET PARTICIPANTS TO APPLY

Annual Total Burden number of Hourly wage Per-entity Required record or report number of hours per responses per estimate labor cost respondents response respondent

§ 150.10(a)(3) Spread Exemption Application 85 3 2 $122.00 $732

TABLE IV–A–17—BURDEN ESTIMATES FOR RECORDKEEPING

Annual Total Burden number of Hourly wage Per-entity Required record or report number of hours per responses per estimate labor cost respondents response respondent

§ 150.10(b) Recordkeeping ...... 6 30 1 $122.00 $3,660

TABLE IV–A–18—BURDEN ESTIMATES FOR SUBMITTING WEEKLY REPORTS

Annual Total Burden number of Hourly wage Per-entity Required record or report number of hours per responses per estimate labor cost respondents response respondent

§ 150.10(c)(1) Weekly Report ...... 6 6 52 $122.00 $38,064

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TABLE IV–A–19—BURDEN ESTIMATES FOR SUBMITTING MONTHLY REPORTS

Annual Total Burden number of Hourly wage Per-entity Required record or report number of hours per responses per estimate labor cost respondents response respondent

§ 150.10(c)(2) Monthly Report ...... 6 6 12 $122.00 $8,784

Other costs to exchanges will include bona fide hedge. In addition, exchanges participants with potentially a more those related to surveillance. For must retain authority to revoke expeditious recognition process than the example, exchanges that elect to grant recognitions. reproposed § 150.11(a)(4) Commission proposal for a 10-day spread exemptions will have to adapt states that once an enumerated Commission recognition process under and develop procedures to determine anticipatory bona fide hedging position reproposed § 150.7. The benefit of whether a particular spread exemption has been recognized by an exchange, the prompter recognitions, though, is not furthers the goals of CEA section position will be deemed to be readily quantifiable, and, in most 4a(a)(3)(B) as well as monitor whether recognized by the Commission. circumstances, is subject to the applicant speculators are, in fact, Reproposed § 150.11(a)(5) discusses characteristics and needs of markets as providing liquidity to other market reports that must be filed by an well as market participants. So it is participants. There will likely also be applicant holding an enumerated challenging to quantify the benefits that costs related to disagreements between anticipatory bona fide hedging position, will likely be associated with the Commission and exchanges over as required under reproposed § 150.7(e). reproposed § 150.11. exchanges’ disposition of a spread The Commission clarified those For example, exchanges will be able applications, or costs from a reporting requirements, which were also to use existing resources and knowledge Commission request or review under proposed in § 150.11(a)(3)(i), and in the administration and assessment of reproposed § 150.11(d) or (e). As eliminated language that was confusing enumerated anticipatory bona fide expressed in the 2016 supplemental to commenters regarding updating and hedging positions. The Commission and proposal, these costs are not easily maintaining the accuracy of such exchanges have evaluated these types of quantified because they depend on the reports. Reproposed 150.11(a)(6) positions for years (as discussed in the specifics of the Commission’s request or explains that exchanges may choose to December 2013 Position Limits review. seek Commission review of an Proposal). Utilizing this experience and application and the Commission has ten familiarity will likely produce such c. Section 150.11—Enumerated days in which to respond. benefits as prompt but reasoned Anticipatory Bona Fide Hedges decision making and streamlined ii. Section 150.11(b)—Enumerated Between the 2016 Supplemental procedures. In addition, reproposed Anticipatory Bona Fide Hedge § 150.11 permits exchanges to act in less Proposal and now, the Commission is Recordkeeping Requirements making two changes in the following than ten days—a timeframe that will be regulatory text: § 150.11(a)(1)(v) and The Commission did not make any less than the Commission’s process § 150.11(a)(6). changes to § 150.11(b) as proposed in under current § 1.48, or under the 2016 supplemental proposal. reproposed § 150.7.1438 This could i. Section 150.11(a)—Exchange- Exchanges must maintain complete potentially enable commercial market Administered Enumerated Anticipatory books and records of all activities participants to pursue trading strategies Bona Fide Hedge Process relating to the processing and in a more timely fashion to advance Under reproposed § 150.11(a)(1), disposition of anticipatory hedging their commercial and hedging needs to exchanges that voluntarily elect to applications under reproposed reduce risk. process enumerated anticipatory bona- § 150.11(b). Reproposed § 150.11, similar to reproposed § 150.9 and § 150.10, also fide hedge applications are required to iii. Section 150.11(c)—Enumerated will provide the benefit of enhanced notify the Commission of their intention Anticipatory Bona Fide Hedge record-retention and reporting of to do so by filing new rules or rule Reporting Requirements amendments with the Commission positions recognized as enumerated The Commission did not make any under part 40 of the Commission’s anticipatory bona fide hedging changes to § 150.11(c) as proposed in regulations. In reproposed positions. As previously discussed, the 2016 supplemental proposal. records retained for specified periods § 150.11(a)(1)(v), the Commission Exchanges will have weekly reporting clarified that exchanges that elect to will enable exchanges to develop obligations under reproposed consistent practices and afford the offer a § 150.11 exemption, must have at § 150.11(c). least one year of experience and Commission accessible information for expertise in the referenced contract, iv. Baseline review, surveillance, and enforcement rather than the derivative contract. In efforts. Likewise, weekly reporting The baseline is the same as it was in under § 150.11 will facilitate the reproposed § 150.11(a)(2), the the December 2013 Position Limits Commission identifies certain types of tracking of positions by the Proposal: The current filing process Commission. information necessary for the detailed in current § 1.48. application, including information vi. Costs and Discussion of Comments v. Benefits required under reproposed § 150.7(d). In The § 150.11-related comments in reproposed § 150.11(a)(3), the There are significant benefits that will response to the 2016 supplement Commission states that applications likely accrue should § 150.11 be proposal’s request for comments must be updated annually and that the finalized. Recognizing anticipatory exchanges have ten days in which to positions as bona fide hedging positions 1438 See discussion in December 2013 Position recognize an enumerated anticipatory under § 150.11 will provide market Limits Proposal, 78 FR 75745–46, Dec. 12, 2013.

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centered on the claim that the qualitative in nature and hinge on enumerated anticipatory bona fide exemption process and reporting specific market and participant hedging position application is not requirements are burdensome. attributes. Other costs could arise from appropriate or is inconsistent with the Nevertheless, as explained above, the reproposed § 150.11 if the Commission Act. This concern was raised by Commission made a few changes to disagrees with an exchange’s commenters as discussed above. The clarify application and reporting disposition of an enumerated Commission believes that such requirements. anticipatory bona fide hedging position disagreements will be rare based on the The costs for reproposed § 150.11 are application, or costs from a Commission Commission’s past experience and similar to the costs for reproposed request or review under reproposed review of exchanges’ efforts. §§ 150.9 and 150.10, and have been § 150.11(d). These costs will include Nevertheless, the Commission notes that quantified are in Tables A3 through G3. time and effort spent by market assessing whether a position is for the As mentioned earlier, the Commission participants associated with a has increased the number of staff hours Commission review. In addition, market reduction of risk arising from and exemption requests based on participants will lose amounts that the anticipatory needs or excessive commenters stating that the Commission can neither predict nor speculation is complicated. Commission underestimated costs. quantify if it became necessary to Note: For a general description of Other costs associated with reproposed unwind trades or reduce positions were reproposed rules identified in the following § 150.11, like those for reproposed the Commission to conclude that an Tables IV–A–20 to IV–A–24, see discussion §§ 150.9 and 150.10, are more exchange’s disposition of an above.

TABLE IV–A–20—BURDEN ESTIMATES FOR FILING NEW OR AMENDED RULES

Annual Total Burden number of Hourly wage Per-entity Required record or report number of hours per responses per estimate labor cost respondents response respondent

New or amended rule filings under part 40 per § 150.11(a)(1), (a)(5)...... 6 5 2 $122.00 $1,220

TABLE IV–A–21—BURDEN ESTIMATES FOR REVIEWING APPLICATIONS

Annual Total Burden number of Hourly wage Per-entity Required record or report number of hours per responses per estimate labor cost respondents response respondent

Collection, review, and disposition of application per § 150.11(a) ...... 6 7 90 $122.00 $76,860

TABLE IV–A–22—BURDEN ESTIMATES FOR MARKET PARTICIPANTS TO APPLY

Annual Total Burden number of Hourly wage Per-entity Required record or report number of hours per responses per estimate labor cost respondents response respondent

§ 150.11(a)(2) Application on Form 704 ...... 90 3 2 $122.00 $732

TABLE IV–A–23—BURDEN ESTIMATES FOR RECORDKEEPING

Annual Total Burden number of Hourly wage Per-entity Required record or report number of hours per responses per estimate labor cost respondents response respondent

§ 150.11(b) Recordkeeping ...... 6 30 1 $122.00 $3,660

TABLE IV–A–24—BURDEN ESTIMATES FOR SUBMITTING WEEKLY REPORTS

Annual Total Burden number of Hourly wage Per-entity Required record or report number of hours per responses per estimate labor cost respondents response respondent

§ 150.11(c) Weekly Report ...... 6 6 52 $122.00 $38,064

Exchanges will have additional Commission believes will be integrated organization surveillance activities as an surveillance costs and duties that the with their existing self-regulatory exchange.

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10. Summary of CEA Section 15(a) important protections of the federal way that trading directly in the futures Factors position limit regime while maintaining contract does. Thus, market efficiency CEA section 15(a) requires the the hedging function of the futures or might be harmed. swaps markets. Commission to consider the costs and c. Price Discovery benefits of its actions in light of five The Commission believes the Reduced liquidity may have a factors. exemption provisions of these reproposed rules will have a negligible negative impact on price discovery. In a. Protection of Market Participants and effect on the protection afforded market the absence of position limits, market the Public participants and the public, as participants might elect to trade less as The imposition of position limits is compared to the level of protection that a result of a perception that the market intended to protect the markets and is provided by the exemptions policy pricing is unfair as a consequence of market participants from manipulation reflected currently in § 150.3. Moreover, what they perceive is the exercise of too and excessive speculation. Position by expanding current § 150.3 to allow much market power by a larger limits may serve as a prophylactic exchanges to review applications for speculator. On the other hand, liquidity measure that reduces market volatility exemptions from federal limits, the may also be harmed by a speculator due to a participant otherwise engaging Commission will be able to rely on the being restricted from additional trading in large trades that induce price exchanges’ experience and expertise in by a position limit. The Commission has impacts. Such price impacts may occur monitoring their own contract markets, set the levels of position limits at high when a party who is holding large open with Commission supervision, to help levels, to avoid harming liquidity that interest is not willing or is unable to ensure that any exemptions do not may be provided by speculators that meet a call for additional margin. In detract from the protection of market would establish large positions, while such an instance, a substantial amount participants and the public. Because restricting speculators from establishing of open interest may have to be exchanges have experience and extraordinarily large positions. The liquidated in a short time interval. In expertise, including as part of their SRO Commission believes that the addition, price impacts could also occur functions, the Commission believes they recognition and exemption processes from a large trader establishing or will be able to carefully design will foster liquidity and potentially liquidating large positions. exemptions under which position limits improve price discovery by making it There are additional benefits to will continue to protect market easier for market participants to have imposing position limits in the spot participants while meeting needs for their bona fide hedging exemptions and month. Spot month position limits are bona fide hedging. Moreover, exchanges spread exemptions recognized, designed to deter and prevent corners have strong incentives—such as however. and squeezes as well as promote a more maintaining credibility of their markets Position limits may serve as a orderly liquidation process at through protecting against the harms of prophylactic measure that reduces expiration.1439 Spot month position excessive speculation and market volatility due to a participant limits may also make it more difficult to manipulation—to appropriately otherwise engaging in large trades that mark the close of a futures contract to administer exemptions. induce price impacts which interrupt price discovery. Spot month position possibly benefit other contracts that b. Efficiency, Competitiveness, and limits make it more difficult to mark the settle on the closing futures price. Financial Integrity of Futures Markets close of a futures contract to possibly Marking the close harms markets by There is a potential market integrity spoiling convergence between futures benefit other contracts that settle on the issue with excess speculation. People closing futures price. Marking the close prices and spot prices at expiration. may not be willing to participate in a Convergence is desirable, because many harms markets by spoiling convergence futures market if they perceive that between futures prices and spot prices market participants want to hedge the there is a participant with an unusually spot price of a commodity at expiration. at expiration and damaging price large speculative position exerting what discovery. In addition, since many other contracts, they believe is unreasonable market including cash market contracts, settle power. A lack of participation may harm d. Sound Risk Management Practices based on the futures price at expiration, liquidity, and consequently, may harm The Commission believes that traders the mispricing might affect a larger market efficiency. knowing their positions and ensuring amount of the commodity than the On the other hand, traders who find that they do not exceed a position limit deliverable supply of the futures position limits binding may have to or exempted level is a sound risk contract. trade in substitute instruments—such as management practice. Under the The CEA provides that position limits futures contracts that are similar but not exemption processes, market do not apply to positions shown to be the same as the core referenced futures participants must explain and document bona fide hedging positions, as defined contract, forward contracts, trade the methods behind their hedging or by the Commission, or spread positions, options, or futures on a foreign board of spreading strategies to exchanges, and as recognized by the Commission. trade—in order to meet their demand for the Commission or exchanges would Exemptions from federal position limits speculative instruments. These traders have to evaluate them. As a result, the for bona fide hedging positions of may also decide to not trade beyond the Commission believes that the evaluation qualified market participants help federal speculative position limit. processes should help market ensure the hedging utility of the futures Trading in substitute instruments may participants, exchanges, the markets while protecting market be less effective that trading in Commission, and the public to participants from excess speculation. referenced contracts and, thus, may understand better the risk management The Commission believes that the raise the transaction costs for such techniques and objectives of various reproposed rules will preserve the traders. In these circumstances, futures market participants. prices might not fully reflect all the 1439 Most futures contracts do not ultimately e. Other Public Interest Considerations result in physical delivery. Instead, most positions speculative demand to hold the futures are eliminated by a trader taking an offsetting contract, because substitute instruments The Commission has not identified position in the contract. may not fully influence prices the same any other public interest considerations.

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The Commission declined to treat the contract requirement, by hiring staff contracts and believes the publication goal of fostering innovation and growth with appropriate experience. However, requirement under § 150.10(a)(7) would for the betterment of markets as an in the absence of any comments have an anti-competitive effect.1446 additional public interest consideration, supporting a contrary view, the In response, the Commission notes because these objectives are amorphous Commission does not perceive that an that it has the responsibility to review and likely difficult to accomplish with ability to process applications for non- the record of the exchange in granting a position limit. Instead, exchanges have enumerated bona fide hedging spread exemptions. For example, a proper incentives and a variety of tools, positions, spread exemptions and/or spread trader, who is a speculator, may including financial innovation, with anticipatory bona fide hedging positions amass a large position in a referenced which to increase liquidity on their is a necessary function for a DCM or contract and a corresponding large exchanges. SEF to compete effectively as a trading position in a non-referenced contract. facility. In the event an incumbent DCM Such a speculator has an incentive to 9. CEA Section 15(b) Considerations declines to process a trader’s request for mark the close of the core referenced Section 15(b) of the CEA requires the hedging recognition or a spread futures contract to benefit their large Commission to consider the public exemption,1442 the trader may seek the position in a referenced contract. The interest to be protected by the antitrust recognition or exemption directly from Commission is concerned that it has an laws and to endeavor to take the least the Commission in order to trade on an adequate record to review timely a grant anticompetitive means of achieving the entrant DCM or SEF. Accordingly, the of a spread exemption, which would objectives, policies and purposes of the Commission does not view the allow a speculator to build a large CEA, before promulgating a regulation reproposed threshold experience position in a referenced contract, under the CEA or issuing certain orders. requirements as establishing a barrier to exempt from position limits. Regarding The Commission believes that the rules entry or competitive restraint likely to the publication requirement, the and guidance in this notice are facilitate anticompetitive effects in any Commission reiterates that the consistent with the public interest relevant antitrust market for contract publication requirement is only for a protected by the antitrust laws. trading.1443 summary describing the type of spread The Commission acknowledges that, The Commission invited comment on position and why it was exempted and, with respect to exchange qualifications any considerations related to the public thus, does not require details of all to recognize or grant non-enumerated interest to be protected by the antitrust components of spread trading within bona fide hedging positions, spread laws and potential anticompetitive low liquidity non-referenced contract exemptions, and anticipatory bona fide effects of the proposal, as well as data markets to be revealed; the Commission hedging position exemptions for federal or other information to support such notes it would not expect such a position limit purposes, the threshold considerations. One exchange summary would reveal identifying experience requirements that it is commenter responded that it was information for any trader, but, rather, reproposing will advantage certain concerned that the overly prescriptive would reveal, at a minimum, the more-established incumbent DCMs intramarket spread exemption referenced contract and a generic (‘‘incumbent DCMs’’) over smaller application process might diminish description of the type of non- DCMs seeking to expand or future 1444 spread trading on all exchanges. referenced contract that is a component entrant DCMs (collectively ‘‘entrant More specifically, the exchange of the spread. In addition, the DCMs’’) or SEFs.1440 Specifically, commenter stated that it believed it Commission notes that spread trades incumbent DCMs—based on their past would be adversely affected by the may qualify as bona fide hedging track records of: (1) Listing actively proposed spread exemption rule traded referenced contracts or actively positions, obviating the need for a because it is an exchange that offers a spread exemption. Finally, the traded components of spreads; and (2) 1445 certain type of spread trading. Commission notes an exchange may setting and administering exchange-set Moreover, the exchange commenter position limits applicable to those petition the Commission for an relies on intramarket spread trading to exemption under CEA section 4a(a)(7) contracts for at least a year, or having enhance liquidity on less actively traded otherwise hired staff with such position or the Commission staff for a no-action letter under § 140.99. limit experience gained elsewhere—will 1442 The Commission recognizes that in certain be immediately eligible to submit rules circumstances it might be in an exchange’s B. Paperwork Reduction Act to the Commission under part 40 of the economic interest to deny processing a particular trader’s application for hedge recognition or a 1. Overview Commission’s regulations to process spread exemption. For example, this might occur in trader applications for recognition of a circumstance in which a trader has reached the The Paperwork Reduction Act non-enumerated bona fide hedging exchange-set limit and the exchange determines (‘‘PRA’’), 44 U.S.C. 3501 et seq., imposes 1441 that liquidity is insufficient to maintain a fair and certain requirements on Federal positions, spread exemptions, and orderly contract market if the trader’s position anticipatory bona fide hedges; in increases. agencies, including the Commission, in contrast, entrant DCMs and SEFs will be 1443 See, e.g., Brown Shoe Co. v. U.S., 370 U.S. connection with their conducting or foreclosed from doing so until such time 294, 324–25 (1962) (‘‘The outer boundaries of a sponsoring any collection of product market are determined by the reasonable information as defined by the PRA. An as they have met the eligibility criteria, interchangeability of use or the cross-elasticity of although the Commission has clarified demand between the product itself and the agency may not conduct or sponsor, and in the reproposed rule that any substitutes for it’’); U.S. v. E.I. du Pont de Nemours a person is not required to respond to, exchange may meet the experience & Co., 353 U.S. 586, 593 (1957)(‘‘Determination of a collection of information unless it the relevant market is a necessary predicate to displays a currently valid control requirement, but not the actively traded finding a violation’’); Rebel Oil v. Atl. Richfield Co., 51 F. 3d 1421, 1434 (9th Cir. 1995) (‘‘A ‘market’ is number issued by the Office of 1440 See reproposed §§ 150.9(a)(1), 150.10(a)(1), any grouping of sales whose sellers, if unified by Management and Budget (‘‘OMB’’). This and 150.11(a)(1). a monopolist or a hypothetical cartel will have reproposed rulemaking would result in 1441 In the case of qualifications to exempt certain market power in dealing with any group of buyers,’’ the collection of information within the spread positions, the contract may be either a quoting Phillip Areeda & Herbert Hovenkamp, referenced contract that is a component of the Antitrust Law ¶518.1b, at 534 (Supp. 1993)). meaning of the PRA, as discussed spread or another contract that is a component of 1444 CL–Nodal–60948 at 4. the spread. See reproposed § 150.10(a)(1)(i). 1445 Id. at 4. 1446 Id. at 4.

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below. Specifically, if adopted, it would requirements for market participants 2. Methodology and Assumptions amend previously-approved collection and exchanges. It is not possible at this time to of information requirements. Therefore, In June 2016, the Commission accurately determine the number of the Commission is submitting this published in the Federal Register a respondents that will be affected by the reproposal to OMB for review in supplemental notice of proposed these rules. Many of the regulations that accordance with 44 U.S.C. 3507(d) and rulemaking to update and revise the impose PRA burdens are exemptions 5 CFR 1320.11. The information regulations proposed in the December that a market participant may elect to collection requirements reproposed 2013 Position Limits Proposal. The take advantage of, meaning that without herein will be an amendment to the Commission proposed to allow a intimate knowledge of the day-to-day previously-approved collection participant to exceed speculative business decisions of all its market associated with OMB control number position limits to the extent that the participants, the Commission could not 3038–0013.1447 If the reproposed changes to participant’s position is recognized as a know which participants, or how many, regulations are adopted, responses to non-enumerated bona fide hedging may elect to obtain such an exemption. this collection of information would be position, an exempt spread position, or Further, the Commission is unsure of mandatory. Several of the reporting an enumerated anticipatory bona fide how many participants not currently in requirements would be mandatory in hedge, by a DCM or SEF. The the market may be required to or may order to obtain exemptive relief, and, Commission proposed to require new or elect to incur the estimated burdens in therefore, would be mandatory under amended rule filings under part 40 of its the future. the PRA to the extent a market regulations that comply with certain The provisions under § 150.9–11 participant elects to seek such relief. conditions set forth in the revisions to permits designated contract markets and The Commission will protect any part 150. Further, the proposed changes swap execution facilities to elect to proprietary information received in stated that in order to seek exemptive process applications for recognition of accordance with the Freedom of relief market participants would need to non-enumerated bona fide hedging Information Act and 17 CFR part 145, file applications with a DCM or SEF that positions, exempt spread positions, or titled ‘‘Commission Records and met criteria established under the enumerated anticipatory bona fide Information.’’ In addition, the proposal. hedges; accordingly the Commission Commission emphasizes that section In this Reproposal, the Commission is does not know which, or how many, 8(a)(1) of the Act strictly prohibits the reproposing its changes to parts 1, 15, designated contract markets and swap Commission, unless specifically 17, 19, 37, 38, 140, 150, and 151 of the execution facilities may elect to offer authorized by the Act, from making Commission’s regulations. Specifically, such recognition processes, or which, or public ‘‘data and information that with regard to the PRA, the Commission how many market participants may would separately disclose the business is reproposing the following: New and submit applications. The Commission is transactions or market positions of any amended series ’04 forms under part 19 unsure of how many designated contract person and trade secrets or names of and § 150.7; submission of deliverable markets, swap execution facilities, and 1448 customers.’’ The Commission also is supply estimates under § 150.2(a)(3); market participants not currently active required to protect certain information recordkeeping obligations under in the market may elect to incur the contained in a government system of § 150.3(g); revised special call authority estimated burdens in the future. records pursuant to the Privacy Act of under § 150.3(h); exchange set limit Finally, many of the regulations 1449 1974. exemption application requirements proposed herein are applying to In December 2013, the Commission under § 150.5(a)(2); and requirements participants in swaps markets for the proposed a number of modifications to for recognition of non-enumerated bona first time, and the Commission’s lack of its speculative position limits regime. fide hedging positions, certain spread experience enforcing speculative Under that proposal, market positions, and enumerated anticipatory position limits for such markets and for participants with positions in a bona fide hedging positions under many of the participants therein hinders ‘‘referenced contract,’’ as defined in § 150.9, § 150.10, and § 150.11, its ability to determine with precision § 150.1, would be subject to the position respectively. the number of affected entities. These limit framework established in parts 19 limitations notwithstanding, the and 150 of the Commission’s The Commission proposes Commission has made best-effort regulations. Proposed changes to part 19 reorganizing the information found in estimations regarding the likely number would prescribe new forms and the OMB Collection Numbers associated of affected entities for the purposes of reporting requirements for persons with this rule. In particular, the calculating burdens under the PRA. claiming exemptions to speculative Commission proposes that the burdens position limits and update reporting related to series ’04 forms be moved 3. Information Provided by Reporting obligations and required information on from OMB Collection #3038–0009 to Entities/Persons existing forms. In proposed part 150, the OMB Collection #3038–0013. This To determine the number of entities Commission changed reporting change is non-substantive but allows for who may file series ’04 forms with the requirements for DCMs listing a core all information collections related to Commission and/or exemption referenced futures contract as well as for exemptions from speculative position applications with DCMs that elect to traders who wish to apply for an limits to be housed in one collection, process such applications, the exemption from exchange-set position making it simpler for market Commission used its proprietary data limits. The Commission also proposed participants to know where to find the collected from market participants as to update and change recordkeeping relevant PRA burdens. If adopted, OMB well as information provided by DCMs Collection #3038–0009 would hold regarding the number of exemptions 1447 Part 19—Reports by persons holding bona collections of information related to fide hedge positions—currently covered by OMB processed by exchange surveillance parts 15, 17, and 21 while OMB 1450 control number 3038–0009, is being proposed for programs each year. As discussed inclusion in OMB control number 3038–0013. Collection #3038–0013 would hold 1448 7 U.S.C. 12(a)(1). collections of information related to 1450 The Commission also described this 1449 5 U.S.C. 552a. parts 19 and 150. information in the 2016 Supplemental Position

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supra,1451 the Commission analyzed Commission anticipates that compliance exceeds a federal limit in a referenced data covering a two-year period of July with the provisions would require the contract. Form 204 would inform the 1, 2014–June 30, 2016 to determine how work of an information technology Commission of the trader’s cash many participants would have been professional; a compliance manager; an positions underlying those commodity over 60, 80, 100, 125, 150, 175, 200, and accounting professional; and an derivative contracts for purposes of 500 percent of the limit levels in each associate general counsel. Thus, the claiming bona fide hedging exemptions. of the 25 commodities subject to limits wage rate is a weighted national average The Commission estimates that under § 150.2 had such levels been in of salary for professionals with the approximately 425 traders would be 1452 effect during the covered period. following titles (and their relative required to file Form 204 once a month The Commission determined that in that weight); ‘‘programmer (average of senior (12 times per year) each. At an period, 409 unique entities would have and non-senior)’’ (15% weight), ‘‘senior estimated 3 labor hours to complete and exceeded any of the limits in any accountant’’ (15%) ‘‘compliance file each Form 204 report for a total commodities; the Commission is using a manager’’ (30%), and ‘‘assistant/ annual burden to industry of 15,300 figure of 425 entities to account for any associate general counsel’’ (40%). All labor hours, the Form 204 reporting additional entities which may be monetary estimates below have been requirement would cost industry required to comply with limits. The rounded to the dollar. $1,866,600 in labor costs. Commission assumes that only entities A commenter estimated that for an As proposed, Form 304 would be over such levels—or close to being over exchange to promulgate the regulations required to be filed by merchants and such levels—will file the necessary required of them under this part such an dealers in cotton and contains forms and applications. The exchange would need a senior level information on the quantity of call Commission’s analysis does not account regulation employee and three cotton bought or sold on a weekly basis. for persons holding hedging or other regulatory analysts.1453 When the Form 304 would be required in order for exemptions from position limits, and Commission estimated a per-hour wage the Commission to produce its weekly the figures provided by DCMs account rate using these professions, however, cotton ‘‘on call’’ report.1456 for exemptions filed for all the average hourly wage rate was lower commodities, not just the 25 subject to than the $122 estimated above.1454 In The Commission estimates that limits under § 150.2. Accordingly, the this reproposal, the Commission is approximately 200 traders would be Commission believes the estimates of therefore estimating all burdens with required to make a Form 304 the number of 425 respondents used the higher wage rate. The Commission submission for call cotton 52 times per herein are highly conservative. notes that the wage rate used for PRA year each. At 1 hour to complete each To determine the number of calculations is an average rate, and that submission for a total annual burden to exchanges who would be affected by the some entities may face a higher or lower industry of 10,400 labor hours, the Form reproposal, the Commission analyzed wage rate based on individual 304 reporting requirement would how many exchanges currently list circumstances. impose upon industry $1,268,800 in actively traded contracts in the labor costs. commodities for which federal position 4. Collections of Information (ii) Form 504 limits will be set, as the proposed rules (a) Recordkeeping and Reporting in § 150.5 as well as in §§ 150.9, 150.10, Obligations for Market Participants As proposed, § 19.01(a)(1) would and 150.11 will all apply to exchanges require persons claiming a conditional (i) Forms 204 and 304 that list commodity derivative contracts spot month limit exemption pursuant to that may be subject federal limits under Previously, the Commission estimated § 150.3(c) to file Form 504. Unlike other § 150.2(d). the combined annual labor hours for series ’04 forms, Form 504 would apply The Commission’s estimates both Form 204 and Form 304 to be 1,350 only to commodity derivative contracts concerning wage rates are based on 2013 hours, which amounted to a total labor in natural gas markets.1457 A Form 504 salary information for the securities cost to industry of $68,850 per filing would show the composition of industry compiled by the Securities annum.1455 Below, the Commission has the natural gas cash position underlying Industry and Financial Markets estimated the costs for each form a referenced contract that is held or Association (‘‘SIFMA’’). The separately. controlled for which the exemption is Commission is using a figure of $122 As proposed, Form 204 would be claimed. The Commission notes that per hour, which is derived from a required to be filed when a trader this form should be submitted daily for weighted average of salaries across accumulates a net long or short each day of the 3-day spot period for the different professions from the SIFMA commodity derivative position that core referenced futures contract in Report on Management & Professional natural gas. The Commission estimates Earnings in the Securities Industry 1453 CL–ICE–60929 at 17. that approximately 40 traders would 2013, modified to account for an 1800- 1454 The Commission computed the alternative claim a conditional spot month limit 12 wage rate as a weighted national average of salary hour work-year, adjusted to account for times per year, and each corresponding the cumulative rate of inflation since for professionals with the following titles (and their relative weight); ‘‘compliance manager’’ (25 percent submission would take 15 labor hours to 2013. This figure was then multiplied weight), 3 ‘‘compliance examiner, intermediate’’ (15 complete and file. Therefore, the by 1.33 to account for benefits, and percent each) and ‘‘assistant/associate general Commission estimates that the proposed counsel’’ (30 percent). After adjusting for inflation, further by 1.5 to account for overhead Form 504 reporting requirement would and administrative expenses. The overhead, and benefits, the wage rate was $107. These titles appeared to best represent the result in approximately 7,200 total commenter’s suggestion but without additional annual labor hours for an additional Limits Proposal. See 2016 Supplemental Position input from the commenter it is impossible to industry-wide labor cost of $878,400. Limits Proposal, 81 FR 38500. ascertain the commenter’s original intent regarding 1451 See supra discussion of number of traders titles of necessary staffing. over the limit levels. 1455 This estimate was based upon an average 1456 The Commission’s Weekly Cotton On-Call 1452 The Commission also used this analysis to wage rate of $51 per hour. Adjusted to the hourly Report can be found here: http://www.cftc.gov/ determine the number of entities subject to the wage rate used for purposes of this PRA estimate, MarketReports/CottonOnCall/index.htm. Commission’s recordkeeping and special call rules the previous total labor cost would have been 1457 See supra, discussion of conditional spot in § 150.3. $202,500. month limit exemption (§ 150.3(c)).

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The Commission requests comment on (v) Recordkeeping and Other Provisions allow for a position that could be its estimates regarding new Form 504. Any person claiming an exemption liquidated in an orderly fashion. As noted supra, the Commission (iii) Form 604 from federal position limits under part 150 would be required to keep and understands that requiring traders to Persons claiming a pass-through swap maintain books and records concerning apply for exemptive relief comports exemption pursuant to § 150.3(a) would all details of their related cash, forward, with existing DCM practice; thus, the Commission anticipates that the be required to file proposed Form 604 futures, options and swap positions and proposed codification of this showing various data (depending on transactions to serve as a reasonable requirement would have the practical basis to demonstrate reduction of risk whether the offset is for non-referenced effect of incrementally increasing, rather on each day that the exemption was contract swaps or spot-month swaps) than creating, the burden of applying for claimed. These records would be including, at a minimum, the such exemptive relief. The Commission required to be comprehensive, in that underlying commodity or commodity estimates that approximately 425 traders they must cover anticipated reference price, the applicable clearing would claim exemptions from DCM or requirements, production and royalties, identifiers, the notional quantity, the SEF-established speculative position contracts for services, cash commodity gross long or short position in terms of limits each year, with each trader on products and by-products, pass-through futures-equivalents in the core average making 1 application to the referenced futures contracts, and the swaps, cross-commodity hedges, and DCM or SEF each year. Each submission gross long or short positions in the more. is estimated to take 2 hours to complete referenced contract for the offsetting risk The Commission estimates that and file, meaning that these traders position. For proposed Form 604 reports approximately 425 traders would claim collectively would incur a total burden an average of 50 exemptions each per filed for positions held outside of the of 850 labor hours per year for an year that fall within the scope of the spot month, the Commission estimates industry-wide additional labor cost of recordkeeping requirements of proposed that approximately 250 traders would $39,976. § 150.3(g). At approximately one hour Under proposed §§ 150.9(a)(3), claim a pass-through swap exemption per exemption claimed to keep and an average of 10 times per year each. At 150.10(a)(3), and 150.11(a)(2), maintain the required books and designated contract markets and swap approximately 30 labor hours to records, the Commission estimates that complete each corresponding execution facilities that elect to process industry would incur a total of 20,000 applications to establish an application submission for a total burden to traders annual labor hours amounting to of 75,000 annual labor hours, process that elicits sufficient $2,592,500 in additional labor costs. information to allow the designated compliance with the proposed Form 604 In addition, proposed § 150.3(h) contract market or swap execution filing requirements industry-wide would provide that upon call from the facility to determine, and the would impose an additional $9,150,000 Commission any person claiming an Commission to verify, whether it is in labor costs. exemption from speculative position appropriate to recognize a commodity (iv) Form 704 limits under proposed § 150.3 must derivative position as an non- provide to the Commission any enumerated bona fide hedging position, Traders claiming anticipatory bona information as specified in the call. It is exempt spread position or enumerated fide hedging exemptions would be difficult to determine in advance of any anticipatory bona fide hedge, required to file proposed Form 704 for such call who may be required to respectively. Pursuant to proposed the initial statement/application submit information under proposed §§ 150.9(a)(4)(i), 150.10(a)(4), and pursuant to § 150.7(d), along with an § 150.3(h), how that information may be 150.11(a)(3), an applicant would be annual update on the same form. submitted, or how many labor hours it required to update an application at Because annual update requires mostly may take to prepare and submit such least on an annual basis. Further, DCMs the same information as the initial information. However, for the purposes and SEFs have authority under statement, allowing market participants of the PRA, the Commission has made §§ 150.9(a)(6), 150.10(a)(6), and to update only fields that have changed estimates regarding the potential 150.11(a)(5) to require that any such since the initial statement was filed burden. applicant file a report with the The Commission estimates that rather than having to update the entire designated contract market or swap approximately 425 traders would be form, the Commission anticipates the execution facility pertaining to the use eligible to be called upon for additional annual update requiring about half the of any exemption that has been granted. information under proposed § 150.3(h) The Commission anticipates that time to complete. The Commission each year. At approximately two hours market participants would be mostly estimates that approximately 250 traders per exemption claimed to keep and familiar with the non-enumerated bona would claim anticipatory exemptions by maintain the required books and fide hedging position application filing an initial statement approximately records, the Commission estimates that provided by exchanges that currently once per year. At an estimated 15 labor industry would incur a total of 850 process such applications, and thus hours to complete and file an initial annual labor hours amounting to believes that the burden for applying to statement on Form 704 for a total annual $103,700 in additional labor costs. an exchange would be minimal. burden to traders of 3,750 labor hours, Information included in the application the anticipatory exemption filing (vi) Exchange-Set Limits and Exchange- would be required to be sufficient to requirement would cost industry an Recognized Exemptions allow the exchange to determine, and additional $457,500 in labor costs. The Traders who wish to avail themselves the Commission to verify, whether the annual update to proposed Form 704 is of any exemption from a DCM or SEF’s position meets the requirements of CEA estimated to be required of the same 250 speculative position limit rules would section 4a(c), but specific data fields are traders once a year, at an estimated 8 need to submit an application to the left to the exchanges to determine. The hours to complete and file, for an DCM or SEF explaining how the Commission notes that there would be industry-wide burden of 2,000 hours exemption would be in accord with a slight additional burden for market and $244,000 in labor costs. sound commercial practices and would participants to submit the notice

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regarding the use of any exemption obtain recognition that certain positions positions, or enumerated anticipatory granted, should the DCM or SEF require are enumerated anticipatory bona fide bona fide hedging positions would be such a report. hedges and that each application would required to file new rules or rule The Commission estimates that 325 require approximately 3 burden hours to amendments pursuant to Part 40 of this entities would file an average of 2 complete and file. Thus, the chapter, establishing or amending its applications each year to obtain Commission estimates an average per application process for recognition of recognition of certain positions as non- entity burden of 6 labor hours and an the above-referenced positions, enumerated bona fide hedges and that industry-wide burden of 510 labor hours consistent with the requirements of each application, including any usage annually. The Commission estimates an proposed §§ 150.9, 150.10, and 150.11. report that may be required by the DCM average cost of approximately $732 per The Commission estimates that, at or SEF, would require approximately 4 entity or $65,880 for the industry as a most, 6 entities would file new rules or burden hours to complete and file. whole for applications under proposed rule amendments pursuant to Part 40 to Thus, the Commission estimates an § 150.11(a)(2). The Commission invites elect to process non-enumerated bona average per entity burden of 8 labor comments on any these proposed fide hedging, spread, or enumerated hours and an industry-wide burden of estimates. anticipatory hedging applications. The 2,600 labor hours annually. The Commission determined this estimate Commission estimates an average cost of (b) Recordkeeping and Reporting by analyzing how many exchanges approximately $976 per entity or Obligations for DCMs and SEFs currently list actively traded contracts $317,200 for the industry as a whole for (i) Submission of Estimates of for the 28 commodities for which applications under § 150.9(a)(3). Deliverable Supply federal position limits would be set, The Commission anticipates that because proposed §§ 150.9(a), 150.10(a), market participants would be mostly For purposes of assisting the and 150.11(a) would require a familiar with the spread exemption Commission in resetting spot-month referenced contract to be listed by and application provided by exchanges that limits, proposed § 150.2(e)(3)(ii) would actively traded on any exchange that currently process such applications, and require DCMs to supply the Commission elects to process applications for thus believes that the burden for with an estimated spot-month recognition of positions in such applying to an exchange would be deliverable supply for each core referenced contract. The Commission minimal. Information included in the referenced futures contract listed. The anticipates that the exchanges that application is required to be sufficient estimate must include documentation as would elect to process applications to allow the exchange to determine, and to the methodology used in deriving the under these sections are likely to have the Commission to verify, whether the estimate, including a description and processes for recognizing such position fulfills the objectives of CEA any statistical data employed. The exemptions currently, and so would section 4a(a)(3)(B), but specific data Commission estimates that the need to file amendments to existing fields are left to the exchanges to submission would require a labor exchange rules rather than adopt new determine. The Commission notes that burden of approximately 20 hours per rules. Thus, the Commission there would be a slight additional estimate. Thus, a DCM that submits one approximates an average per entity burden for market participants to submit estimate may incur a burden of 20 hours burden of 10 labor hours.1458 The the notice regarding the use of any for a cost of approximately $2,440. Commission estimates an average cost of exemption granted should the DCM or DCMs that submit more than one approximately $1,220 per entity for SEF require such a report. estimate may multiply this per-estimate filing revised rules under part 40 of the The Commission estimates that 85 burden by the number of estimates Commission’s regulations. entities would file an average of 2 submitted to obtain an approximate applications each year to obtain an total burden for all submissions, subject (iii) Review and Disposition of exemption for certain spread positions to any efficiencies and economies of Applications and that each application, including any scale that may result from submitting An exchange that elects to process usage report required by the DCM or multiple estimates. applications may incur a burden related SEF, would require approximately 3 The Commission notes that, in to the review and disposition of such burden hours to complete and file. response to comments, the Commission applications pursuant to proposed Thus, the Commission approximates an proposes to allow a DCM that does not §§ 150.9(a), 150.10(a), and 150.11(a). average per entity burden of 6 labor wish a spot-month limit level to be The review of an application would be hours and an industry-wide burden of changed to petition the Commission to required to include analysis of the facts 510 labor hours annually. The not change the limit level and, if the and circumstances of such application Commission estimates an average cost of petition is approved, the DCM would to determine whether the application approximately $732 per entity or not need to submit deliverable supply meets the standards established by the $62,220 for the industry as a whole for estimates for such a commodity. A DCM Commission. Exchanges would be applications under § 150.10(a)(2). that submits one petition may incur a required to notify the applicant The Commission anticipates that burden of one hour, resulting in an regarding the disposition of the market participants would be mostly estimated per-petition cost of application, including whether the familiar with the enumerated approximately $488. Again, DCMs that application was approved, denied, anticipatory bona fide hedge application submit more than one petition may referred to the Commission, or requires provided by exchanges that currently multiply this per-petition burden by the additional information. process such applications, and thus number of petitions submitted. In the 2016 Supplemental Proposal, believes that the burden for applying to the Commission noted that the an exchange would be minimal. The (ii) Filing New or Amended Rules Pursuant to Part 40 exchanges that would elect to process application is required to include, at a non-enumerated bona fide hedging minimum, the information required Designated contract markets and swap position, exempt spread position, and under § 150.7(d). The Commission execution facilities that elect to process estimates that 90 entities would file an the recognition of non-enumerated bona 1458 Table IV–B–1 at the end of this section average of 2 applications each year to fide hedging positions, exempt spread provides a more detailed breakdown of costs.

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enumerated anticipatory bona fide hours annually. The Commission systematic records, which include all hedging position applications are likely estimates an average cost of pertinent data and memoranda, of all to have processes for the review and approximately $277,500 per entity activities relating to the processing and disposition of such applications under § 150.9(a). disposition of applications for currently in place. The Commission The Commission estimates that each recognition of non-enumerated bona noted its preliminary belief that in such exchange would process about 85 fide hedging positions, exempt spread cases, complying with the rules would spread exemption applications per year positions, and enumerated anticipatory be less burdensome because the and that each application would require bona fide hedges. The Commission exchange would already have staff, 7 hours to process, for an average per believes that exchanges currently policies, and procedures established to entity burden of 595 labor hours process applications for recognition of accomplish its duties under the rules. annually. The Commission estimates an non-enumerated bona fide hedging One exchange submitted a comment average cost of approximately $72,590 positions, exempt spread positions, and requesting the Commission alter its per entity under proposed § 150.10(a). enumerated anticipatory bona fide estimates of the burdens to exchanges The Commission invites comments on hedges maintain records of such for reviewing such submissions, noting these estimates. applications as required pursuant to that the proposed rules ‘‘provide[d] for The Commission estimates that each other Commission regulations, the collection of considerably more entity would process about 90 including § 1.31. However, the documents than are currently required anticipatory hedging applications per Commission also believes that the rules for Exchange exemption requests.’’ The year and that each application would may confer additional recordkeeping commenter continued that the ‘‘review require 7 hours to process, for an obligations on exchanges that elect to and consideration of these documents average per entity burden of 630 labor process applications for recognition of will result in additional time spent on hours annually. The Commission non-enumerated bona fide hedging each exemption request’’ and suggested estimates an average cost of positions, exempt spread positions, and the Commission increase its estimate approximately $76,860 per entity under enumerated anticipatory bona fide from five hours to seven hours per proposed § 150.11(a). hedges. review.1459 The commenter also The Commission estimates that 6 suggested the Commission increase the (iv) Publication of Summaries entities would have recordkeeping number of applications that exchanges Exchanges that would elect to process obligations pursuant to proposed are estimated to process, stating that the the applications under proposed §§ 150.9(b), 150.10(b), and 150.11(b). Commission’s estimate of 285 §§ 150.9 and 150.10 may incur burdens Thus, the Commission approximates an exemption requests (for all three types to publish on their Web sites summaries average per entity burden of 90 labor of applications) paled in comparison to of the unique types of non-enumerated hours annually for all three sections. the exchange’s estimate of 500 bona fide hedging position positions The Commission estimates an average applications.1460 and spread positions, respectively. This cost of approximately $10,980 per entity The Commission notes that it is requirement would be new even for for records and filings under §§ 150.9(b), unclear whether the exchange’s estimate exchanges that already have a similar 150.10(b), and 150.11(b).1463 The of 500 applications includes process under exchange-set limits. Commission invites comments on its applications in commodities outside of The Commission estimated in the estimates. the commodities subject to the proposed 2016 Supplemental Position Limits (vi) Reporting rules. If so, the exchange may have Proposal that a single summary would overestimated the number of new require 5 hours to write, approve, and The Commission anticipates that applications the exchange may process post. An exchange also commented that exchanges that elect to process per year. Further, the estimates of one these summaries would likely require applications for recognition of non- exchange may not be representative of seven hours per summary to enumerated bona fide hedging the number of applications received by prepare.1461 Thus, the Commission now positions, spread exemptions, and the other five exchanges. However, in an estimates that each exchange would enumerated anticipatory bona fide abundance of caution, the Commission post approximately 40 summaries per hedges would be required to file two proposes to use the exchange’s estimate year, with an average per summary types of reports. In particular, proposed for the number of applications. Since burden of 7 labor hours.1462 The §§ 150.9(c) and 150.10(c) would require the commenter did not suggest the Commission estimates an average cost of a designated contract market or swap proportion of applications was approximately $34,160 per entity, execution facility that elects to process improperly distributed amongst the representing the combined burdens of applications for non-enumerated bona sections regarding non-enumerated bona § 150.9(a)(7) and § 150.10(a)(7). The fide hedging positions and exempt fide hedging positions, exempt spread Commission invites comments on these spread positions to submit to the positions, and enumerated anticipatory estimates. Commission (i) a summary of any non- hedging positions, the Commission has enumerated bona fide hedging position estimated the costs resulting from each (v) Recordkeeping and exempt spread position newly type of application using roughly the Designated contract markets and swap published on the designated contract same proportion as originally proposed. execution facilities that elect to process market or swap execution facility’s Web Thus, the Commission estimates that applications are required under site; and (ii) no less frequently than each exchange would process proposed §§ 150.9(b), 150.10(b), and monthly, any report submitted by an approximately 325 non-enumerated 150.11(b) to keep full, complete, and applicant to such designated contract bona fide hedging position applications market or swap execution facility per year and that each application 1461 See CL–ICE–60929 at 17. pursuant to rules authorized under would require 7 hours to process, for an 1462 The Commission has combined the burdens average per entity burden of 2,275 labor for summaries published in accordance with 1463 The Commission has combined the burdens § 150.9(a)(7) and § 150.10(a)(7) in order to make the for recordkeeping under §§ 150.9(b), 150.10(b), and text clearer. Table IV–B–1 at the end of this section 150.11(b). Table IV–B–1 at the end of this section 1459 See CL–ICE–60929 at 17. provides a more detailed breakdown of costs by provides a more detailed breakdown of costs by 1460 Id. regulation. regulation.

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proposed §§ 150.9(a)(6)and 150.10(a)(6), content of such reports is similar to the 150.11(c).1465 The Commission is respectively. Further, proposed information required of the reports in revising its estimate to reflect the §§ 150.9(c), 150.10(c), and 150.11(c) §§ 150.9(c), 150.10(c), and 150.11(c), but commenter’s assertion that the weekly would require designated contract the frequency of such reports would report will require a burden of markets and swap execution facilities increase under the proposed rules. The approximately 6 hours to complete and that elect to process relevant Commission estimated that the weekly submit. Thus, the Commission estimates applications to submit to the report would require approximately 3 an average per entity burden of 936 Commission a report for each week as hours to complete and submit and that labor hours annually. The Commission of the close of business on Friday the monthly report would require 2 estimates an average cost of showing various information concerning hours to complete and submit. approximately $114,192 per entity for the derivative positions that have been An exchange commented that the weekly reports pursuant to all three recognized by the designated contract Commission ‘‘significantly understated’’ related sections. The Commission market or swap execution facility as an the time required to prepare, review, invites comments on its estimates. non-enumerated bona fide hedging and submit the weekly and monthly position, exempt spread position, or reports based on the amount of time the The Commission also estimates that 6 enumerated anticipatory bona fide exchange currently spends to prepare entities would have monthly reporting hedge position, and for any revocation, and submit the reports it already obligations pursuant to reproposed modification or rejection of such submits. The commenter suggested the §§ 150.9(c)(2) and 150.10(c)(2).1466 The recognition. Commission revise its estimates to Commission also estimates that the The Commission understands that 5 reflect the exchange’s estimates of six monthly report would require a burden exchanges currently submit reports, on hours to prepare the weekly report and of approximately 6 hours to complete a voluntary basis each month, which six hours to prepare the monthly and submit. Thus, the Commission provide information regarding report.1464 approximates an average per entity exchange-recognized exemptions of all The Commission estimates that 6 burden of 144 labor hours annually. The types. The Commission stated in the entities would have weekly reporting Commission estimates an average cost of 2016 Supplemental Position Limits obligations pursuant to reproposed approximately $17,568 per entity for Proposal its preliminary belief that the §§ 150.9(c)(1), 150.10(c)(1), and monthly reports under both sections.

TABLE IV–B–1—BREAKDOWN OF BURDEN ESTIMATES BY REGULATION AND TYPE OF RESPONDENT

Annual num- Estimated Type of Total number ber of re- Total annual number of bur- respondent Required record or report of respondents sponses per responses den hours per Annual burden respondent response

A B C D E 1467 F G 1468

Exchange .. New or amended rule filings under part 40 6 2 12 5 60 per § 150.9(a)(1), (a)(6). Exchange .. New or amended rule filings under part 40 6 2 12 5 60 per § 150.10(a)(1), (a)(6). Exchange .. New or amended rule filings under part 40 6 2 12 5 60 per § 150.11(a)(1), (a)(5). Exchange .. Collection, review, and disposition of appli- 6 325 1,950 7 13,650 cation per § 150.9(a). Exchange .. Collection, review, and disposition of appli- 6 85 510 7 3,570 cation per § 150.10(a). Exchange .. Collection, review, and disposition of appli- 6 90 540 7 3,780 cation per § 150.11(a). Exchange .. Summaries Posted Online per § 150.9(a) .... 6 30 180 7 1,260 Exchange .. Summaries Posted Online per § 150.10(a) .. 6 10 60 7 420 Exchange .. § 150.9(b) Recordkeeping ...... 6 1 6 30 180 Exchange .. § 150.10(b) Recordkeeping ...... 6 1 6 30 180 Exchange .. § 150.11(b) Recordkeeping ...... 6 1 6 30 180 Exchange .. § 150.9(c)(1) Weekly Report ...... 6 52 312 6 1,872 Exchange .. § 150.10(c)(1) Weekly Report ...... 6 52 312 6 1,872 Exchange .. § 150.11(c) Weekly Report ...... 6 52 312 6 1,872 Exchange .. § 150.9(c)(2) Monthly Report ...... 6 12 72 6 432 Exchange .. § 150.10(c)(2) Monthly Report ...... 6 12 72 6 432 Exchange .. § 150.2(a)(3)(ii) DS Estimate Submission 6 4 24 1 24 Petition. Exchange .. § 150.2(a)(3)(ii) DS Estimate Submission .... 6 4 24 20 480 Exchange .. § 150.5(a)(2)(ii) Exchange-Set Limit Exemp- 6 425 2,550 2 5,100 tion Application. Market Par- § 150.5(a)(2)(ii) Exchange-Set Limit Exemp- 425 1 425 2 850 ticipant. tion Application. Market Par- § 150.9(a)(3) NEBFH Application ...... 325 2 650 4 2,600 ticipant.

1464 See CL–ICE–60929 at 17. provides a more detailed breakdown of costs by 150.10(c)(2). Table IV–B–1 at the end of this section 1465 The Commission has combined the burdens regulation. provides a more detailed breakdown of costs by for recordkeeping under §§ 150.9(c), 150.10(c), and 1466 The Commission has combined the burdens regulation. 150.11(c). Table IV–B–1 at the end of this section for recordkeeping under §§ 150.9(c)(2) and

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TABLE IV–B–1—BREAKDOWN OF BURDEN ESTIMATES BY REGULATION AND TYPE OF RESPONDENT—Continued

Annual num- Estimated Type of Total number ber of re- Total annual number of bur- respondent Required record or report of respondents sponses per responses den hours per Annual burden respondent response

A B C D E 1467 F G 1468

Market Par- § 150.10(a)(3) Spread Exemption Applica- 85 2 170 3 510 ticipant. tion. Market Par- § 150.11(a)(2) Application On Form 704 ..... 90 2 180 3 540 ticipant. Market Par- § 150.3(g) Recordkeeping ...... 425 50 21,250 1 21,250 ticipant. Market Par- § 19.01(a)(1) Form 504 ...... 40 12 480 15 7,200 ticipant. Market Par- § 19.01(a)(2)(i) Form 604 Non Spot Month 250 10 2,500 30 75,000 ticipant. Market Par- § 19.01(a)(2)(ii) Form 604 Spot Month ...... 100 10 1,000 20 20,000 ticipant. Market Par- § 19.02 Form 304 ...... 200 52 10,400 1 10,400 ticipant. Market Par- § 19.01(a)(3) Form 204 ...... 425 12 5,100 3 15,300 ticipant. Market Par- § 150.3(h) Special Call ...... 425 1 425 2 850 ticipant. Market Par- § 150.7(a) Form 704 Initial Statement ...... 250 1 250 15 3,750 ticipant. Market Par- § 150.7(a) Form 704 Annual Update ...... 250 1 250 8 2,000 ticipant.

Totals ...... 431 116.13 50,052 3.91 195,734 1467 Column C times column D. 1468 Column E times column F.

4. Initial Set-Up and Ongoing futures markets for over 70 years, the commodities beyond the legacy Maintenance Costs Commission believed that traders in agricultural commodities will increase those markets would have already monitoring costs for firms. However, the In documents submitted to OMB in developed means of compliance and Commission continues to expect that accordance with the requirements of the thus would not require additional firms trading in the commodities subject Paperwork Reduction Act, the capital or start-up costs. The to federal limits under § 150.2 do Commission estimated that the total Commission stated its expectation that, currently monitor for exchange-set and/ annualized capital, operational, and while affected futures entities would be or federal limits, and submit reports to maintenance costs associated with able to significantly leverage existing claim exemptions in contracts for future complying with the proposed rules systems and faculties to comply with delivery in such commodities. The amending part 150 would be the extended regime, entities trading Commission therefore continues to approximately $11.6 million across only or primarily in swaps contracts believe that costs for futures market approximately 400 firms. Of this $11.6 may not have developed such means. participants resulting from the rules million, the Commission estimated that One commenter provided specific adopted herein are marginal increases $5 million would be from annualized estimates of the start-up costs to develop upon existing costs, rather than entirely capital and start-up costs and $6.6 new systems to track and report new burdens. Further, the Commission million would be from operating and positions, stating that per-entity costs notes that it is difficult to ascertain an maintenance costs. These cost estimates will range from $750,000 to $1,500,000. estimate of the average cost to market were based on Commission staff’s The commenter also stated that ongoing participants, as, depending on its size estimated costs to develop the reports annual costs would range from $100,000 and complexity, a market participant and recordkeeping required in the to $550,000 per entity.1469 The could comply with position limits using proposed part 150. Commission notes that the commenter anything from an Excel spreadsheet to The Commission explained that the did not provide data underlying its cost multiple transaction capture systems. proposed expansion of the number of estimates from which the Commission The Commission is increasing its contract markets with Commission-set could duplicate the commenter’s estimates to respond to the commenter. position limits, and the Congressional estimates. For swaps market participants unused determination that such limits be The Commission maintains its belief to speculative position limits on swaps applied on an aggregate basis across all that market participants will be able to contracts, the Commission continues to trading venues and all economically- leverage existing systems and strategies estimate a greater cost to start and equivalent contracts, might increase for tracking and reporting positions. As continue monitoring for and complying operational costs for traders to monitor noted above, the Commission recognizes with speculative position limits. position size to remain in compliance that expanding the federal speculative Specifically, the Commission with federal position limits. The position limits regime into additional estimates that 441 entities would incur Commission further explained that as annualized start-up costs across all such limits have been in place in the 1469 See CL–FIA–59595 at 35–36. affected entities of $47,800,000. The

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Commission also estimates that 441 across all affected entities. The the start-up and annual operating and entities would incur ongoing operating Commission invites comments on its maintenance costs by affected entities. and maintenance costs of $12,075,000 estimates. Table IV–B–2 breaks down

TABLE IV–B–2—BREAKDOWN OF START-UP AND ANNUAL OPERATING AND MAINTENANCE COSTS

Total Average Total annual Average Total number annualized annualized operating & annual (oper- Total of respondents capital/start-up capital/start-up maintenance ating & main- annualized costs costs costs tenance costs) cost requested

§§ 19 and 150—Futures & Swaps Partici- pants ...... 425 42,500,000 100,000 10,625,000 25,000 53,125,000 §§ 19 and 150—Swaps Only Participants 10 5,000,000 500,000 1,000,000 100,000 6,000,000 § 150—Exchanges ...... 6 300,000 50,000 450,000 75,000 750,000

Total ...... 47,800,000 ...... 12,075,000 ...... 59,875,000

5. Request for Comment Please provide the Commission with large traders are not small entities for 1472 The Commission invites the public a copy of submitted comments so that purposes of the RFA. all comments can be summarized and One commenter, the NFP Electric and other Federal agencies to comment 1473 on any aspect of the reproposed addressed in the final rulemaking, and Entities, stated that the Commission information collection requirements please refer to the ADDRESSES section of ‘‘ignore[d] its responsibilities under the discussed above. The Commission will this rulemaking for instructions on RFA’’ because it did not account for the consider public comments on this submitting comments to the impact on the members of the trade reproposed collection of information in: Commission. OMB is required to make associations. The commenter states that the rules impose costs on ‘‘small (1) Evaluating whether the reproposed a decision concerning the proposed entities’’ that ‘‘should not be swept up collection of information is necessary information collection requirements for the proper performance of the in the Commission’s new speculative between 30 and 60 days after 1474 functions of the Commission, including position limits.’’ The Commission publication of this Release in the notes, however, that under the Between whether the information will have a Federal Register. Therefore, a comment practical use; NFP Electrics Exemptive Order certain to OMB is best assured of receiving full delineated non-financial energy (2) evaluating the accuracy of the consideration if OMB receives it within estimated burden of the reproposed transactions between certain specifically 30 calendar days of publication of this defined entities were exempted, collection of information, including the Release. Nothing in the foregoing affects degree to which the methodology and pursuant to CEA sections 4(c)(1) and the deadline enumerated above for the assumptions that the Commission 4(c)(6), from all requirements of the CEA public comment to the Commission on employed were valid; and Commission regulations issued (3) enhancing the quality, utility, and the Reproposal. thereunder, subject to certain anti-fraud, clarity of the information proposed to be C. Regulatory Flexibility Act anti-manipulation, and record collected; and inspection conditions.1475 All entities (4) minimizing the burden of the The Regulatory Flexibility Act reproposed information collection (‘‘RFA’’) requires that agencies consider 1472 See Policy Statement and Establishment of Definitions of ‘‘Small Entities’’ for Purposes of the requirements on registered entities, whether the rules they propose will Regulatory Flexibility Act, 47 FR 18618–19, Apr. including through the use of appropriate have a significant economic impact on 30, 1982 (DCMs, FCMs, and large traders) (‘‘RFA automated, electronic, mechanical, or a substantial number of small entities Small Entities Definitions’’); Opting Out of other technological information and, if so, provide a regulatory Segregation, 66 FR 20740–43, Apr. 25, 2001 (eligible contract participants); Position Limits for collection techniques, e.g., permitting flexibility analysis respecting the Futures and Swaps; Final Rule and Interim Final electronic submission of responses. impact.1470 A regulatory flexibility Rule, 76 FR 71626, 71680, Nov. 18, 2011 (clearing Copies of the submission from the analysis or certification typically is members); Core Principles and Other Requirements Commission to OMB are available from required for ‘‘any rule for which the for Swap Execution Facilities, 78 FR 33476, 33548, the CFTC Clearance Officer, 1155 21st Jun. 4, 2013 (SEFs); A New Regulatory Framework agency publishes a general notice of for Clearing Organizations, 66 FR 45604, 45609, Street NW., Washington, DC 20581, proposed rulemaking pursuant to’’ the Aug. 29, 2001 (DCOs); Registration of Swap Dealers (202) 418–5160 or from http:// notice-and-comment provisions of the and Major Swap Participants, 77 FR 2613, Jan. 19, RegInfo.gov. Organizations and 2012, (swap dealers and major swap participants); Administrative Procedure Act, 5 U.S.C. individuals desiring to submit and Special Calls, 72 FR 50209, Aug. 31, 2007 553(b).1471 The requirements related to (foreign brokers). comments on the reproposed the proposed amendments fall mainly 1473 The NFP Electric Entities is a group of trade information collection requirements on registered entities, exchanges, FCMs, associations related to electricity entities comprised should send those comments to: of the National Rural Electric Cooperative • The Office of Information and swap dealers, clearing members, foreign Association, the American Public Power Regulatory Affairs, Office of brokers, and large traders. The Association, and the Large Public Power Council, Commission has previously determined with the support of ACES and The Energy Management and Budget, Room 10235, Authority. New Executive Office Building, that registered DCMs, FCMs, swap 1474 See CL–NFP–59690 at 26–27. Washington, DC 20503, Attn: Desk dealers, major swap participants, 1475 See the Between NFP Electrics Exemptive Officer of the Commodity Futures eligible contract participants, SEFs, Order (Order Exempting, Pursuant to Authority of Trading Commission; clearing members, foreign brokers and the Commodity Exchange Act, Certain Transactions • (202) 395–6566 (fax); or Between Entities Described in the Federal Power • Act, and Other Electric Cooperatives, 78 FR 19670 [email protected] 1470 44 U.S.C. 601 et seq. (Apr. 2, 2013) (‘‘Federal Power Act 201(f) Order’’). (email). 1471 5 U.S.C. 601(2), 603–05. Continued

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that meet the requirements for the These economic studies bearing on Speculators in the commodity futures exemption provided by the Federal the proposed rule arrived in the market can generally enhance liquidity Power Act 201(f) Order are, therefore, administrative record in various ways. and reduce a hedger’s cost associated already exempt from position limits They include studies cited in the with searching for a counterparty who compliance for all transactions that Commission’s notice of proposed wants to take an opposition position. meet the Order’s conditions. rulemaking; studies substantially relied Speculators facilitate the needs of Further, while the requirements under upon in comment letters; and studies hedgers to transfer price risk and this rulemaking may impact non- mentioned in a list submitted by increase overall trading volume, all of financial end users, the Commission commenter Markus Henn (‘‘Henn which can generally contribute to the notes that position limits levels apply Letter’’).1479 Those studies that were well-being of a marketplace.1481 only to large traders. Accordingly, the submitted formally for the record Congress has found ‘‘excessive Chairman, on behalf of the Commission, receive focused discussion in Section IV speculation’’ in futures contracts to be hereby certifies, on behalf of the below. ‘‘an undue and unnecessary burden on 1482 Commission, pursuant to 5 U.S.C. As a group, these studies do not show interstate commerce.’’ In accordance 605(b), that the actions proposed to be a consensus in favor of or against with that finding, Congress has taken herein would not have a position limits. Many studies limited provided for position limits in order to significant economic impact on a themselves to subsidiary questions and ‘‘diminish, eliminate, or prevent such substantial number of small entities. did not direct address the desirability or burden.’’ This paper evaluates economic The Chairman made the same utility of position limits themselves. studies concerning how position limits certification in the December 2013 The quality of the studies varies. Some can diminish unreasonable price Position Limits Proposal 1476 and the studies are written by esteemed fluctuations and changes. 2016 Supplemental Position Limits economists and published in academic, a.’’Excess Speculation’’ and Volatility Proposal.1477 peer-reviewed journals. For other studies, that is not the case. Those Although volatility may be an V. Appendices studies that did at least touch on indicator of excess speculation, as position limits had disparate Congress has determined, price A. Appendix A—Review of Economic volatility, in itself, does not establish 1478 conclusions on the ability economists to Studies 1483 use market fundamentals to explain ‘‘excess speculation.’’ Changes in Introduction commodity prices; the existence of fundamentals of supply and demand can create substantial volatility, and There are various statistical ‘‘excessive speculation’’ in various futures markets; and the utility of some commodities are, based on their techniques for testing various nature, more prone to price volatility. hypotheses about position limits and position limits. Section 4a(a)(1) of the CEA provides for position limits as a Changes in these fundamentals may related matter. Many of these techniques induce disagreement between market are deployed to determine whether means to address certain specified burdens on interstate commerce. participants on the appropriate price, speculative positions influence price, causing some measure of price price changes, or volatility. The Studies that dispute the utility of position limits for the purposes volatility, but this does not necessarily Commission has engaged in a imply the existence of excess comprehensive review and analysis of Congress identified are less helpful than studies addressing other questions. speculation. the various economic studies and One of the main functions of the papers in the administrative record. Preliminary Matters swaps and futures markets is to permit 1. Defining ‘‘Speculation’’ and Use of parties with structural exposure to price See also CL–NFP–59690 at 14–15. The Federal Proxies To Measure Speculation risk (hedgers such as buyers or sellers of Power Act 201(f) Order exempted all ‘‘Exempt Non- commodity-related products) to manage Financial Energy Transactions’’ (as defined in the It can be difficult to distinguish price changes or price volatility by Federal Power Act 201(f) Order) that are entered between ordinary speculation that is into solely between ‘‘Exempt Entities’’ (also as transferring price risk to others. defined in the Federal Power Act 201(f) Order, permitted and desirable, because it Speculators in these markets often, in namely ‘‘any electric facility or utility that is wholly facilitates the transfer of risk and effect, shield hedgers from some forms owned by a government entity as described in the provides liquidity for hedgers, and of price volatility by accepting this price Federal Power Act (‘FPA’) section 201(f) . . .; (ii) harmful or ‘‘excessive’’ speculation. any electric facility or utility that is wholly owned risk. The nation’s futures and swaps by an Indian tribe recognized by the U.S. Ideally, speculation may better align markets helps producers and suppliers government pursuant to section 104 of the Act of prices with market fundamentals.1480 of these commodities, and the November 2, 1994 . . .; (iii) any electric facility or customers they serve, hedge price risk to utility that is wholly owned by a cooperative, 1479 February 10, 2014, comment letter by Markus avoid price uncertainty when desired. regardless of such cooperative’s status pursuant to Henn of World Economic, Ecology & Development, FPA section 201(f), so long as the cooperative is including an attachment, a November 26, 2013 list In this way, volatility and speculation treated as such under Internal Revenue Code entitled ‘‘Evidence on the Negative Impact of are not per se unwelcome phenomena in section 501(c)(12) or 1381(a)(2)(C), . . . and exists Commodity Speculation by Academics, Analysis these markets. They are natural events for the primary purpose of providing electric energy and Public Institutions.’’ See http:// service to its member/owner customers at cost; or in these markets. It is the nature of comments.cftc.gov/PublicComments/ 1484 (iv) any other entity that is wholly owned, directly ViewComment.aspx?id=59628&SearchText=henn. markets to fluctuate. or indirectly, by any one or more of the foregoing.’’). As noted, of the various economic studies and See Federal Power Act 201(f) Order at 19688. papers in the administrative record, some were Harrison and Kreps, Speculative Investor Behavior 1476 See December 2013 Position Limits Proposal, cited in the December 2013 Position Limits in a Stock Market with Heterogeneous Expectations, 78 FR at 75784. Proposal. Others were substantially relied upon in Quarterly Journal of Economics (Oxford University 1477 See 2016 Supplemental Position Limits comment letters or mentioned in a list submitted by Press 1978). Proposal, 81 FR at 38499. commenter Markus Henn (CL–WEED–59628); these 1481 Bahattin Bu¨ yu¨ ks¸ahin and Jeffrey H. Harris, 1478 Earlier this year, a draft literature review studies are available in the comment letter file The Role of Speculators in the Crude Oil Futures written by staff was released prematurely. Although through the Commission’s Web site at http:// Market (working paper 2009). there are similarities between the analysis in that comments.cftc.gov/PublicComments/ 1482 7 U.S.C. 6a(a)(1). document and the analysis herein, that document CommentList.aspx?id=1708. 1483 Id. did not represent the final views of the Commission 1480 Speculation is a natural market phenomenon 1484 What may be ‘‘natural’’ volatility in one or the Office of the Chief Economist. in a market with differing investor expectations. commodity futures market may be unexpected in

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Just as volatility is not a per se literature that predicts that profitable b. Working’s Speculative T Index harmful or unexpected event in the speculation has a stabilizing effect, commodity futures markets, speculation ‘‘since speculators buy when the price While there is no well-established in those markets is welcome and will is low, therefore, increasing depressed economic definition of ‘‘excess often actually reduce volatility. A well- prices, and sell when the price is high, speculation,’’ many economists reasoned 2009 economic study (by therefore, decreasing inflated studying commodity futures economists who were then CFTC prices.’’ 1487 marketplace have used a proxy for employees) concluded that speculative Some economic studies attempt to speculation in commodity futures trading in the futures market is not, in distinguish between normal and helpful marketplace known in the economic and of itself, destabilizing.1485 This speculative activity and excessive literature as the Working’s speculative T frequently cited study concludes that speculation: between normal volatility index. Economist Holbrook Working normal speculative trading activity and, in the words of the Commodity devised in 1960 a ratio to measure the actually reduces volatility levels, as a Exchange Act, ‘‘unreasonable adequacy or excessiveness of general rule, while acknowledging that fluctuations’’ in price.1488 Part of the speculation. As applied to commodity there are limited empirical studies on research task before any economist futures positions, the speculative T the subject. ‘‘The limited nature of the studying markets for excessive index is used to assess the amount of previous literature on the market impact speculation is to model and interpret speculative positions in the marketplace of speculators can be attributed to the excessive speculation and unwanted beyond the amount of speculative difficulty of obtaining data on their volatility so as to distinguish between positions necessary to provide liquidity 1486 trading activities.’’ There is, unwanted phenomena and the proper for hedgers in the marketplace.1489 however, substantial theoretical workings of a well-functioning market.

It is calculated by computing the ratio high number of speculators in a market plausible explanation for their statistical of long and short positions for all trades place.1492 findings. in the commodity market, including As further detailed below, there is no those of hedgers and those of c. Absence of Consensus on ‘‘Price broad academic consensus on the speculators.1490 A high ratio indicates Bubbles’’ economic definition of ‘‘excess speculation’’ or ‘‘price bubble’’ in many speculators are holding There are several published studies commodity futures markets. There is commodity futures positions. When this on the effect of speculation on prices speculative T-index is included as an also no broad academic consensus on and price volatility, as well as studies economic variable in economist’s the best statistical model to test for the on speculation generally. These studies models to explain prices, economists existence of excess speculation. There is employ various statistical may interpret the T index to be a proxy open skepticism in many economic for the relative amount of speculation in methodologies. Some of these find the quarters that there can even exist a the marketplace. existence of ‘‘price bubbles,’’ meaning significant ‘‘price bubble’’ in commodity A high Working T index is one way somehow artificially high prices that futures markets.1493 to quantify excess speculation in last longer than they should. These A large measure of the difficulty technical terms, but even then that may studies are analyzed below, but there is stems from the difficulties of second- not translate into excessive speculation no academic consensus on what a guessing the market’s determination of in ‘‘economic terms.’’1491 Additional ‘‘price bubble’’ is and how it can be the price of a commodity contract: economic analysis or historical detected. Thus many of the Experts may express opinions about what comparisons are useful to understand interpretations set forth in the ‘‘price the fundamental price should be, given the meaning and impact of a relatively bubble’’ studies are not the only current supply and demand conditions, but

another. Some critics of the proposed rule of the administrative record in a March 28, 2011 1492 See id. at 9–10 (a speculative index of 1.41 emphasize that different commodity markets comment. for crude oil futures contracts in 2008 meant that behave differently, and that not all of the 1486 Id. at 3. share of speculation beyond what was minimally commodity markets referenced in the rule are likely necessary to meeting short and long hedging needs, 1487 Id. at 5. to behave as the crude oil markets did in the 2006– was 41 percent: while such a percentage may seem 1488 2009 time period. On the other hand, some 7 U.S.C. 6a(a)(1). on its face ‘‘potentially alarming,’’ it is comparable economic studies suggest there can be ‘‘spillovers’’ 1489 See Bahattin Bu¨ yu¨ ks¸ahin and Jeffrey H. historically with agricultural commodity markets). or transmission of volatility from one commodity Harris, The Role of Speculators in the Crude Oil 1493 Dwight R. Sanders & Scott H. Irwin, A market to the next. See, e.g., Du, Yu, and Hayes, Futures Market, at 9 n.7, 10–11 & 24 (working paper speculative bubble in commodity futures prices? Speculation and Volatility Spillover in the Crude 2009) (employing this technique). Cross-sectional evidence, 41 Agricultural Oil and Agricultural Commodity Markets: A 1490 The Working speculative index is Economics 25–32 (2010) (arguing that while Bayesian Analysis, Energy Economics (2012). ‘‘predicated on the fact that long and short hedgers ‘‘bubble’’ explanations ‘‘are deceptively appealing, 1485 Brunetti and Bu¨ yu¨ ks¸ahin, Is Speculation they do not generally withstand close do not always trade simultaneously or in the same Destabilizing? (working paper 2009). The examination’’). Because commodity index fund Commission cited this study in particular in its quantity, so that speculators fill the role of buying is very predictable, it seems highly unlikely December 2013 Position Limits Proposal. In satisfying unmet hedging demand in the that in ordinary market environment traders would addition, a copy of this economic study was marketplace. Id. at 1. fail to trade against an index fund if the fund were formally submitted by the CME Group, Inc., as part 1491 Id. at 10. driving prices away from fundamental values.

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a basic axiom of classical economics is that markets. However, there is no academic when a position limit breach occurs, it free markets do a better job of weighing consensus on the ultimate question of is difficult to measure the impact on information and determining prices that any 1494 the extent and breadth of the impact, individual participants in the group of experts. and there is no singular economic study marketplace. Nonetheless, there are statistical of compelling persuasiveness. Even when an economic researcher techniques, and theoretical models, that can find detailed information on economists have employed to attempt to 2. Dearth of Compelling Empirical specific trades and the nature of the discern whether recent behavior in the Studies on the Effect of Position Limits traders, that might not be sufficient to nation’s commodity futures markets has on Prices or Price Volatility characterize an individual trade as deviated from what can be reasonably There are not many compelling, peer- hedging or speculative. A market ascribed to the fundamentals of supply reviewed economic studies engaging in participant may have business needs it and demand. quantitative, empirical analysis of the hedges with derivatives and also engage impact of position limits on prices or in speculative trading. Thus the identity d. The Project: Studying Whether price volatility, and thus on whether of the market participant purchasing the Speculative Positions Causing position limits are useful in curbing commodity futures contracts alone does Unwarranted Price Moves excessive speculation.1496 The not accurately capture the motivation In order to test for the presence of limitations that inhere in empirical for or purpose of the trade. Thus, an ‘‘excessive’’ speculation, many of these analysis of this complex question are set economic researcher faces significant economic studies look to whether the forth below. data constraints in reliably existence of substantial positions by characterizing trades as speculative or speculative traders causes price a. Trader Identity and Role: Incomplete Data hedging, making it difficult to determine volatility or a semi-permanent change in whether position limits are useful in price. The idea underlying these studies As many economic researchers curbing certain speculative activity. is that if the presence of sufficiently observe in their studies, there is no large positions can induce such price decisive accounting on whether a b. Limitations on Studying Markets behavior, it is ‘‘excessive.’’ Economists particular trade or set of trades is With Pre-Existing Position Limits use various statistical tools, including speculative or hedging. In practice, Designing an economic study of the correlation analysis, to determine researchers often use a rough proxy effect of position limits is complicated whether there is price behavior caused based on the nature of the trader: by the fact that for many commodity by speculative positions that is Whether they are commercial or non- markets, position limits are already in ‘‘unwarranted.’’ ‘‘Unwarranted’’ price commercial. However, in both practice place. There is therefore not reliable movements are those not associated and theory, this proxy may fail: empirical data for how certain modern with fundamentals of supply and Commercial traders may speculate and commodity futures markets would demand, the inherent volatility of non-commercial traders may well operate in the absence of position limits. market prices, or other factors hedge. For example, a commercial For all the agricultural commodities independent of position. trader might speculate and take an referenced in the rule, the futures In these studies, economists discuss outsize position, in the sense that it markets have already had in place spot- whether positions have caused exceeds a given hedging business need, month position limits at least as strict as movements in price. Technically, in a commodity on the belief that the those proposed in the rule. For energy economists will study ‘‘price returns’’ price will go up and down. Thus commodities such as crude oil, there for a class of commodity, rather than ‘‘traders sometimes may be have been pre-existing ‘‘accountability just ‘‘price’’ (the nominal price level). misclassified between commercial and levels,’’ meaning an exchange has the Price return gives one the change in noncommercial positions, and some option (but not the requirement) to ask price over time, divided by price.1495 traders classified as commercial may a trader to reduce its position if it 1497 have speculative motives.’’ exceeds a certain level. For crude oil, Further compounding these the current all-months-combined classification problems, the publicly accountability level is 20,000 contracts. available data also aggregates traders’ The position limit in the proposed rule Price return measures price changes positions across maturity dates for for the all-months-combined limit is over the scale of the underlying price. futures contracts, while the price for any 109,200 contracts. That is, different commodities may have given commodity futures contract is not The existence of binding position 1498 entirely different scales for prices; by aggregated by maturity. In addition, limits in agricultural commodities and dividing by the underlying price, price section 8 of the Commodity Exchange accountability levels in the energy returns put different commodity classes Act limits the distribution of detailed markets does not mean that traders do on the same percentage scale for trade positon data to academic not transgress these limits in current comparison purposes. researchers. The identity of individual markets and take outsized market The conclusions of these various traders for specific trades, and their positions for speculative reasons. But economic analyses, discussed in detail position in the market at the time of the existence of current limits does in Section III below, have achieved a name, is not disseminated publicly to make the economist’s task of measuring reasonable measure of academic 1499 economic researchers. Thus, even position limit impact more difficult. consensus on some subsidiary matters When an economist studies an bearing on the ultimate question of 1496 As noted above, however, CEA section 4a(a) agricultural futures market and attempts whether excessive speculation has had reflects the underlying assumption that position limits may be useful for that purpose. to assess the economic advantages and an impact on the commodity futures 1497 International Monetary Fund, IMF Global disadvantages of imposing position Financial Stability Report: Financial Stress and limits, he or she does not have a dataset 1494 D. Andrew Austin & Mark Jickling, Hedge Deleveraging: Macrofinancial Implications and Fund Speculation and Oil Prices (1 ed. 2011). Policy (Oct. 2008). of market prices in a marketplace 1495 P is price and t is a particular time, with t+1 1498 Id. being the point in time that is one fixed increment 1499 Julien Chevallier, Price relationships in crude data, 15 Environmental Economics and Policy away over which the return is being computed. oil futures: new evidence from CFTC disaggregated Studies 135 (2012).

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without position limits. Thus its notice of proposed rulemaking. For This discussion evaluates 244 papers economists are dependent upon example, the Staff of the Permanent in connection with the position limits economic models and model Subcommittee on Investigations of the rule: 133 studies submitted as interpretation when they attempt to Homeland Security and Government comments or mentioned in the describe how a marketplace without Affairs found 1501 that excessive December 2013 Position Limits position limits would function. Many speculation has had ‘‘undue’’ influence Proposal; over 100 additional studies or economic studies do not account in on wheat price movements,1502 the articles listed in the Henn Letter; and their models for pre-existing position natural gas market,1503 and oil ten additional studies submitted by limits or accountability levels. In fact, prices.1504 Congress itself found commenters not included in the above many economic studies that bear on the ‘‘excessive speculation’’ in futures sets. rulemaking do not endeavor to reach the contracts to be ‘‘an undue and This group of 244 papers can be ultimate question of the impact of unnecessary burden on interstate categorized below by statistical position limits on prices and market commerce.’’ 1505 methodology: 36 Granger causality dynamics at all. These studies, like all the studies analyses; 25 comovement or There may be fewer instances of analyzed here, were undertaken in an cointegration analyses; 46 studies dramatic, large-scale ‘‘excessive absence of definitive economic creating models of fundamental supply speculation’’ because position limits definitions and tests for excessive and demand; 8 switching regressions or have been in place in many of these speculation; limitations on data quality similar analyses; 3 studies using commodity futures markets since 1938. and availability; and the inherent eigenvalue stability analysis; 26 papers There have thus been few opportunities difficulty of modelling complex presenting theoretical models; and 73 to study the effect of the imposition of phenomena. papers that were primarily surveys of a position limits rule.1500 the economic literature, perhaps with c. Inherent Difficulties of Modelling Discussion some aspect of empirical testing or Complex Economic Phenomena 1. Empirical Studies: Economic Studies analysis.1506 There is no singularly persuasive with Statistical Analysis Bearing on a. Granger ‘‘Causality’’ Speculative Positions in the Commodity study, because these studies use i. Overview of the Granger Method economic models that are, by nature, Markets or Speculation Generally simplifications of a complex reality. Below is a discussion of the 36 Economic studies presented in the analyses employing the ‘‘Granger’’ or Each of the various models and context of this rulemaking may involve statistical methods used in these diverse ‘‘Granger causality’’ method of theoretical models; statistical analysis statistical analysis. This discussion studies has advantages and based upon market data; and, most disadvantages, but they deploy includes a description of the method commonly, a combination of both. The imperfect market data to answer and its advantages and disadvantages. economic studies using statistical ambitious and complex economic The Granger method seeks to find methods can be categorized into basic questions. Given the data and modeling whether a linear correlation exists statistical methods, such as models of limitations, it is unreasonable to expect between two sets of data that are known fundamental supply and demand (and an economic model that is fulsome as ‘‘time series.’’ An example of a time related methods), Granger causality, or (extending to position limits and market series would be a pair of numbers other methods. The economic studies speculation), accurate (accommodating constituting future prices and time, with presented or cited in the comment and reflecting economic history), and the time between the different future letters in this rulemaking are best predictive. This is particularly true in prices being a fixed amount of time. the context of market data involving grouped and analyzed by the statistical This fixed time is known as the ‘‘time volatile and complex events. method they employ, for there are step.’’ The Granger method takes two Some studies are better-designed and advantages and disadvantages particular time series, such as Series A (futures better-executed than others, which to each statistical method. price returns, each for a different time, means that they used defensible models for a fixed time step) and Series B with transparent source data. These are 1501 See Analysis, Section III(B), infra (discussing an economic analysis of these reports). discussed throughout this review. Much 1506 The remaining 27 papers fall into two groups. 1502 Permanent Subcomm. on Investigations of the of the analysis below highlights the Two additional papers presented unique U.S. Senate, Comm. on Homeland Sec. & methodologies involving volatility are interwoven flexibility of model design choices and Governmental Affairs, Excessive Speculation in the into the analysis below. The remaining twenty-five the sensitivity of the results to these Wheat Market, (2009), available at http:// _ papers were not ultimately susceptible to modelling choices. hsgac.senate.gov/public/ files/REPORTExcessive meaningful economic analysis. These papers SpecullationintheWheatMarketwoexhibits included pure opinion pieces, studies written in 3. Staff-Level Congressional chartsJune2409.pdf. foreign languages, press releases, background Determinations 1503 Permanent Subcomm. on Investigations of the documents on basic points of economics or law, U.S. Senate, Comm. on Homeland Sec. & studies unavailable due to broken hyperlinks that There have been findings by Governmental Affairs, Excessive Speculation in the could not be resolved, or studies founded on policymakers that excessive speculation Natural Gas Market, (2007), available at http:// methodologies too suspect to warrant extensive exists in various commodity futures www.hsgac.senate.gov//imo/media/doc/ discussion. In the latter category, for example, was REPORTExcessiveSpeculationintheNatural an unpublished study purported to use a ‘‘novel markets, as the Commission observed in GasMarket.pdf?attempt=2. source of information’’—Google metrics involving 1504 Permanent Subcomm. on Investigations of the user searches—as a proxy for the demand 1500 CFTC, A Study of the Silver Market, Report U.S. Senate, Comm. on Homeland Sec. & associated with ‘‘corn price dynamics.’’ Massimo To The Congress In Response To Section 21 Of The Governmental Affairs, The Role of Market Peri, Daniela Vandone & Lucia Baldi, Internet, noise Commodity Exchange Act, Part Two, 123 (May 19, Speculation in Rising Oil and Gas Prices: A Need trading and commodity futures prices, 33 1981) (observing that the imposition of a position to Put the Cop Back on the Beat, at 19–32 (2006) International Review of Economics & Finance 82– limit in silver futures contracts by the Chicago available at http://www.hsgac.senate.gov//imo/ 89 (2014) (cited by Henn Letter). See also, Letter Board of Trade in 1979 did not raise prices); id. at media/doc/REPORTExcessiveSpeculationinthe from Markus Henn, World Economic, Ecology & 123–24 (observing that price reaction to position NaturalGasMarket.pdf?attempt=2 (finding Development, to CFTC (Feb. 10, 2014). See also, limits involves a variety of factors and ‘‘it is not increased speculation in energy commodities and Markus Henn, Evidence on the Negative Impact of possible to predict in advance the effect of an effect of speculation on prices). Commodity Speculation by Academics, Analysis imposition of position limits’’). 1505 7 U.S.C. 6a(a)(1). and Public Institutions, (Nov. 26, 2013).

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(changes in speculative positions over deal of transparency in analyzing both ‘‘hidden’’ because the time step chosen the same time step). It then seeks to inputs and results. Although the results is so long that the events look to occur determine whether there is a linear can be highly sensitive to modelling simultaneously over the observed correlation between Series A and Series choices, the modelling choices are made interval (be it a day or a week). B. This is done by using position data explicitly. That is, the equations that are A second disadvantage concerns the that is lagged over time. used for the linear regression can easily sensitivity of the test to the time period For example, for the time of 12:00 be viewed together with the definitions studied. Especially in the context of the p.m. and the price of $20 for a May for the variables. Granger method, the selection of the cotton futures contract, the researcher particular time internal is important to using Granger ‘‘causality’’ would iii. Disadvantages of the Granger obtain the most useful results: Selection associate a position in May cotton Method of too large a time period may hide futures from a set time prior to 12:00 Not all statistical methods apply well correlations. Some of the position p.m. If the time step were one minute, to all situations. In the particular studies use daily price data, while that time would be 11:59 a.m. The context of speculation and positions others use weekly price data. When researcher performs a regression limits, application of the Granger commodity prices are quite volatile, and analysis on these two time series (price methodology has some disadvantages positions are more gradual in changes, and time on the one side of the and causes for concern. While the daily time steps may have greater equation, and position and lagged time statistical answers are, by their nature, unexplained variation in the commodity on the other). They estimate the fairly precise, the drafting of the prices than when the time series for correlation (technically, they look at the question and the economic price data is constructed based on coefficient of the regression) through interpretation of the results can cause weekly sampling. A study by this analysis to come to a conclusion of problems. This limitation of the Granger International Monetary Fund whether, over that minute-interval, it method of course is shared with some economists, using weekly data, observed can be said that there is a linear other statistical methods. However, we that this time interval ‘‘may hamper the correlation between futures prices and discuss below why this is particularly identification of very short-run effects, positions. true of Granger in the context of these given that the transmission from While the Granger test is referred to studies on speculation and prices. Many positions to prices may happen at as the ‘‘Granger causality test,’’ it is of the potential problems in these higher frequency. Indeed, some market important to note that, notwithstanding studies do not so inhere so much in the participants anecdotally suggest that this shorthand, ‘‘Granger causality’’ method itself as in the modelling there are short-run effects that may last does not establish an actual cause-and- choices, other operational choices such only a matter of days.’’ 1509 effect relationship. What the Granger as the length of time step and time lag, Another potential problem is picking method gives as a result is evidence of and the interpretation of the results.1508 a time lag that is too short to detect the existence of a linear correlation Below, we analyze why this is so. possible market phenomenon. between the two time series or a lack First, the typical application of the ‘‘[K]nowing whether price changes lead thereof. Granger method in the studies review or lag position changes over short Moreover, the Granger method only assumes a linear relation between the horizons (a few days) is of limited value tests for linear correlations. It cannot variables of interest: For example, prices for assessing the price pressure effects of exclude causation associated with other and positions. The technique is useful flows into commodity derivatives statistical relationships. for describing statistical patterns in data markets.’’ 1510 The persuasiveness of a Granger study among variables ordered in time. But In the statistical calculations often turns on the soundness of the Granger does not claim to discuss underlying the Granger method, this modelling choices, as discussed further greater volatility may lead to a larger 1507 simultaneous events. It is a statistical in subsection 3 below. test which, in rough terms, says that if denominator in what is called the ‘‘t- statistic,’’ and that will in turn lead to ii. Advantages of the Granger Method event A typically precedes event B, then event A ‘‘Granger-causes’’ event B. a lower t-statistic (in absolute value). At the highest level, the Granger The t-statistic is used in the Granger method is based on well-credentialed Granger is a statistical method for analyzing data for correlations, and method to assess how well a variable, statistical methodology. It has been used such as positions, explains another for several decades by economists and ‘‘Granger causation’’ is not ‘‘causation’’ per se. It does not illustrate the method variable, such as commodity prices. In its properties are well-established and this way, the selection of the time well-debated in the economic literature. and means of actual causation nor does it claim to establish actual causation in interval can easily affect the strength of In that sense, unlike some of the other the Granger method result. reality. methods employed in this context, it A third disadvantage of Granger For example, the Granger method has stood the test of time. It has been inheres in the selection of the time lag. cannot explain what causal mechanism deployed in macroeconomics and A Granger analysis will not capture an links two events, events A and B, and financial economics. effect that is delayed beyond the length a Granger model cannot detect all real- The Granger test has several of the time lag. And a Granger analysis world causation. For example, an advantages. It is auditable in the sense with too long a time lag may not detect that it can be fully replicated by a third individual Granger model cannot conclude whether there is a relation party. The method is relatively simple 1509 Antoshin, Canetti, and Miyajima, IMF Global to apply. It need not depend on complex between event A and event B that is Financial Stability Report: Financial Stress and mathematics. The method’s Deleveraging: Macrofinancial Implications and 1508 See, e.g., Grosche, Limitations of Granger Policy, Annex 1.2, Financial Investment in straightforward approach permits a great Causality Analysis To Assess the Price Effects From Commodities Markets at p. 65 (October 2008) the Financialization of Agricultural Commodity (footnote and citation omitted). 1507 See generally Grosche, Limitations of Granger Markets Under Bounded Rationality (Agricultural 1510 Singleton, The 2008 Boom/Bust in Oil Prices, Causality Analysis To Assess the Price Effects From and Resource Economics 2012); Williams, Dodging at 15 (working paper March 23, 2011) (‘‘Of more the Financialization of Agricultural Commodity Dodd-Frank: Excessive Speculation, Commodities relevance is whether flows affect returns and risk Markets Under Bounded Rationality, at 2–5 Markets, and the Burden of Proof, Law & Policy premiums over weeks and months.’’) (footnote (Agricultural and Resource Economics 2012). Journal of the University of Denver (2015). omitted).

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price changes during periods of price identity as a commercial trader is is large due to common correlation volatility. The Granger technique does strongly associated with hedging (or at between explanatory variables.1517 not guide the selection of the time lag. least non-speculative trades), in practice Authors of Granger method studies There are some heuristic techniques to that may be far from the case. may add ‘‘control variables’’ in order to reflect other factors that may be help determine the time lag based on There is also the statistical concept of 1511 affecting or relevant to the two main the ‘‘goodness-of-fit’’ of regressions, ‘‘robustness,’’ meaning roughly that the variables of primary interest (such as but these supplemental techniques may results of a study are not qualitatively price and position). The introduction of yield time lags that do not have a strong different based on different applications theoretical footing.1512 control variables will help to discount (different data sets, different tweaks of In such ways, and others, the authors spurious corrections between the of such study have wide license in assumptions). In several ways, variables of primary interest by studying modelling design. The results can be application of the Granger method in whether another variable could be highly dependent upon and sensitive to this particular context offers grounds for correlated to (and thus ‘‘Granger model design choices. Key design caution for study authors seeking causing’’) variables such as price and decisions of seemingly little import, statistical robustness. First, for a given position. Adding extra variables can, on such as the selection of time steps, can time step and commodity, the particular the one hand, affect for third factors in fact make a substantial difference in time interval chosen may affect the which may be relevant. On the other the study’s result. While such flexibility result. Second, a Granger method is, by hand, the introduction of the third can be useful, this flexibility also its nature, very sensitive to which factors may compromise the statistical permits Granger results to be sensitive particular dataset is chosen. Once again, power of the primary question of to modelling assumptions. Such a study’s author(s) have wide discretion interest. sensitivity, especially in the particular in the selection of which datasets to Finally, there are also economic context of the volatile commodity study, and Granger methodology will be studies casting doubt on the suitability prices, is problematic. Volatility in highly sensitive to this selection. of commodities data for meaningful commodity prices is a complex There is the related problem of Granger tests, given volatility in phenomenon, with possibly overlapping economic robustness. For example, commodities price data.1518 This is effects of short- and long-term volatility because of individual market because volatility increases the standard and many exogenous variables that can characteristics, a study limited to a error of the estimated coefficient for the affect prices. In short, ‘‘care must be particular commodity or time period lagged variable(s). Thus, Granger tests taken not to overstate the interpretive may fail to detect patters that would be examining commodities data may lack power’’ of Granger causality studies.1513 detectable applying the same method in statistical power to detect Granger Finally, the method cannot discern to other time periods of commodities. causality. the true cause of something when event Applying Granger analysis to iv. Comparison of Strengths and A and B occur almost simultaneously. commodity prices presents special Weaknesses Granger cannot say whether A caused B challenges in this context because many Granger techniques provide great or whether C causes A and then C commodity prices can be quite volatile, causes B with a brief time lag. In this flexibility. This flexibility also provides especially in the short-term. That is, the way, Granger correlation analysis is great license to economists on selection Granger method may have low fundamentally incapable of establishing of critical factors such as the length of ‘‘statistical power’’ in this context. In a cause and effect relationship. the time lag and the time step. The There can also be limitations with mathematical terms, high volatility in ultimate conclusions of such studies regard to the data used in Granger one of the Granger variables can lead to may be influenced by model design. studies on position limits, the majority large standard errors for regression Unsurprisingly, different economists 1515 of which used Commission data. There coefficients for the t-statistic. reach different results. In this sense, the is a problem which inheres in this data A modelling choice to include other conclusions of Granger-based papers are in the particular context of position variables can further reduce the vulnerable to criticism. limit studies. The trade data used statistical power of the statistical test v. Analysis of Studies Reviewed That identifies the entity doing the trade as 1516 used in the Granger method. Other Use Granger Methodology ‘‘commercial’’ or ‘‘non-commercial.’’ economic variables in the regression The data does not identify whether a analysis, if not properly chosen, can Overall, when the Granger studies particular trade is a hedge or a compromise the Granger ‘‘causality’’ find a correlation (in the sense of a lead- speculative gamble.1514 While the test. For instance, explanatory variables lag relationship) between speculative studies’ authors may infer that a trader’s may not be uncorrelated to the positions and price returns, they do so speculative position or position change not with respect to price returns as a 1511 Roughly speaking, ‘‘goodness-of-fit’’ analyses variables. To the extent that the whole, but the risk premium component examine how well the data fits the model. Using a variables are correlated to speculative of price returns. The risk premium is the goodness of fit criteria allows the data to select the portion of expected return of a futures number of lags that empirically fits the data the positions, they may, in the estimation of best. the regression, wash out the price effect. contract associated with holding the 1512 See generally Williams, Dodging Dodd-Frank: The t-statistic of the regression contract. It is not an express term of the Excessive Speculation, Commodities Markets, and coefficient remains small because the contract, but an amount that can be the Burden of Proof, Law & Policy Journal of the standard error estimate of the coefficient derived from economic analysis as the University of Denver (2015) at 136–38 (discussing difference between the futures price problems associated with Granger test’s assumptions and parameters). 1515 See Bahattin Bu¨ yu¨ ks¸ahin and Jeffrey H. return and a hypothesized price return 1513 Id. at 138. Harris, The Role of Speculators in the Crude Oil 1514 There are other difficulties in the CFTC Futures Market (working paper 2009) (later 1517 This argument is also correct for F-tests (a dataset that complicate empirical analysis of published in The Energy Journal, Vol. 32, No. 2, multivariable extension of t-tests). herding activity. See Acharya, Ramadorai, and 167–202 (2011) under the title Do Speculators Drive 1518 David Frenk, Review of Irwin and Sanders Lochstoer, Limits to Arbitrage and Hedging: Crude Oil Futures Prices?). 2010 OECD Report, at p. 6 (Better Markets June 20, Evidence from the Commodity Markets, at 19 1516 These test statistics is a t-test for one lag in 2010) and citations therein, cited in Henn Letter at (Journal of Financial Economics 2013). the relevant variable or an F-test for multiple lags. 6–7.

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for a futures contract. The risk premium Professor Kenneth Singleton found interval for a Granger analysis in this is the return required to bear the evidence that speculative positions context is a better choice because undiversifiable risk on the relevant side Granger-caused risk premium on weekly speculative positions change gradually of a futures contract.1519 time intervals during the 2007 to 2009 and there is, on a daily basis, substantial There are also Granger studies that period when studying the crude oil price volatility, especially in the crude analyze speculative positions with futures markets.1522 Part of Singleton’s oil market.1526 The common sense respect to price returns as a whole or results were replicated in part in a paper explanation for this may be that prices price volatility; these do not find a by Hamilton and Wu using a different change more often and more rapidly statistically significant correlation. methodology than Granger causality than position sizes, as a general rule. A Moreover, those studies that do find a analysis.1523 Professor Singleton found a weekly time interval is a good way to lead-lag correlation using the Granger link between the volume of speculative filter out price changes that speculative methodology in the risk premium positions and an increase in risk position changes cannot explain.1527 context are limited to studies in premium. Because risk premium is a Other Granger analyses of the crude particular markets in particular time component of price returns and hence oil market use shorter time intervals and frames: Studies using weekly, not daily, price, he thus found a link—Granger do not find Granger-causality between price data and analyzing crude oil and causal link—between speculative speculative position changes and either ethanol-related commodities (including positions and price. However, because price returns, price changes or price wheat, which is an economic substitute risk premium is just a relatively small volatility.1528 The academic literature for corn) during the 2007–2010 component of price, this study does not contains a divergence of views on timeframe. purport to explain entirely the large whether the existence of ‘‘excess There are 36 primarily Granger-based 2008 changes in crude oil prices. speculation’’ in the crude oil market economic studies in the administrative In the case of index funds, many would necessarily result in something record. For analysis purposes, these funds take long positions. The presence that is easy to measure, like increases in papers are grouped according to of large index funds positions raises an oil inventories. Some economists argue whether they discuss primarily crude issue of whether what economists against the role of ‘‘excess speculation’’ oil or other energy derivatives (8 would call this ‘‘heterogeneity of views’’ in crude oil, observing that when there studies); the possible impact of can affect marketplace health. Singleton was a run-up in prices of certain commodity index funds across multiple presents, with his Granger-like analysis, commodities, there was no noticeable 1529 commodities (13); and agricultural a discussion of heterogeneity in this increase in inventories. This commodities (15). context. He conjectures—without assumes that a fundamental shock in the oil prices, for example, is likely to Crude Oil and Other Energy Derivatives supporting empirical analysis—that learning about economic fundamentals increase or decrease inventories, as There was a substantial increase in with heterogeneous views may induce hedgers in the physical market crude oil prices through July 2008, excessive price volatility, drift in anticipate future price increases or followed by a significant price collapse commodity prices, and a tendency decreases. However, other economists from July 2008 through March of have explained that, at least in theory, 1520 towards booms and busts. He asserts 2009. Several Granger analyses have that under these conditions the flow of speculation can affect spot oil prices looked at price returns and/or price financial index investments into without causing substantial increases in volatility in the crude oil markets, or the inventory (providing the price elasticity commodity markets may harm price 1530 energy markets generally, in the 2007– 1524 of oil demand is small). 1521 discovery and thus social welfare. 2009 timeframe. Another paper using Granger analysis 1526 concluded that speculators did have an Frenk, Review of Irwin and Sanders 2010 1519 In theory, if the futures contract at expiration OECD Report, at 6 (Better Markets June 10, 2010). is a perfect substitute for the spot commodity, then impact on price volatility in the crude 1527 There are not many other economic studies the expiring futures price should converge to the oil market.1525 in the administrative record duplicating the results spot price. It is important to note that many Some commenters have suggested that of Singleton and Hamilton and Wu. A few others expiring futures contracts are imperfect substitutes using a weekly, not a daily, time reached similar conclusions regarding the crude oil for the spot commodity and this might prevent market using Granger analysis, but these are convergence. Moreover, the risk premium decreases relatively modest or narrowly constructed studies to zero as the futures contract approaches Reports, Energy Economics (2004); Singleton, that are not often cited by economic peers. See expiration. Thus, the risk premium has no effect on Investor Flows and the 2008 Boom/Bust in Oil Goyal and Tripathi, Regulation and Price Discovery: the final convergence of the futures to the spot price Prices (working paper March 23, 2011) (published Oil Spot and Futures Markets (working paper 2012) at expiration of the futures contract, but could, in in final form in Management Science in 2013); (concluding that regulations of the nation of India, theory, impact the rate of convergence (although Singleton, The 2008 Boom/Bust in Oil Prices including position limits, may have mitigated short any impact may be negligible). (working paper May 17, 2010). duration ‘‘bubbles’’). 1520 Bahattin Bu¨ yu¨ ks¸ahin and Jeffrey H. Harris, 1522 Kenneth J. Singleton, Investor Flows and the 1528 Kaufmann and Ullman, Oil Prices, The Role of Speculators in the Crude Oil Futures 2008 Boom/Bust in Oil Prices, SSRN Electronic Speculation, and Fundamentals: Interpreting Market at 2 (working paper 2009). Journal 15 (2011) 18. (Equation 6, lagged correlation Causal Relations Among Spot and Futures Prices, 1521 See, e.g., Goyal and Tripathi, Regulation and analysis that is, functionally, a Granger analysis). Energy Economics, Vol. 31, Issue 4 (July 2009); Price Discovery: Oil Spot and Futures Markets 1523 Hamilton and Wu, Risk Premia in Crude Oil Kaufman, The role of market fundamentals and (working paper 2012); Irwin and Sanders, Energy Futures Prices, Journal of International Money and speculation in recent price changes for crude oil, Futures Prices and Commodity Index Investment: Finance (2013) (replicating Singleton’s result using Energy Policy, Vol . 39, Issue 1 (January 2011); New Evidence from Firm-Level Position Data a different methodology, a two-factor linear model Sanders, Boris, and Manfredo, Hedgers, Funds, and (working paper 2014); Kaufmann and Ullman, Oil of fundamental supply and demand). Small Speculators in the Energy Futures Markets: Prices, Speculation, and Fundamentals: 1524 Kenneth J. Singleton, Investor Flows and the An Analysis of the CFTC’s Commitment of Traders Interpreting Causal Relations Among Spot and 2008 Boom/Bust in Oil Prices, SSRN Electronic Reports, Energy Economics (2004). Futures Prices, Energy Economics, Vol. 31, Issue 4 Journal 15 (2011) 5–8. 1529 Irwin and Sanders, Index Funds, (July 2009); Kaufman, The role of market 1525 Jochen Mo¨bert, Deutsche Bank Research, Financialization, and Commodity Futures Markets, fundamentals and speculation in recent price Dispersion in beliefs among speculators 9–10 at 14–15, Applied Economic Perspectives and changes for crude oil, Energy Policy, Vol. 39, Issue (2009). This paper concluded that as net long Policy (2010). 1 (January 2011); Mobert, Do Speculators Drive positions increased, volatility increased. This paper 1530 Hamilton, Causes and Consequences of the Crude Oil Prices? (2009 working paper); Sanders, was inconclusive of the impact of speculation on Oil Shock of 2007–2008, Brookings Paper on Boris, and Manfredo, Hedgers, Funds, and Small price levels (id. at 8–9), and observed caveats on the Economic Activity (2009); Parsons, Black Gold & Speculators in the Energy Futures Markets: An difficulty of accurate modelling in the complex Fool’s Gold: Speculation in the Oil Futures Market Analysis of the CFTC’s Commitment of Traders crude oil market (id. at 11). at 82, 106–107 (Economia 2009) (if oil prices were

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Irwin and Sanders conclude that there is not necessarily the case that there is speculation in the crude oil market. is no Granger-causation between a masking effect. However, there are gaps in this positions in a particular commodity This argument does not prove that inference. Kaufmann assumes there index fund and price returns in four there is no masking effect. There is at should be a long-run equilibrium energy commodity markets.1531 Irwin least the concern that the Irwin and between the spot and the futures price and Sanders’ paper contains a fairly Sanders model, as constructed, masks but cannot discern a supply and robust Granger analysis which analyzes possible Granger-causality between demand reason for the lack of several models in conjunction with their position changes and price returns. correlation. There are many factors of standard model equation for position Theoretically, one could learn more by supply and demand that would lead to and price. However, all of the equations examining the linear correlation differences between far-out futures that they test for Granger causation between explanatory variables (lagged prices and spot prices in the crude oil contain a possible prejudice: The use of price returns and changes in position) market during the time period studied— variables that may be correlated with by performing additional diagnostic 1986–2007. These factors include the price other than the position variable, regressions. These regressions would depletion of oil fields; variability in thus masking the power of the position estimate correlations between economic growth; discovery of new oil variable. Moreover, their paper fails to explanatory variables and resolve the sources and better modes of extraction; show that the particular index fund data open question of whether the price adaption of oil infrastructure.1537 they used was generally representative equation is significantly ‘‘masking’’ Index Funds Generally of index funds by statistical testing.1532 Granger-causality between position There is an earlier paper by Sanders, changes and price returns. Some economists have used the Boris, and Manfredo that has a similar Selecting between competing models Granger methodology to study a group result.1533 However, this 2004 paper with divergent results becomes more of of commodity markets and to analyze, uses variables that may be correlated a judgment call than a science. Irwin overall, the effect, or lack thereof, of with price other than position data, and and Sanders’ 2014 paper is well-done, commodity index fund investments on so, in the Granger analysis, the price as are papers with opposite conclusions, both energy and agricultural commodity equation used for Granger testing may which find an empirical relationship prices.1538 These relatively few Granger mask some or all of the impact of between position changes and price studies on the ‘‘financialization’’ effect positions on price (if any).1534 As returns (risk premia), such as the vary in their conclusions. Overall, as a discussed, Irwin and Sanders’ 2014 Singleton Granger analysis discussed group, the Granger studies on the effect paper is also not completely free from above, and a paper by Hamilton and Wu of index funds across a swath of this masking problem. However, it has based on a different statistical method only one, not several, variables that discussed below.1535 1537 Cf. Kaufmann and Ullman, Oil Prices, could mask correlation between It is impossible to easily discern who Speculation, and Fundamentals: Interpreting Causal Relations Among Spot and Futures Prices, position changes and price returns: A is correct or what accounts for the 31 Energy Economics (July 2009) (concluding that lagged price return variable. Irwin and difference in result. It could be the there is Granger-price causation between different Sanders, aware of the possibility of this ‘‘masking’’ issue in the Irwin and types of crude oil). This study does not look for Sanders model. It could also be the causation between position and price and so, again, masking of correlation, present a is of marginal relevance in the position limits defense of their choice to include a focus in the Irwin and Sanders work on context. lagged price return variable in their price returns, as opposed to the focus in 1538 See, e.g., Antoshin, Canetti, and Miyajima, model. They argue that one does not both Singleton’s as well as Hamilton IMF Global Financial Stability Report: Financial know whether positions will affect just and Wu’s on just a component of price Stress and Deleveraging: Macrofinancial Implications and Policy, Annex 1.2, Financial current price returns or both current and returns, risk premia. Irwin and Sanders, Investment in Commodities Markets (October 2008); lagged price returns, and in this way it by focusing on price returns, are doing Jeffrey H. Harris and Bahattin Bu¨ yu¨ ks¸ahin, The Role Granger-causality testing with a model of Speculators in the Crude Oil Futures Market (working paper 2009); Brunetti and Bu¨ yu¨ ks¸ahin, Is driven above the level determined by fundamental less sensitive to changes in just risk Speculation Destabilizing? (working paper 2009); factors of supply and demand by forces such as premia. The differing results could also Frenk, Review of Irwin and Sanders 2010 OECD speculation, storage would not necessarily increase, be due to the different time horizons Report (Better Markets June 10, 2010); Gilbert, for ‘‘successful innovations in the financial industry Speculative Influences on Commodity Futures made it possible for paper oil to be a financial asset (weekly versus daily time increments) Prices, 2006–2008, UN Conference on Trade and in a very complete way’’); accord Lombardi and used in the competing studies. Development (2010) (page citations are to the 2009 Van Robays, Do Financial Investors Destabilize the This clash of well-executed studies is working paper version placed in the administrative Oil Price?, at 21–22, European Central Bank on an important issue—the dramatic record); Gilbert, Commodity Speculation and Working Paper Series No. 1346 (June 2011). The Commodity Investment (powerpoint presentation ability drawdown or stock pile inventory is limited changes in crude oil prices in 2006– 2010); Irwin and Sanders, The Impact of Index and by storage capacity. Further, since it is expensive 2009. The study by Kaufman is not Swap Funds on Commodity Futures Markets: A to store oil above ground, buy and hold strategies 1536 directly on point. He finds Granger- Systems Approach, Journal of Alternative are only a loose constraint on prices. causation between different types of Investments (2011); Irwin and Sanders, The Impact 1531 Dwight R. Sanders & Scott H. Irwin, Energy crude oil contracts, but does not look to of Index and Swap Funds on Commodity Futures Futures Prices and Commodity Index Investment: positions or whether positions Granger- Markets: Preliminary Results (working paper 2010); New Evidence from Firm-Level Position Data, 46 Mayer, The Growing Interdependence Between Energy Economics (working paper 2014). cause changes in price returns. Financial and Commodity Markets, UN Conference 1532 In this paper, Irwin and Sanders critiqued Kaufmann also finds that far-out on Trade and Development (discussion paper 2009); Singleton’s results, concluding that Singleton found futures contracts and spot crude oil are Stoll and Whaley, Commodity Index Investing and Granger causation because he improperly calculated not correlated and he concludes that the Commodity Futures Prices (working paper 2010); positon data. This debate cannot be resolved reason for this lack of correlation is Tse and Williams, Does Index Speculation Impact definitively. In the absence of better daily data on Commodity Prices?, Financial Review, Vol. 48, position in both swaps and position markets, it is Issue 3 (2013); Tse, The Relationship Among unclear who is correct here. 1535 James D. Hamilton & Jing Cynthia Wu, Risk Agricultural Futures, ETFs, and the US Stock 1533 Dwight R. Sanders, Keith Boris & Mark premia in crude oil futures prices, 42 Journal of Market, Review of Futures Markets (2012). A fairly Manfredo, Hedgers, funds, and small speculators in International Money and Finance 9–37 (2014). late submission by Williams, Dodging Dodd-Frank: the energy futures markets: An analysis of the 1536 Robert K. Kaufmann, The role of market Excessive Speculation, Commodities Markets, and CFTC’s Commitments of Traders reports, 26 Energy fundamentals and speculation in recent price the Burden of Proof, Law & Policy Journal of the Economics 425–445 (2004). changes for crude oil, 39 Energy Policy 105–115 University of Denver (2015), studies generally the 1534 Id. at 439, Equation 5. (2011). limitations of Granger causality.

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commodity futures prices do not learned to anticipate and account for While both the Stoll and Whaley and agree.1539 index fund rollovers.) 1547 the Gilbert papers are often cited in the Gilbert concluded that commodity Stoll and Whaley’s analysis does not literature, they both have limitations in index fund positons did Granger-cause account for the possibility that there scope and approach. Other studies do price increases in certain commodity could be a delayed effect on futures not fully resolve this academic debate. futures markets during the 2006–2008 price changes associated with a delay in In a paper by James W. Williams, the time period.1540 Gilbert, a Professor of laying off, in the futures markets, risks limitations of Granger causality analysis Economics at the University of Trento, acquired in commodity index swap in the position limits context is Italy, found that this price impact contracts. In practices, dealers may do discussed.1551 appeared to be lasting or this, acquiring risk in multiple markets The general findings of Irwin and ‘‘permanent.’’ 1541 within acceptable limits as they manage Sanders support Stoll and Whaley’s their portfolio risk.1548 Moreover, a conclusions.1552 Irwin and Sanders Gilbert’s study is based upon a paper by Tse and Williams criticizes analyzed weekly CFTC price data over composed proxy for commodity fund Stoll and Whaley’s approach for using a number of years and found that there index investments. The index data they ‘‘low frequency data’’ and failing to use was neither Granger-causation between use is not explained in sufficient detail ‘‘sufficiently granular data to capture index fund positions and futures price in the paper and the results derived fast futures markets dynamics.’’ 1549 returns or Granger-causation between from this index are therefore not Using intraday, shorter time intervals to changes in fund positions and futures replicable.1542 The price equation he analyze the possible effect of price volatility. Utilizing a Working’s T- uses for testing is problematic.1543 commodity fund investments in the index, Irwin and Sanders also find that Gilbert’s numerical results on price futures markets, Tse and Williams there was not excessive speculation in impact are dramatic, finding substantial conclude that there was ‘‘transmission’’ these markets. average impact in various commodities of price impacts from futures contracts Frenk criticizes Irwin and Sanders for due to speculation, with average impact in a particular commodity fund index (1) both their specific methodology, in parts of 2008 of over 10 percent for (the GSCI index) to commodities that arguing that they used incorrect proxies aluminum, copper, nickel, wheat, and were not in the index. However, this for hedging volumes and (2) rehearsing 1544 corn. Yet he provides little detail on Granger-causation result does not the general disadvantages of using how he arrived at these percentages necessarily establish any price impact Granger analysis.1553 Frenk identifies other than to say that they are associated with excessive speculation. difficulties in Irwin and Sanders’ data ‘‘estimates’’ that he inferred from the Other factors may lead to this result, and underlying assumption. statistical results set forth in his Table such as time delay in illiquid markets, There is a significant problem with 1545 5. Because his findings are not well- the role of the GSCI index as a price the Irwin and Sanders paper. The price documented and contain unexplained influencing mechanism, or the more formula used for Granger testing in their inferences, his paper is unreliable. rapid market response that tends to paper is complex, incorporating many By contrast, the Granger analysis of occur with more liquid markets.1550 lagged price returns and lagged Stoll and Whaley concludes that inflows positions, and risks masking correlation and outflows from commodity index 1547 Stoll and Whaley also found a divergence of due to the possible interdependence of funds to the commodity markets do not futures and cash prices in wheat in 2006–2009 have Granger-caused price changes in period, especially in 2008 period, but concluded as speculators because they participated in these 1546 that there were limited negative impacts on market markets to diversify their returns (relative to equity the commodity futures market. The functioning associated with this failure to diverge. holdings). In Tse, The Relationship Among authors of this study did find a fleeting This result should not be used to suggest that Agricultural Futures, ETFs, and the US Stock price impact from when commodity divergence is not a costly phenomenon. Stoll and Market, Review of Futures Markets (2012), Tse index funds roll over to another contract Whaley’s analysis is limited to CME’s wheat futures concluded that there were now positive correlations contract. It failed to converge for a period of time between agricultural ETF returns and S&P 500. This month. (This fleeting rollover impact because storage was mispriced in the contract result suggests that the diversification benefit has at finding may be outdated; markets have during this time period, and market participants least decreased. In this paper, Tse also found, using knew this and prices reflected this difference. CME 5-minute, intraday returns, that agricultural ETF eventually changed the wheat contract to charge a price returns are Granger-caused by some of the 1539 There are many more studies using the more appropriate amount for storage and the underlying commodity futures market. This result comovement or cointegration analysis, discussed in divergence phenomenon dissipated. So this is a rare result finding causation from the futures Section I(B) below, that look at the financialization example of divergence is associated with economic prices to financial or institutional traders. questions. differences between the spot and futures contracts. 1551 James W. Williams, Dodging Dodd-Frank: 1540 Christopher L. Gilbert, Speculative Influences It not an example of divergence associated with Excessive Speculation, Commodities Markets, and on Commodity Futures Prices, 2006–2008 (2010). market manipulation, with attendant social welfare the Burden of Proof, 37 Law & Policy 135–38 (2015). 1541 Id. at 23; see also id. at 24, Table 6 (average costs. See Frank Easterbrook, Monopoly, (sensitivities of Granger studies to parameters, price impact by commodity, including a maximum Manipulation, and the Regulation of Futures including time-sensitivity to time intervals, makes price impact of over 16 percent for crude oil during Markets, S118, Journal of Business (1986) (‘‘When ‘‘Granger-inspired studies of excessive speculation 2006–2008 time period). the closing price on a futures contract significantly . . . problematic,’’ a problem compounded by the 1542 Several statements about the index in the diverges from the price of the cash commodity volatile nature of the commodity markets). paper indicate a lack of economic rigor, or at least immediately before and after, this is strong 1552 Dwight R Sanders & Scott H Irwin, The major inferential leaps, in the assumption that the evidence that someone has reduced the accuracy of Impact of Index Funds in Commodity Futures index approximates commodity index funds. Id. at the market price and inflicted real economic loss on Markets: A Systems Approach, 14 The Journal of 18, 21. participants in the market.’’). Alternative Investments 40–49 (2011). 1543 See id. at 22 (Equation 4) (complex equation 1548 See Frank Easterbrook, Monopoly, 1553 David Frenk, Better Markets, Inc., that subtracts logarithmic prices without detailed Manipulation, and the Regulation of Futures Speculation and Financial Fund Activity and The economic justification for the destructive of data Markets S124, Journal of Business (1986) (in the Impact of Index and Swap Funds on Commodity though subtraction). specific context of position limits, ‘‘Offenses may be Futures Markets 6 (2010). Some of Frenk’s critiques 1544 Id. at 24, Table 6. harder to detect when they involve more than one fall short of the mark. For example, he criticizes 1545 See id. at 23–24 (little or no statistical market.’’). Irwin and Sanders for using a one-week interval for assessment of how the results of Table 4 and 5 1549 Yiuman Tse & Michael R. Williams, Does their testing. Id. at 7. This is not a flaw in the Irwin results translate into the large price impact Index Speculation Impact Commodity Prices? An and Sanders paper and in fact using a one-week percentages in Table 6). Intraday Analysis, 48 Financial Review 365–383 time interval helps to ameliorate another problem 1546 Hans R. Stoll & Robert E. Whaley, Commodity (2013). Frenk identifies: The difficulty of applying Granger Index Investing and Commodity Futures Prices 1550 Stoll and Whaley also observed that analysis to highly volatile data such as commodity (working paper 2010). commodity index funds should not be thought of prices.

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variables.1554 In a model designed to Jeffrey H. Harris lead to the conclusion A few papers arrive at nuanced or test whether there is Granger-causation that there was no Granger-causation inconclusive results, but generally between position changes and price between swap dealer positions (a proxy cannot find significant Granger return, additional variables may for commodity index fund positions) causation between position and price in diminish the statistical power of the and returns in the crude oil or natural the agricultural commodity markets.1562 position change variable in the testing gas futures.1559 This finding stayed There are studies (some are more equation by masking the effect of consistent across tests using different properly categorized as articles) that do positon on price returns. The inclusion time periods within 2000 to 2008 and purport to find Granger causation of these lagged price returns and different lag periods. Rather, between positions and price returns.1563 position change variables in the model Bu¨ yu¨ ks¸ahin and Harris found price The papers finding substantial price design may well diminish the statistical changes Granger-cause changes in impacts caused by speculative positions power of the position change position. This study performs an in the commodity futures markets are variable.1555 In this way it may also additional Working T analysis and not published in academic, peer- mask a possible correlation between concludes that this measure of reviewed economic or agricultural position changes and price returns.1556 speculative positions was not Granger journals.1564 Other studies doing Granger testing causing price changes in the crude oil for the effects of commodity index funds or natural gas markets. Speculative Limits (working paper 2007); Sanders, on prices arrive at conflicting The study by Brunetti and Irwin, and Merrin, Smart Money? The Forecasting 1557 Ability of CFTC Large Traders, Journal of results. Then-CFTC economists who Bu¨ yu¨ ks¸ahin is also an important Agricultural and Resource Economics (2009); were able to access non-public, daily contribution to the literature.1560 Sanders, Irwin, and Merrin, A Speculative Bubble market data to do Granger-based Brunetti and Bu¨ yu¨ ks¸ahin consider price in Commodity Futures? Cross-Sectional Evidence, economic analysis of the possible Agricultural Economics (2010); Irwin, Sanders, and returns and positions in several markets Merrin, Devil or Angel: The Role of Speculation in impact of commodity index funds have (crude oil, natural gas, corn, Eurodollar, the Recent Commodity Price Boom, Journal of added to this debate.1558 A battery of and mini-Dow) and find no Granger Agricultural and Applied Economics (2009); Granger tests discussed in a paper causation between position and price Sanders, Irwin, and Merrin, The Adequacy of prepared by Bahattin Bu¨ yu¨ ks¸ahin and Speculation in Agricultural Futures Markets: Too returns for any of these commodity Much of a Good Thing?, Applied Economic markets during a time period when Perspectives and Policy (2010). An additional paper 1554 Dwight R Sanders & Scott H Irwin, The commodity index funds were is, for the most part, in accord with Irwin and Impact of Index Funds in Commodity Futures participating in these markets. This Sanders’ work. Aulerich, Irwin, and Garcia, Markets: A Systems Approach, 14 The Journal of Bubbles, Food Prices, and Speculation: Evidence Alternative Investments 40–49 (2011). study also finds that speculators in from the CFTC’s Daily Large Trader Data Files 1555 In Table 54 of the Irwin and Sanders paper, these markets during the time period are (NBER Conference 2012) (concluding overall that the price return equation used for the Granger decreasing, not increasing, volatility. buying pressure from financial index investment in correlation analysis diminishes the potential impact These CFTC-staff studies have the recent years did not cause massive price ‘‘bubbles’’ of positions on current price returns. Irwin and in agricultural futures prices, and any such Sanders use this equation to test for Granger- advantage of using non-public, daily evidence of price increase is weak evidence of small causation between price returns and position data. However, such studies are subject and fleeting price impact). changes, but inclusion of lagged price returns in the to the same limitations that are inherent 1562 See, e.g., Borin and Di Nino, The Role of equation is problematic. Within the workings of the in Granger analysis in this context: The Financial Investments in Agricultural Commodity Granger statistics, placing lagged price returns and Derivatives Markets (working paper 2012) (finding change of position data in the same equation can open question of whether the proper ‘‘sparse’’ evidence of Granger causation between mask the impact of change of positions on price. time lag was selected, the ad hoc traders’ investment decisions and futures prices and That is because price returns and lagged price assumption of the time step selected to also ‘‘scarce evidence of hearing behavior except in returns may have common correlation; a statistician compute the volatility, and the the cotton market’’); Grosche, Limitations of would say that lagged price return data and change Granger Causality Analysis to Assess the Price in positions are competing for common correlation inclusion in both studies of variables Effects From the Financialization of Agricultural with price returns in the Table 4 equation. In this such as lagged price returns that may Commodity Markets Under Bounded Rationality, way, the explanatory power of the change in inadvertently mask correlation. The Agricultural and Resource Economics (2012); position variable in this Irwin and Sanders paper inherent limitations of Granger analysis Gilbert, How to Understand High Food Prices, is diminished by introduction of the lagged price Journal of Agricultural Economics (2008); Robles, return variables. may well bear on the conflicting results Torero, and von Braun, When Speculation Matters 1556 See James W. Williams, Dodging Dodd-Frank: of these Granger papers. (working paper 2009) (speculative trading may have Excessive Speculation, Commodities Markets, and influenced agricultural commodity prices ‘‘but the the Burden of Proof, 37 Law & Policy 137–138 Agricultural Commodities evidence is far from conclusive’’). (2015) (Granger methodology may be problematic in The final set of Granger papers 1563 See, e.g., Algieri, Price Volatility, Speculation analysis of position limits, because there may be and Excessive Speculation in Commodity Markets: nonlinear relationships between economic concern the agricultural commodity Sheep or Shepherd Behaviour? (working paper variables). markets. These include a series of 2012) (‘‘excessive speculation’’ has driven price 1557 Compare Jo¨rg Mayer, United Nations papers by Irwin and Sanders and co- volatility for maize, rice, soybeans, and wheat for Conference on Trade and Development, The authors not finding Granger causation a particular timeframe); Cooke and Robles, Recent Growing Interdependence Between Financial and 1561 Food Prices Movements: A Time Series Analysis Commodity Markets (2009). between positions and price returns. (working paper 2009) (concluding that financial 1558 Those studies reflect the views of the activity in futures market and proxies for individual economists, and, not necessarily of the 1559 See Bahattin Bu¨ yu¨ ks¸ahin and Jeffrey H. speculation can help explain observed changes in Commission. Compare Mayer, The Growing Harris, The Role of Speculators in the Crude Oil international food prices for corn, wheat, rice, and Interdependence Between Financial and Futures Market (working paper 2009). soybeans); Timmer, Did Speculation Affect World Commodity Markets, UN Conference on Trade and 1560 Celso Brunetti & Bahattin Buyuksahin, Is Rice Prices?, UN Food and Agricultural Development (discussion paper 2009) (finding Speculation Destabilizing?, SSRN Electronic Organization (working paper 2009) (concluding that financial investment in commodity trading Granger- Journal. The Commission cited this study in the price of rice was not affected by financial cause price changes in soybeans, soybean oil, particular in its December 2013 Position Limits speculators, but run-ups in wheat and corn prices copper, crude oilTable 4) with IMF Global Financial Proposal. See also Letter from CME Group, Inc., to ‘‘was almost certainly caused by financial Stability Report: Financial Stress and Deleveraging: CFTC (Mar. 28, 2011). speculators’’); Varadi, An Evidence of Speculation Macrofinancial Implications and Policy, Annex 1.2, 1561 See, e.g.,Irwin and Sanders, The ‘‘Necessity’’ in Indian Commodity Markets (working paper 2012) Financial Investment in Commodities Markets of New Position Limits in Agricultural Futures (inferring the unexplained price increases must be (October 2008) (not providing specifications or Markets: The Verdict from Daily Firm-Level Position due to speculation). background on study, but reporting results finding Data (working paper 2014); Irwin and Sanders, The 1564 Other limitations arise from fairly cryptic an absence of Granger causation between position Performance of CBOT Corn, Soybean, and Wheat inferential reasoning that the cause of any price-run and price in all but the copper markets). Futures Contracts after Recent Changes in Continued

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Gilbert, in a 2008 paper, reaches a The debate is hard to resolve, This technique can be used to ferret different result with respect to including for the fairly technical reasons out unexpected divergences in prices. agricultural commodities.1565 Gilbert provided in Grosche.1570 Grosche For example, many economists perform performs Granger testing on other observes that index trading and other cointegration tests comparing futures variables that could explain (in the financial investment may be based on a and spot prices, which generally should sense of Granger-causing) run-ups in mixture of speculative and hedging constrain each other by staying within agricultural commodity futures prices. motives in the agricultural sphere.1571 reasonable bands of each other. If they Specifically, he looks at macroeconomic The interaction between the physical find a discrepancy, they consider and financial factors that affected the and financial contracts in the whether excess speculation or a price price of many commodities during the agricultural commodity sphere is under- ‘‘bubble’’ could explain this price 1566 2005–2008 time period. Gilbert researched and the possible ‘‘spillover’’ discrepancy. obtains results suggesting that the main effects from financial to agricultural determinants in agricultural commodity markets is unknown.1572 ii. Advantages and Disadvantages futures prices during this time period b. Comovement, Cointegration and are macroeconomic (such as GDP Such approaches are useful to ‘‘Financialization’’ growth) and financial factors (such as compare commodity markets with other the value of the dollar and interest i. Description markets in seeking a correlation over time between these sets of prices. For rates).1567 Gilbert concludes that (1) These studies employ a statistical example, a study may look at a price there is little Granger-causation method that can be viewed evidence that speculation by commodity mathematically as a special case of index for commodities for one time index funds caused the run-up in Granger causality, a method frequently series and a price index for equities for agricultural commodity prices during referred to as comovement. This method another time series. In rough terms, this time period; and (2) moreover, there looks for whether there is correlation studying the linear regressions of these is evidence that macroeconomic factors that is contemporaneous and not lagged. price data over time establishes whether other than ‘‘excessive speculation’’ (This is effectively similar to a Granger there is a confluence of price trends in might have caused the price run-up. analysis where the type period of lag is these two markets. It may capture Gilbert’s work does not purport to show set to zero.) Like Granger causality, this correlations that a Granger causality that macroeconomic and financial method employs linear regression to approach may miss if the latter uses too factors account for all price changes. establish correlation between market large a time lag. In this way, Moreover, his 2008 piece is difficult to prices or price returns and speculative comovement analyses may be stronger reconcile with his 2010 work, which positions. When the time step is set to than Granger analyses at finding does find price impacts from zero, the economist can no longer seek correlations, avoiding the problem of speculation using Granger analysis for to establish an inference of cause and correlations being hidden by the some agricultural commodities.1568 effect between prices or price returns improper selection of length of time lag. The work of Gilbert, as well as Irwin and positions. Instead, the economist is But the complementary disadvantage and Sanders, also suggest a cautious using a Granger-type analysis to is that a comovement result cannot approach is warranted in concluding establish whether there is a correlation establish even weak, Granger-style how sizeable or lasting any price impact that is contemporaneous. A subset of causation. In the particular context of associated with ‘‘excessive speculation’’ these comovement studies uses a position limits, this disadvantage is can be, at least when employing a technique called cointegration for significant. As further explained below Granger analysis. One paper authored testing correlation between two sets of in the discussion of specific studies, by Irwin emphasized that the only data, to see if there is a statistical correlations between prices or price evidence of Granger-causation between relationship notwithstanding the ‘‘white positions and price returns in the noise’’ of price data.1573 returns and positions can be caused by agricultural market was weak evidence external factors such as broad macroeconomic trends. In particular, of temporary changes in price.1569 Daily Large Trader Data Files, 22 (NBER Conference 2012) (finding some weak evidence of temporary using comovement to try to establish a changes in price Granger-caused by positions, but up must be due to speculation. See, e.g., Timmer, ‘‘price bubble’’ over time ranges that are observing that the ‘‘size of the estimated system Did Speculation Affect World Rice Prices?, 38, UN short-term (months) or medium-term (18 impact is too small’’ to be consistent with the Food and Agricultural Organization (working paper commodity index funds causing a huge run-up in months to two years) is problematic 2009) (regarding theory that financial speculators prices). because of the impact macroeconomic are the cause for price run-ups, the paper states that 1570 Grosche, Limitations of Granger Causality ‘‘[t]hese conclusions are reached mostly by or other external factors (wars, Analysis to Assess the Price Effects from the eliminating the other explanations and by logical Financialization of Agricultural Commodity recessions, etc.) can have on short-term reasoning’’); Varadi, An Evidence of Speculation in Markets Under Bounded Rationality, Agricultural prices. A comovement study showing a Indian Commodity Markets (working paper 2012) and Resource Economics (2012). correlation between two sets of data— (asserting author’s ‘‘estimations’’ that speculation 1571 has played a ‘‘decisive role’’ in creating commodity Id. at 18. crude oil futures and spot prices—over 1572 price bubbles in Indian commodity markets, Id. at 17. See also Williams, Dodging Dodd- just a year or two years is, all else being Frank: Excessive Speculation, Commodities without provision of a theoretical framework to equal, a fairly weak basis to infer a price reach this conclusion). Markets, and the Burden of Proof, Law & Policy Journal of the University of Denver (2015). 1565 Christopher J. Gilbert, How to Understand bubble. There can be other factors that 1573 High Food Prices, Journal of Agricultural Two time series of price data are said to be cause decoupling of prices over such a Economics (2008). cointegrated if the error term in the modeling of time period. their statistical correlation is a term that is, among 1566 Id. other things, independent of time. In layperson’s 1567 iii. ‘‘Financialization’’ Id. at 27–28. terms, the two streams of price data each roughly 1568 Gilbert, Speculative Influences on follow a random walk through time. (In more Commodity Futures Prices, 2006–2008, 24 (Table 4), technical terms, cointegration means there is a Many of the papers in this category UN Conference on Trade and Development (2010) linear connection between the two streams of data focus on a documented correlation (referencing price impacts in wheat, corn, and where the difference is ‘‘white noise’’ (Brownian between returns to commodity futures soybean). motion) or a random walk. There is some and the financial (including equity) 1569 Aulerich, Irwin, and Garcia, Bubbles, Food cointegrating vector of coefficients that can be used Prices, and Speculation: Evidence from the CFTC’s to form a linear combination of the two time series.) markets that has increased strongly in

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recent years.1574 This is often called substantial growth in commodity index grown substantially in the last decade. comovement between the commodity investments; this includes commodity There have also been significant and financial markets. The many factors exchange-traded funds and other changes in the long positions held in that have driven explosive growth in commodity indices that fund managers commodity futures index funds during commodity derivatives trading in recent and other financial investors use. Both the financial crisis:1576 years are well-documented in a study by the number of such indices, and the Basu and Gavin.1575 There has been volume of trading involving them, has

Figure 1B. Over-the-counter trading in pronounced spike during the 2007–2008 commodity derivatives by swap dealers time period.1577 has also increased over time, with a

Figure 2B. The factors driving this economics that there were negative Investors also sought higher yields in a growth include the desire of correlations between returns on equity low-yield environment.1580 institutional portfolio managers to and commodity futures.1578 This belief hedge against stock risk, based on the may not be economically justifiable.1579 belief by some academic and industry

1574 Tang and Xiong, Index Investment and 1577 Id. at 41. cycle risk is controversial. Basu and Gavin, What Financialization of Commodities, Financial 1578 Id. at 38, 44–45. Explains the Growth in Commodity Derivatives?, at Analysts Journal (2012). 1579 See id. at 44 (however, following the collapse 44 Federal Reserve Bank of St. Louis (2011), citing 1575 Basu and Gavin, What Explains the Growth of commodity prices in the summer of 2008 and Bu¨ yu¨ ks¸ahin, Haigh, and Robe (2008) (unconditional in Commodity Derivatives?, Federal Reserve Bank of subsequent financial panic in September of 2008, correlation between equity and commodity futures the correlation between commodity prices and St. Louis (2011). returns is near zero). equities became highly and positively correlated). 1580 1576 Id. at 40. Use of commodities to hedge equity or business Id. at 38, 44.

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iv. The Masters Hypothesis government and policy researchers evidence that they are causing increases 1583 One variation on this financialization deploy this method (4 papers); and in oil prices. As a Congressional theme is the Masters ‘‘hypothesis.’’ other academicians have used this Research Study observed, this might 1584 Michael W. Masters, a hedge fund method (14 papers). suggest that certain traders with ‘‘better information on macroeconomic trends, manager, is a leading proponent of the The Example of Oil Prices 2006–2008 view that commodity index investments which strongly influence energy One of the key challenges for demand, take more aggressive positions, have been a major driver of increases in application of the Masters hypothesis is the commodity futures prices. In brief, which would then influence oil reconciliation of a supposed speculative prices.’’ 1586 his views are expressed in the following price with what is happening in the The economics of the crude oil market statement: physical market. The debate within are a good example of the dangers of Institutional Investors, with nearly $30 academia, practitioners and applying comovement or cointegration trillion in assets under management, have policymakers on this topic has been methods over short- and medium-term. decided en masse to embrace commodities considerable, especially given the run- futures as an investable asset class. In the last Short-term crude oil prices are less up in prices in certain commodities, five years, they have poured hundreds of elastic than longer-term prices. This billions of dollars into the commodities such as the 2006–2008 rise in crude oil prices. ‘‘Dramatic swings in crude oil means, in the short term, changes in futures markets, a large fraction of which has price do not affect the supply of crude gone into energy futures. While individually prices have led Congress to examine the these Investors are trying to do the right thing functioning of the markets where prices oil as much as long-term price changes for their portfolios (and stakeholders), they are set.’’ 1585 The correlation of oil with do. There are many reasons why this is are unaware that collectively they are having economic trends is not necessarily so, having to do with the cost of storing a massive impact on the futures markets that crude oil above ground and the cost of makes the Hunt brothers pale in comparison. starting and stopping crude oil 1 Commodity Futures Markets (working paper 2012); In the last 4 ⁄2, years assets allocated to and Haigh, Harris, and Overdahl, Market Growth, extraction. So it is unsurprising that commodity index replication trading Trader Participation and Pricing in Energy Futures there are short- and medium-term strategies have grown from $13 billion in Markets (working paper 2007). divergences in price between spot and 2003 to $317 billion in July 2008. At the 1583 See, e.g., Baffes and Haniotos, Placing the same time, the prices for the 25 commodities 2006/08 Commodity Boom into Perspective, World longer-term futures contracts in the that make up these indices have risen by an Bank Policy Research Working Paper 5371 (2010); crude oil markets. average of over 200%. Today’s commodities Belke, Bordon, and Volz, Effects of Global Liquidity On the supply side of crude oil futures markets are excessively on Commodity and Food Prices, German Institute market economics, a short-term shock to speculative....1581 for Economic Research (2013); Kawamoto, Kimura, et al., What Has Caused the Surge in Global supply (wars, embargoes, or other Statements are not, in themselves, Commodity Prices and Strengthened Cross-market events) will not necessarily translate rigorous economic studies, nor do they Linkage?, Bank of Japan Working Papers Series into a long-term change in prices, even No.11–E–3 (May 2011); and Pollin and Heintz, How purport to be. Several economists have Wall Street Speculation is Driving Up Gasoline though it may cause substantial short- attempted to formalize and study Prices Today (AFR working paper 2011). term price changes and volatility. rigorously the ‘‘Masters hypothesis’’ or 1584 See, e.g., Ada¨mmer, Bohl and Stephan, Similarly, on the demand side of crude related conjectures using comovement Speculative Bubbles in Agricultural Prices (working oil market economics, short-term paper 2011); Algieri, A Roller Coaster Ride: An or cointegration methods. These studies Empirical Investigation of the Main Drivers of changes to demand can impact short- are discussed below. Wheat Price (working paper 2013); Babula and term crude oil prices without causing Rothenberg, A Dynamic Monthly Model of U.S. Pork lasting long-term price impact.1587 v. Discussion of Specific Studies Product Markets: Testing for and Discerning the For such reasons, comovement and There are 25 papers that use some Role of Hedging on Pork-Related Food Costs, Journal of Int’l Agricultural Trade and Development cointegration studies of crude oil prices form of comovement or cointegration (2013); Basu and Miffre, Capturing the Risk over medium time frames are analysis, broadly defined. Former and Premium of Commodity Futures: The Role of unpersuasive.1588 Bu¨ yu¨ ks¸ahin and Robe current economists within the Office of Hedging Pressure, Journal of Banking and Risk showed that correlations between equity Chief Economist have used this method (2013); Hoff, Herding Behavior in Asset Markets, Journal of Financial Stability (2009); Tang and and energy commodity investments repeatedly (7 papers); 1582 several Xiong, Index Investment and Financialization of increased massively after Lehman’s Commodities, Financial Analysts Journal (2012); 1581 M.W. Masters, A.K. White, The Accidental Creti, Joets, and Mignon, On the Links Between Hunt brothers: How Institutional Investors Are Stock and Commodity Markets’ Volatility, Energy 1586 Id. at 16, (Congressional Research Service Driving up Food and Energy Prices, Economics (2010); Bichetti and Maystre, The R41902 June 29, 2011). www.accidentalhuntbrothers.com (2008). Mr. Synchronized and Long-lasting Structural Change 1587 This is true for a variety of reasons, including Masters, Portfolio Manager for Masters Capital on Commodity Markets: Evidence from High the fact that refining production is expensive to Management, LLC, has often referred to these large Frequency Data (working paper 2012); Bunn, change on short notice. See generally Hamilton, investors as ‘‘passive’’ investors. ‘‘Passive Chevalier, and Le Pen, Fundamental and Financial Causes and Consequences of the Oil Shock of 2007– speculators are an invasive species that will Influences on the Co-movement of Oil and Gas 2008, at 17–23, Brookings Paper on Economic continue to damage the markets until they Prices (working paper 2012); Coleman and Dark, Activity (2009) (while oil prices may have been eradicated.’’ Masters Statement, CFTC March 2010 Economic Significance of Non-Hedger Investment ‘‘too high’’ in July 2009, ‘‘low price elasticity of hearing at 5. According to Barclay’s, index fund in Commodity Markets (working paper 2012); demand, and the failure of physical production to investment fund in commodities reached $431 Dorfman and Karali, Have Commodity Index Funds increase’’ are more likely the predominant causes billion as of July 2011. Algieri, A Roller Coaster Increased Price Linkages between Commodities? than ‘‘speculation per se’’). Ride, 5 (working paper 2011). (working paper 2012); Korniotis, Does Speculation 1588 Pollin and Heintz, How Wall Street 1582 See, e.g., Boyd, Bu¨ yu¨ ks¸ahin, and Haigh, The Affect Spot Price Levels? The Case of Metals With Speculation is Driving Up Gasoline Prices Today, Prevalence, Sources, and Effects of Herding and Without Futures Markets (working paper, FRB at 10, Americans for Financial Reform (working (working paper 2013); Bu¨ yu¨ ks¸ahin and Robe, Does Finance and Economic Discussion Series 2009) paper 2011) (‘‘Lagged values of both gasoline prices it Matter Who Trades Energy Derivatives?, Review (also submitted as a comment by CME); Le Pen and and crude oil prices can affect current gas prices. of Env’t, Energy, and Economics (2013); Se´vi, Futures Trading and the Excess Comovement This implies that past speculative pressures are Bu¨ yu¨ ks¸ahin and Robe, Speculators, Commodities, of Commodity Prices (working paper 2012); and carried over, at least for several months, to current and Cross-Market Linkages (working paper 2012); Windawi, Speculation, Embedding, and Food prices.’’); Bunn, Chevalier, Le Pen, and Sevi, Bu¨ yu¨ ks¸ahin and Robe, Does ‘‘Paper Oil’’ Matter? Prices: A Cointegration Analysis (working paper Fundamental and Financial Influences on the Co- (working paper 2011); Bu¨ yu¨ ks¸ahin, Harris, and 2012). movement of Oil and Gas Prices, at 18 (working Haigh, Fundamentals, Trader Activity, and 1585 Jickling and Austin, Hedge Fund Speculation paper 2012) (‘‘we find significant evidence that Derivatives Pricing (working paper 2008); Cheng, and Oil Prices 1 (Congressional Research Service speculation, with its focus on index trading, Kirilenko, and Xiong, Convective Risk Flows in R41902 June 29, 2011). increases the correlation between oil and gas’’).

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collapse in 2008.1589 As explained in with financial investments and futures prices or price volatility.1599 another paper by Bu¨ yu¨ ks¸ahin and Robe, cointegration between nearby, one-year, These hypothesized effects of this raises the question of whether and two-year crude oil futures contracts. financialization are debated among hedge fund and index fund inflows are At least for the crude oil market, these academics, practitioners, and transmitting financial shocks to price linkages exist. However, one policymakers. Results of studies that commodity prices.1590 However, as cannot obtain, using comovement and test for a bubble component in Bu¨ yu¨ ks¸ahin and Robe’s survey of cointegration techniques, decisive commodity futures prices—regardless of Granger and comovement economic evidence on whether this effect the cause—are decidedly mixed.1600 literature demonstrate, it does not improves market efficiency; such a appear that index traders and hedge conclusion involves interpreting the Commission-affiliated economists funds had an impact on crude oil prices informational linkages between the have confirmed a general decrease in during this time period.1591 Further, markets. To the extent that the paper by volatility associated with Celso Brunetti and Bahattin Bu¨ yu¨ ks¸ahin Bu¨ yu¨ ks¸ahin, Harris, and Haigh moves financialization, a salutary effect separately found that hedge funds exert beyond establishing the linkage to associated with increased liquidity.1601 a calming influence on crude oil prices inferring that the linkage has salutary In theoretical models outside the by lowering oil price volatility.1592 effects on commodity markets, that comovement methodology, competition Cointegration results suggest that conclusion was not empirically tested, from index investment reduces the risk financial traders’ influence of crude oil because it was not modelled explicitly. premium that accrues to long position futures prices is desirable. For example, At most, these studies establish the holders, and this can have the net effect then-CFTC economists, Bu¨ yu¨ ks¸ahin, existence of such price linkages. of lowering the cost of hedging to Harris, and Haigh show how the traditional physical market Financialization Comovement Literature increased presence of swap dealers, participants.1602 Some economists rely hedge funds, and other financial traders Some studies have examined upon the efficient market hypothesis have led to the cointegration of various ‘‘financialization’’ by using comovement that market prices fully incorporate all crude oil futures contracts (the nearby analysis to ask whether increased the available public ‘‘information’’ into contract, the one-year contract, and the investment flows into commodity prices—in support of conclusion that two-year contract).1593 This co- indices (typically composed with financialization provides benefits such integration result by these economists substantial long futures positions) are as better price discovery, liquidity, and suggests that there was a long-term correlated with increases in futures transfer of risks to entities better relation between the strength of price prices or the volatility of commodity futures prices across many different cointegration and the market activities 1599 See Irwin and Sanders, Index Funds, of financial traders,1594 but this result types of studies. Some of these Financialization, and Commodity Futures Markets, does not suggest any harm to the financializaton comovement studies at 15, Applied Economic Perspectives and Policy marketplace or price discovery from the have looked to whether these (2010) (surveying literature in support and against investment flows decrease the risk the idea of a speculative bubble in prices arising cointegration of various crude oil from commodity index fund participation in the contracts. The authors conjecture that premium for holding a long futures futures market). Compare Gilbert, Speculative the greater market activity by these contract, thereby causing a non- Influences on Commodity Futures Prices, 2006– traders can ‘‘enhance market quality’’ transient increase in the long futures 2008, UN Conf. On Trade Development (2010); contract price (which, in turn, may Einloth, Speculation and Recent Volatility in the through ‘‘enhance[d] linkages among Price of Oil (working paper 2009), and Tang and various futures prices’’ that make these increase the price of the underlying Xiong, Index Investment and Financialization of commodity markets ‘‘more commodity). Commodities, Financial Analysts Journal (2012) informationally efficient.’’ 1595 There is consensus in the economic with Bahattin Bu¨ yu¨ ks¸ahin and Jeffrey H. Harris, The Both research papers 1596 are correct literature that equities and commodities Role of Speculators in the Crude Oil Futures Market no longer exhibit the strong negative (working paper 2009); Brunetti and Bu¨ yu¨ ks¸ahin, Is that, respectively, there is increased Speculation Destabilizing? (working paper 2009); comovement between crude oil prices correlations that index fund investment Stoll and Whaley, Commodity index Investing and managers may have sought in hedging Commodity Futures Prices, Journal of Applied Finance (2010), Irwin and Sanders (multiple 1589 Bu¨ yu¨ ks¸ahin and Robe, Does ‘‘Paper Oil’’ their portfolios. In recent years there has studies). Matter? (working paper 2011). been an increased positive correlation 1600 See, e.g., Bu¨ yu¨ ks¸ahin and Robe, Speculators, 1590 Bu¨ yu¨ ks¸ahin and Robe, Does it Matter Who between equity and commodity prices Commodities, and Cross-Market Linkages (working Trades Energy Derivatives?, Review of Env’t, 1597 since 2008. There is also substantial paper 2012); Irwin and Sanders, Index Funds, Energy, and Economics (2013). consensus among economists who study Financialization, and Commodity Futures Markets, 1591 Id. at 5. this issue that risk premiums for at 15, Applied Economic Perspectives and Policy 1592 Celso Brunetti and Bahattin Bu¨ yu¨ ks¸ahin, Is (2010), citing, inter alia, Phillips and Yu, Dating the Speculation Destabilizing? (working paper 2009). holding long futures contracts have Timeline of Financial Bubbles During the Subprime 1598 See also Haigh, Harris, and Overdahl, Market decreased due to financialization. Crisis, Quantitative Economics (2011); and Kilian Growth, Trader Participation and Pricing in Energy However, there is a divergence of and Murphy, The Role of Inventories and Futures Markets (working paper 2007) views among economists on the Speculative Trading in the Global Market for Crude (participation of swap dealers and arbitrageurs has impacts, if any, on the large positions Oil, Journal of Applied Econometrics (2010). assisted in improved price efficiency—price 1601 Brunetti and Bu¨ yu¨ ks¸ahin, Is Speculation converge—in crude oil futures contracts, with taken by index funds on commodity Destabilizing? (working paper 2009) (finding that nearby, one, and two-year crude oil futures hedge funds in the commodity markets take the contracts statistically cointegrated through the 1597 E.g., Basu and Gavin, What Explains the opposite position to other market participants, period studied, July 2004 to mid-2006). Growth in Commodity Derivatives?, at 44 Federal therefore providing liquidity to the market in 1593 Bu¨ yu¨ ks¸ahin, Harris, and Haigh, Reserve Bank of St. Louis (2011) (commodity and various commodity market places studied, Fundamentals, Trader Activity, and Derivatives equity prices highly and positively correlated in including crude oil, natural gas, corn, and two Pricing (working paper 2008). February 2010); Tang and Xiong, Index Investment financial contracts). 1594 Id. at 3. and Financialization of Commodities, Financial 1602 Acharya, Ramadorai, and Lochstoer, Limits to 1595 Id. at 4–5. Analysts Journal (2012); Inamura, Kimata, et al., Arbitrage and Hedging: Evidence from Commodity 1596 Bu¨ yu¨ ks¸ahin and Robe, Does it Matter Who Recent Surge in Global Commodity Prices (Bank of Markets, Journal of Financial Economics (2013) Trades Energy Derivatives?, Review of Env’t, Japan Review March 2011). (existence of financial commodity index trading Energy, and Economics (2013); Bu¨ yu¨ ks¸ahin, Harris, 1598 Hamilton and Wu, Risk Premia in Crude Oil will tend to decrease risk premium, thereby and Haigh, Fundamentals, Trader Activity, and Futures Prices, Journal of International Money and generally making it cheaper for producers to hedge Derivatives Pricing (working paper 2008). Finance (2013). through short futures contracts).

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prepared to assume it.1603 Comovement indices and investible commodities, is large positive correlations between these and cointegration analyses are some of lower during times market stress. markets. According to many, one of the the statistical tools used to test whether Another comovement study provided factors leading to the influx of these purported benefits of greater an empirical link between commodity investment funds in during the 2006– market participation hold true under index investment and futures price 2008 time period was negative particular market conditions. movements, including increased price correlations between commodities While competition and increased volatility.1609 Tang and Xiong find that returns and equities returns. Yet this trading volume can generally help the increasing presence of index traders factor is less prevalent today. ‘‘The markets, inflows do not universally in commodity futures markets improves positive correlation between the benefit market welfare. In a paper by risk sharing in these markets with agriculture ETFs and S&P 500 suggests Cheng, Kirilenko, and Xiong, the concomitant volatility spillover from that the diversification benefits of using authors use comovement methodology outside markets. This study finds an agricultural index have to conclude that in times of distress, evidence of volatility spillovers from the decreased.’’ 1613 financial traders reduce their net long financial crisis in the 2006–2009 time Some commenters have pointed to position, causing risk to flow from period, spillovers that may have been a studies such as Tang and Xiong’s in financial traders to commercial key driver of recent commodity price support of the position limits rule.1614 hedgers.1604 ‘‘[J]ust when the volatility.1610 However, most financial investors’ uncertainty in the economy was rising, This Tang and Xiong finding of exposure to commodities through the number of futures contracts used by volatility ‘‘spillovers’’ is frequently cited commodity index funds or ETFs would commercial hedgers to hedge their risk by commenters in support of position not be prevented by position limits. was going down.’’ 1605 limits. However, some academics are Studies on the price returns or price Cheng, Kirilenko, and Xiong argue skeptical of their results. Irwin and volatility effect of commodity index that tests such as Granger, which look Sanders concede that the Tang and funds are thus not directly relevant to to whether financial traders’ positions Xiong paper ‘‘appears to offer concrete the placement of position limits on and futures prices are negatively evidence’’ of some form of individual commodities contract.1615 correlated when they trade to financialization, but offers several Moreover, commodity index funds are accommodate hedgers, overlook an reasons to view these findings with not the only large investors whose important lesson from the distressed caution.1611 activities may affect commodity futures financial literature.1606 When financial Tang and Xiong’s results do not prices.1616 entities trade in response to their own necessarily point to lasting difficulties A paper by Korniotis contains an financial distress, their trades may be associated with the integration of important caveat in the financialization correlated positively to futures price financial and commodity markets. debate: The effects of financialization changes. These correlations may net out, Instead, they argue that commodity may vary widely depending on the type so that any significant correlation markets were not integrated with of commodity.1617 Crude oil is an between their positions and price financial markets prior to the important component of the S&P changes may be masked by trading development of commodity index Goldman-Sachs Commodity Index during financial distress.1607 funds. In their paper, Tang and Xiong Using cointegration techniques and view financialization as a ‘‘process’’ 1613 Tse, The Relationship Among Agricultural non-public trading data, then-CFTC which helps explain ‘‘the synchronized Futures, EFTs, and the US Stock Market, at 16, economists, Bu¨ yu¨ ks¸ahin and Robe price boom and bust of a broad set of Review of Futures Markets (2012). Indeed, this decreased correlation may be due, in part, to demonstrate that the correlations seemingly unrelated commodities’’ ethanol, an economic substitute for gasoline as an between equity indices and during the 2006–2008 time period.1612 additive to reformulated blend stock, being commodities increase with greater A problem with this line of reasoning manufactured with corn and other grains. participation by financial that critics have identified is that there 1614 See generally Henn Letter. speculators.1608 There is no such effect could be other factors which lead to 1615 See December 2013 Position Limits Proposal at 75740 n.483 (‘‘The speculative position limits for other types of traders. In concert increased correlation between equities that the Commission proposes apply only to with the work of Cheng, Kirilenko, and and futures during this time period. transactions involving one commodity or the spread Xiong, they find that this cointegration After all, 2006–2009 was an eventful between two commodities .... They do not apply effect, the price linkages between equity time where broad macroeconomic to diversified commodity index contracts involving more than two commodities .... [C]ommenters factors held sway and could have led to assert that such contracts, which this proposal does 1603 Filimonov, Bicchetti, and Maystre, not address, consume liquidity and damage the Quantification of the High Level of Endogeneity and 1609 Tang and Xiong, Index Investment and price discovery function of the marketplace’’). of Structural Regime Shifts in Commodity Markets, Financialization of Commodities, Financial 1616 Irwin and Sanders, Index Funds, at3 and citations therein (working paper 2013). Analysts Journal (2012). Financialization, and Commodity Futures Markets, 1604 Cheng, Kirilenko, and Xiong, Convective Risk 1610 Of course, the spillover effect may not be at 26, Applied Economic Perspectives and Policy Flows in Commodity Futures Markets (working limited to domestic markets. Cf. UN Food and (2010) (emergency evidence that ‘‘other traders, paper 2012). Agricultural Org., Price Volatility in Agricultural such as broker-dealers and hedge funds, play key 1605 Id. at 2 (citing papers on a growing body of Markets. Economic and Social Perspectives Policy roles in transmitting shocks to commodity futures theoretical work indicating that at times of financial Brief 12 (2010) (citing financialization as a possible markets from other sectors’’), citing, inter alia crisis, funding and risk constraints may force basis for short-term volatility and observing that Bu¨ yu¨ ks¸ahin and Robe, Does it Matter Who Trades financial traders to unwind positions, which, in international integration of markets can propagate Energy Derivatives?, Review of Env’t, Energy, and turn, forces hedgers to reduce their hedging price risks to domestic markets quicker than Economics (2013); Haigh, Hranaiova, and Overdahl, positions). before). Hedge Funds, Volatility, and Liquidity Provisions in 1606 Id. at 3. 1611 Irwin and Sanders, Index Funds, the Energy Futures Markets, Journal of Alternative 1607 Id. See also Acharya, Ramadorai, and Financialization, and Commodity Futures Markets, Investments (Spring 2007); Basu and Gavin, What Lochstoer, Limits to Arbitrage and Hedging: 15, Applied Economic Perspectives and Policy Explains the Growth in Commodity Derivatives?, Evidence from the Commodity Markets, Journal of (2010) (questioning the small magnitude of Federal Reserve Bank of St. Louis (2011) Financial Economics (2013) (decreases in financial correlation and suggesting that Tang and Xiong may (documenting increased participation in commodity traders’ risk capacity should lead to increases in not have adequately controlled for fundamental trading by swap dealers). hedgers’ hedging cost, all else being equal). factors affecting price). 1617 Korniotis, Does Speculation Affect Spot Price 1608 Bu¨ yu¨ ks¸ahin and Robe, Speculators, 1612 Tang and Xiong, Index Investment and Levels? The Case of Metals With and Without Commodities, and Cross-Market Linkages (working Financialization of Commodities, Financial Futures Markets (working paper, FRB Finance and paper 2012). Analysts Journal (2012). Economic Discussion Series 2009).

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(GSCI), more so than industrial metals. Though the evidence for herding is actual prices. The economists look for Federal Reserve Board economist meager, the underlying idea is deviations between the fundamental George Korniotis found that there was consistent with accepted and price, based on the model, and the cointegration between metals with and theoretically plausible results on risk actual price of the commodity. When without futures contracts that did not premia. Risk premiums rise with the pursuing this method, economists look weaken as financial speculation volatility of the futures markets, and for whether the price deviations are increased in the marketplace and the risk premiums depend in part on statistically significant. When there are spot prices for industrial metals were speculators’ hedging pressure and statistically significant deviations of the unrelated to the GSCI. inventory levels.1622 actual price from market fundamentals, With the exceptions discussed in they infer that the price is not driven by Agricultural Commodities and detail above, many of the studies in this market fundamentals. Financialization vein do not warrant detailed discussion. Many of these studies present a model Even well-executed economic studies Agricultural economists have reached for one particular commodity or set of using comovement methodology that do similarly conclusions on the commodities. Some looked at volatile not focus on position limits may be of cointegration of financial speculators markets. Others used at very predictable little or marginal relevance.1618 and food prices. While there are markets. respectable empirical results suggesting We group together for analysis a Herding that financial speculation have affected diverse set of studies that fall within There are other possible ways in some recent agricultural commodity this broad category of economic models which additional trading volume may price dynamics, there is no unanimity of fundamental supply and demand. not be an unalloyed benefit to the in the academic community on Some asserted that their models wellbeing of a marketplace. A few conclusive empirical evidence of the generally could explain prices. Some comovement studies attempt to test for causal dynamics, breadth, and papers were neutral. And some papers the existence of ‘‘herding.’’ This is a magnitude of such effects.1623 reached the conclusion that market formalized version of price trending. c. Models of Fundamental Supply and fundamentals could not explain certain The idea here is that traders may initiate Demand and Related Methods price data in the markets they studied. a trade with the expectation that ii. Advantages positive-feedback traders will purchase i. Description the traded instruments at a higher price Some economists have developed This methodology is well-recognized later.1619 Some economists argue that economic models for the supply and and accepted means for detecting price financialization aggravates ‘‘herding’’ demand of a commodity. These models deviations. This is a centuries-old behavior and herding creates price often include theories of how storage technique, as old as the quantification of bubbles.1620 Others dispute any such capacity and use affect supply and economics. The model forces the effect.1621 demand, often a critical factor in the economist to explain supply and case of physical commodities and their demand. This requirement thus 1618 See Baffes and Haniotos, Placing the 2006/08 inter-temporal price (that is, their price provides welcome transparency. Commodity Boom into Perspective, World Bank over time). Using models of supply and Moreover, the models are auditable: Policy Research Working Paper 5371 (2010); When the fundamental price deviates Kawamoto, Kimura, et al., What Has Caused the demand, the economists then attempt to Surge in Global Commodity Prices and arrive at a ‘‘fundamental’’ price (or price from the actual price, the economists Strengthened Cross-market Linkage?, Bank of Japan return) for commodity based on the may well be able to look at the model Working Papers Series No.11–E–3 (May 2011); model. Specifically, the economists look and see which aspects of supply and/or Coleman and Dark, Economic Significance of Non- demand created the deviation. If the Hedger Investment in Commodity Markets (working at where the model is in equilibrium paper 2012); Dorfman and Karali, Have Commodity with respect to quantities supplied and economist cannot ascertain the source of Index Funds Increased Price Linkages between quantities demanded to arrive at this the deviation, (1) the economist may Commodities? (working paper 2012); Le Pen and price. The fundamental price given by seek to add additional variables to the Se´vi, Futures Trading and the Excess Comovement models for supply or demand to better of Commodity Prices (working paper 2012); Creti, such a model is then compared with Joets, and Mignon, On the Links Between Stock and model supply and demand or (2) Commodity Markets’ Volatility, Energy Economics moderate level of herding in futures markets conclude that this unexplained (2010); Bichetti and Maystre, The Synchronized and [among hedge funds] serves to stabilize prices’’). deviation is empirical support for the Long-lasting Structural Change on Commodity 1622 Basu and Miffre, Capturing the Risk Premium existence of a non-fundamental price. Markets: Evidence from High Frequency Data of Commodity Futures: The Role of Hedging (working paper 2012). Another advantage of this model is Pressure, Journal of Banking and Risk (2013). that the loose language of ‘‘bubble’’ is 1619 Boyd, Bu¨ yu¨ ks¸ahin, and Haigh, The 1623 See Aulerich, Irwin, and Garcia, Bubbles, Prevalence, Sources, and Effects of Herding Food Prices, and Speculation: Evidence from the replaced by the term ‘‘non-fundamental (working paper 2013); Hoff, Herding Behavior in CFTC’s Daily Large Trader Data Files, at 3 n.4, price.’’ The model supplies an Asset Markets, Journal of Financial Stability (2009). NBER Conference on Economics of Food Price economically motivated specification See also Froot, Scharfstein, and Stein, Herd on the Volatility (2012) (studies testing for the existence of for the price of a commodity. This Street: Informational Inefficiencies in a Market with price bubbles in agricultural futures markets have Short Term Speculation (working paper 1990) led to ‘‘mixed results’’). See also.Belke, Bordon, and feature permits deeper economic (theoretical paper discussing herding); Weiner, Do Volz, Effects of Global Liquidity on Commodity and analysis and debate on whether a non- Birds of A Feather Flock Together? Speculator Food Prices, German Institute for Economic fundamental price exists without a Herding in the Oil Market (working paper 2006) Research (2013); Ada¨mmer, Bohl and Stephan, (doing a herding analysis to conclude that there are digression into debates about what the Speculative Bubbles in Agricultural Prices (working 1624 subgroups within speculators that act in parallel, paper 2011); Algieri, A Roller Coaster Ride: an term ‘‘bubble’’ means. and this amplifies their effect on crude oil prices). Empirical Investigation of the Main Drivers of 1620 Hoff, Herding Behavior in Asset Markets, Wheat Price (working paper 2013); Babula and 1624 Nobel laureates in economics cannot agree on Journal of Financial Stability (2009); Mayer, The Rothenberg, A Dynamic Monthly Model of U.S. Pork whether bubbles exist or what the proper definition Growing Interdependence Between Financial and Product Markets: Testing for and Discerning the of a bubble is. Studies that focus on the causes of Commodity Markets, UN Conference on Trade and Role of Hedging on Pork-Related Food Costs, price formation avoid these definitional Development (discussion paper 2009) (Granger Journal of Int’l Agricultural Trade and Development uncertainties. See Easterbrook, Frank, Monopoly, analysis). (2013); Windawi, Speculation, Embedding, and Manipulation, and the Regulation of Futures 1621 E.g., Brunetti and Bu¨ yu¨ ks¸ahin, Is Speculation Food Prices: A Cointegration Analysis (working Markets, at S117, Journal of Business (1986) (it is Destabilizing?, at 5 n.3 (working paper 2009) (‘‘the paper 2012). Continued

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iii. Disadvantages models a ‘‘price band,’’ a band for prices are anticipated to be lower. Given As applied to position limits, this which prices falling within that range this, some economists have studied approach has several drawbacks as well. remain reflective of fundamental supply crude oil storage to determine whether First and foremost, the analyses and and demand. Prices outside the price crude oil inventories could be conclusions that flow from these studies band are non-fundamental prices. contributing to the boom and bust in are only as good as the models Determining the height of the band crude oil prices during the 2007–2008 themselves. Specifically, the price depends on what is viewed as a time period. Specifically, using models benchmark is based on the model, and statistically significant deviation, by of fundamental supply and demand, an analysis of deviation from the definition. But determining what a they study the elasticity of crude oil benchmark is only as strong as the statistically significant deviation is prices to determine whether the effect of model itself. These models incorporate requires the economist to make an speculators’ trading on crude oil many simplifying assumptions. Market assumption that can be quite inventories could affect crude oil prices. behavior and the real world in general, consequential. The economist must set Several economists have examined are much more complicated. a level of price changes that his or her above-ground oil inventories in the Moreover, these models do not model will ignore as attributable merely United States during this 2007–2008 function well when there is a supply to chance. Nothing in underlying timeframe and examined the interplay shock or when demand falls statistics of the price data will provide of crude oil inventories and prices. They precipitously. Another disadvantage is the economist with this level. If the concluded that the short-term elasticity model construction using variables that level is fixed so that the price band is of crude oil demand would have had to are highly correlated with the price. If relatively tall, less prices are likely to be have been unusually low—quite the correlation between price and a labelled statistically significant inelastic—for inventory demand to fully variable is too high, then using the deviation by the test. explain the unusual crude oil prices in variable in the model may permit the 2007–2008. (Price inelasticity of iv. Analysis of Specific Papers Using variable to function as a proxy for price. demand means that the price of crude Fundamental Models This will hobble the model’s ability to oil is sensitive to changes in quantity detect price deviations. Crude Oil Models demand: A small decrease in demand is A substantial disadvantage of this Even before 2007, there were likely to cause a large drop in price, for model is the inherent difficulty of suspicions about prices in the crude oil example, when the short-term elasticity modelling fundamentals of supply and market. The Governor of the Federal of demand is inelastic, all else being demand in a market of any complexity. Reserve Board said in 2004: ‘‘The sharp equal.) From this, they conclude that Or even, in a model, in anticipating or increases and extreme volatility of oil speculative traders’ effect on inventory measuring the impact of large prices have led observers to suggest that demand was unlikely to be a complete macroeconomic trends. For example, some part of the rise in prices reflects explanation for the 2007–2008 crude oil economists have a notoriously bad track a speculative component arising from price swings. That is, it would be record of predicting economic the activities of traders in the oil unlikely for speculators to be able to (at recessions. Thus it is difficult to markets.’’ 1625 Then the price of crude least easily) cause substantial conclude that a model with a few oil doubled from June 2007 to June movements in crude oil prices by variables, designed without this 2008, and then rapidly declined in the speculators’ influence on the amount of hindsight, would be successful in second-half of 2008. Many economists crude oil stored in above-ground crude predicting how crude oil prices would 1627 thereafter published papers saying that oil inventories. behave during the advent of an the increase in demand up to June 2008 Nonetheless, inventories may still economic recession. With hindsight, and/or the decrease in demand for explain part of the unusual price economists know now that September September 2008 crude oil could not be behavior of crude oil in 2007–2008. 2008 was at the outset of a substantial explained by market fundamentals. Even if the short-term elasticity of global recession, or at least a point of Many attempted to infer from this fact demand would have to have been very dramatic decrease in the output of the that speculative trading was causing small in absolute value, speculation world economy. And with hindsight, it changes in crude oil prices or price may have also affected below-ground is apparent that the recession 1628 volatility. inventories. dramatically reduced the demand for To understand these papers’ strengths Many economists conclude that there crude oil. But at the outset of a and weaknesses, it is important to was a substantial demand shock to recession, a model designed without appreciate a critical factor about crude crude oil during this time period, a knowledge of the recession (or of its oil market economics—storage.1626 Data severity) might confuse a statistically 1627 on storage is often used to study crude Byun, Speculation in Commodity Futures significant deviation of actual crude oil Market, Inventories and the Price of Crude Oil oil prices for speculative price prices for the fundamental price derived (working paper 2013); Hamilton, Causes and influences. from the model. Consequences of the Oil Shock of 2007–2008, Crude oil is storable, and so its price Brookings Paper on Economic Activity (2009); In addition, while this statistical reflects, in particular, the demand for Kilian and Lee, Quantifying the Speculative method replaces the loose language of Component in the Real Price of Oil: The Role of crude oil inventory. Speculators ‘‘bubbles’’ with a statistically derived Global Oil Inventories (working paper 2013); Kilian influence the spot price of crude oil by fundamental price, studies offering and Murphy, The Role of Inventories and placing physical crude oil into storage Speculative Trading in the Global Market for Crude economic analysis of the fundamentals when future prices are anticipated to be Oil, Journal of Applied Econometrics (2010); Knittel of price and demand do not eliminate and Pindyck, The Simple Economics of Commodity higher and out of storage when future all subjectivity in determining whether Price Speculation (working paper 2013). a non-fundament price has occurred. An 1628 Hamilton, Causes and Consequences of the 1625 Ben S. Bernake, Oil and the Economy, Oil Shock of 2007–2008, Brookings Paper on economist will often obtain from these Remarks by then Governor Bernake at the Economic Activity (2009) (below-ground Distinguished Lecture Series, Darton College, inventories should also be considered and are not not necessarily market manipulation to exploit an Albany, Georgia (2004). included in the data) (concluding that speculative advantageous position in the marketplace in 1626 Brennan and Schwartz, Arbitrage in Stock trading did affect both the speed and magnitude of anticipation of changes in supply and demand.’’) Index Futures (Journal of Business 1990). the price decline in 2008).

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demand arising from the onset of a These studies do not, in total, lead to supply and demand, by selecting one of global recession. As the deep recession consensus. There are distinctive the stronger proxies for crude oil, such of 2008 and 2009 began to set in, there differences and disagreement in the as the Dry Baltic Index or was a decrease in demand for papers on the existence of excessive macroeconomic variables such as global September 2008 crude oil in the crude speculation in the crude oil market gross domestic product as explanatory oil futures market. It is unlikely that a during 2007–2009. Even within the variables.1634 demand shock associated with the Federal Reserve system, there is One of the best studies in this area is recession was anticipated by the disagreement, for instance, Plante and Hamilton, Causes and Consequences of marketplace, including speculators, Yu¨ cel, in Did Speculation Drive Oil the Oil Shock of 2007–2008.1635 He given the notorious difficulty of Prices? Futures Market Points to concludes that fundamentals of supply predicting recessions. Kilian and Fundamentals,1632 and Juvenal and and demand are responsible for most of Murphy 1629 assert, if a global recession Petrella, in Speculation in the Oil the run-up in prices, while speculative causes the demand shock, the Market.1633 trading may have increased both the economics of the crude oil market The methodology of fundamentals of speed and absolute magnitude of the suggests that there is little policymakers supply and demand does not zero in mid-2008 decline in prices. As to the can do to prevent this kind of price precisely on causation and leaves room first point, he concludes that while oil bubble from appearing in the crude oil for interpretation of why a price does prices may have been ‘‘too high’’ in July market at the outset of the recession.1630 not follow modelled supply and 2008, ‘‘low price elasticity of demand, Several economists wrote papers demand behavior. Labelling prices and the failure of physical production to suggesting that their results indicated ‘‘bubbles’’ caused by speculation simply increase’’ are more likely the that crude oil price changes during this because one does not understand or predominant causes than ‘‘speculation time period reflected uneconomic or cannot otherwise account for price per se.’’ 1636 He acknowledges, however, ‘‘bubble-like’’ behavior. Generally, these movements is problematic. One that the speed and magnitude of the authors find that their models of supply explanation for the failure of these price decline in mid-2008 may have and demand could not track well the models to track such fast-moving prices been induced, in part, by speculative run up in crude oil prices to around that is speculative activity is at work. trading. $145 in mid-2008 or the bust to close to But there are other explanations. On Given this mixed result, both $30 a barrel just a few weeks later, and some level, there is a tautological error proponents and opponents of position they concluded that activity by in labelling price changes as ‘‘bubble- limits cite various aspects of this speculators in these markets was or like’’ simply because economists could Hamilton study. His study follows the might be affecting the rapid crude oil not, as of a certain time and with certain data closely; his model discusses key price changes.1631 model, otherwise explain or predict issues such as inventory. He does not price movements. These models are leap to strained interpretations based on 1629 Kilian and Murphy, The Role of Inventories trying to explain very complex theoretical model assumptions. When and Speculative Trading in the Global Market for phenomena and make difficult choices his model does not provide a full Crude Oil, Journal of Applied Econometrics (2010). on how to use imperfect data. explanation for price behavior based on 1630 See id. at 6 & n. 8 (economic theory suggests a link between cyclical fluctuations in global real Some models performed better at supply and demand, he does not simply activity and the real price of oil). modelling the real-world crude oil jump to the conclusion that speculation 1631 E.g., Cifarelli and Paladino, Oil Price prices, using models of fundamental is at work. Instead, he offers measured Dynamics and Speculation: A Multivariate Financial Approach, at p.1, Energy Economics Speculation, Futures Prices, and the U.S. Real Price 1634 E.g., Kilian and Murphy, The Role of (2010) (‘‘Despite the difficulties, we identify a of Crude Oil, American Journal of Social and Inventories and Speculative Trading in the Global significant role played by speculation in the oil Management Science (2010) (contending that there Market for Crude Oil, Journal of Applied market, which is consistent with the observed large is ‘‘hoarding’’ in the crude oil market and that Econometrics (2010). In the construction of his daily upward and downward shifts in prices—a elimination of the longer-term futures contracts study, Kilian used a shipping index, the Dry Baltic clear evidence that it is not a fundamental-driven would curb excessive speculation); Weiner, Index. In shipping, a predominant factor in the cost market’’); Einloth, Speculation and Recent Speculation in International Crises: Report from the of shipping is the cost of crude oil. By using the Volatility in the Price of Oil (working paper 2009) Gulf, Journal of Int’l Business Studies (2005) (a Dry Baltic Index to attempt to compose a model to (using convenience yields to conclude that combination of political and market events, not explain crude oil prices, the economist chose a speculation did not play a major role in rise of speculation, was behind the price volatility in variable which would naturally be highly correlated crude oil to $100 a barrel in March of 2008, did play 1990–1991); Breitenfellner, Crespo, and Keppel, to crude oil prices. However, by using a proxy, the a role in its subsequent rise to $140 a barrel, and Determinants of Crude Oil Prices: Supply, Demand, effectiveness of the model is lessened. It is unclear did not play a role in subsequent decline); Cartel, or Speculation?, at 134, Monetary Policy and whether the results are attributable to fundamentals Hamilton, Causes and Consequences of the Oil the Economy (2009) (concluding ‘‘it is conceivable’’ driving crude oil prices or crude oil prices driving Shock of 2007–2008, Brookings Paper on Economic that interaction between crude oil production and the Dry Baltic Index. See also Morana, Oil Price Activity (2009) (speculative trading increased the financial markets exacerbated pressure on crude oil Dynamics, Macro-finance Interactions and the Role speed and magnitude of mid-2008 price collapse). prices, but finding no proof of this). of Financial Speculation, pp. 206–226, Journal of Papers using this methodology reach a broad range 1632 Plante and Yu¨ cel, Did Speculation Drive Oil Banking & Finance, Vol. 37, Issue 1 (Jan. 2013) of conclusions. See also Eckaus, The Oil Price Prices? Futures Market Points to Fundamentals (careful, large-scale modeling of the oil market Really is a Speculative Bubble (working paper 2008) (working paper Federal Reserve of Dallas 2011) macro-finance interface, finding the existence of (reject the hedging pressure hypothesis that (crude oil data for the 2007–2009 time period ‘‘are ‘‘excess speculation’’ in these markets using inventory positions are an important determinant of consistent with how a well-functioning futures Workings T and other tests, and concluding that risk premiums, and concludes that oil prices are market would behave,’’ and if speculation had been financial factors may have up to a 30 percent speculative because he cannot perceive a reason for to blame, there would have been ‘‘very large contribution to oil price fluctuations). Id. at p.220 the prices based on supply and demand); Morana, positive spreads . . . followed by significant (using Working’s T and model to conclude that Oil Price Dynamics, Macro-finance Interactions and increases in inventory’’). there is a significant liquidity effect associated with the Role of Financial Speculation, at 206–226, 1633 Juvenal and Petrella, Speculation in the Oil non-fundamental financial shocks in the oil market, Journal of Banking & Finance, Vol. 37, Issue 1 (Jan. Market (working paper of Federal Reserve Bank of leading to a higher real oil price without affecting 2013) (concluding that there is excessive St. Louis 2012) (concluding that speculation played inventories); id. at 223–224 (macro-finance factors speculation in the crude oil market that did lead to a ‘‘significant role’’ in both the price increases in played a larger role than ‘‘financial factors’’ in the a substantial price impact in 2007–2008); Sornette, 2008 and the subsequent collapse, but they did not 2007–2009 crude oil ‘‘price shock,’’ but ‘‘excessive Woodard and Zhou, The 2006–2008 Oil Bubble and carefully model ‘‘excess speculation.’’ Instead, they speculation’’ did have a price impact). Beyond: Evidence of Speculation, and Prediction, interpreted the second principle component as 1635 Hamilton, Causes and Consequences of the Physica A. (2009) (find evidence of a bubble, but being ‘‘excess speculation’’ even though the second Oil Shock of 2007–2008, Brookings Paper on only based upon an undocumented model largely component may be assigned many other Economic Activity (2009). presented by graphs); Stevans and Sessions, interpretations or even be deemed uninterpretable.). 1636 See id. at 17–23.

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judgments on the possibility that supply liquidity and that there is little position limits.1644 Others rest on speculation may have affected the linkage between price volatility and unreliable model assumptions.1645 precipitous mid-2008 crude oil price hedge fund position change. They claim decline and presents statistical evidence that hedge fund participation in futures 1644 Chan, Trade Size, Order Imbalance, and that this may have occurred. markets, at least as of 2007, was not Volatility-Volume Relation, Journal of Financial injecting unwarranted volatility into Economics (2000) (studying the equity market to Other Studies Based on Supply and determine the role that trade size has on volatility 1643 Demand Models futures prices. for equities); Chordia, Subrahmanyam and Roll, A discussion of crude oil prices Other papers on the fundamentals of Order imbalance, Liquidity, and Market Returns, supply and demand do not bear directly Journal of Financial Economics (2002) (show that during the 2007–2008 timeframe is order imbalances in either direction for equity illustrative of other commodities during on position limits. Some discuss matters markets affect daily returns after controlling for this time period. For example, there is far afield from the impact of positions aggregate volume and liquidity); Doroudian and considerable comovement between the on price or other matters bearing on Vercammen, First and Second Order Impacts of real price of crude oil and the real price Speculation and Commodity Price Volatility of other industrial commodities during (working paper 2012) (claiming a ‘‘second order’’ price distortion caused by institutional investors); times of major fluctuation in global real Frankel and Rose, Determinants of Agricultural and 1637 activity (such as global recessions). Mineral Commodity Prices (working paper 2010) All commodities during this time period (two macroeconomic fundamentals—global output were buffeted by macroeconomic and inflation—have positive effects on real factors, including a global recession, commodities, but microeconomic variables have and a deep one at that during 2008 and greatest overall effects, including volatility, inventories, and spot-forward spread); Girardi, Do 2009. Financial Investors Affect Commodity Prices? Outside of the crude oil context, there (working paper 2011) (during the late 2000s there are some noteworthy studies of was a positive, statistically significant and fundamental supply and demand that substantial correlation between hard red winter bear on the position limits rulemaking. wheat price and the U.S. equity market, as well as Allen, Litov, and Mei, in Large a substantial correlation between hard red winter wheat prices and crude oil prices); Hong and Yogo, Investors, Price Manipulation, and Digging into Commodities (working paper 2009) Limits to Arbitrage: An Anatomy of (investors use commodities to hedge market Market Corners,1638 examine historical fluctuations, as evidenced by yield spread analysis); corners and squeezes in security and Kyle and Wang, Speculation Duopoly with commodity markets and conclude that a Agreement to Disagree: Can Overconfidence corner or squeeze may induce Survive the Market Test?, Journal of Finance (1997) (theoretical model explaining how overconfidence arbitragers to exit the market, since by fund managers can lead to a persistence in arbitragers will only take short positions market prices); Plato and Hoffman, Measuring the when the prospect of profits is high Influence of Commodity Fund Trading on Soybean enough. Two papers, Gorton, Hayashi, Price Discovery (working paper 2007) (‘‘finding that Rouwenhorst, The Fundamentals of the price discovery performance of the soybean 1639 futures market has improved along with the Commodity Futures Returns, and increased commodity fund trading’’); Westcott and Ederington, Dewally, and Fernando, Hoffman, Price Determination for Corn and Wheat: Determinants of Trader Profits in The Role of Market Factors and Government Futures Markets,1640 offer empirical Programs (working paper 1999) (analysis of supply support for the hedging pressure and demand fundamentals for wheat and corn that hypothesis: That the returns on long does not include position data); and Wright, International Grain Reserves and Other Instruments futures positions vary inversely with to Address Volatility in Grain Markets, World Bank 1641 inventory and price volatility. Research Observer (2012) (about price limits, not Haigh, Hranaiova, and Overdahl, in position limits). Hedge Funds, Volatility, and Liquidity 1645 Bos and van der Molen, A Bitter Brew? How Provisions in the Energy Futures Energy Futures Markets, Journal of Alternative Index Fund Speculation Can Drive Up Commodity Markets,1642 suggest that hedge funds Investments (2007). Prices, Journal of Agricultural and Applied 1643 See also Harrison and Kreps, Speculative Economics (2010) (most of the changes in spot Investor Behavior in a Stock Market With prices can be attributed to shifts in demand and 1637 Kilian and Murphy, The Role of Inventories Heterogeneous Expectations, Quarterly Journal of supply, and failure to account properly for these and Speculative Trading in the Global Market for inputs in the coffee price generation process may Crude Oil, at p.7 n. 9, Journal of Applied Economics (1978) (differences in subjective beliefs lead to serious overestimation of the effects of Econometrics (2010). induce trading and speculation); Manera, Nicolini speculation; nevertheless, asserting without 1638 Allen, Litov, and Mei, Large Investors, Price and Vignati, Futures Price Volatility in detailed analysis that speculation is an important Manipulation, and Limits to Arbitrage: An Anatomy Commodities Markets: The Role of Short-Term vs part of the coffee price generation process), Gupta of Market Corners, Review of Finance (2006). Long-Term Speculation (working paper 2013) and Kamzemi, Factor Exposures and Hedge Fund 1639 Gorton, Hayashi, Rouwenhorst, The (short-term speculation, as estimated by daily Operational Risk: The Case of Amaranth (working Fundamentals of Commodity Futures Returns, volume divided by open interest, increases paper 2009) (trying to explain the behavior of Review of Finance (2013). volatility while long term speculation, using a Amaranth on the mistaken notion that a hedge fund 1640 Ederington, Dewally, and Fernando, Working’s T analysis, decreases it); Trostle, Global should be diversified); Henderson, Pearson and Determinants of Trader Profits in Futures Markets Agricultural Supply and Demand: Factors Wang, New Evidence on the Financialization of (working paper 2013). Contributing to the Recent Increase in Food 1641 All else being equal, the more inventory Commodity Markets (working paper 2012) (analysis Commodity Prices, USDA Economic Research founded on questionable assumption that available for delivery the less costly it is for shorts Service (2008) (surveying supply and demand to hedge their exposure. Similarly, the more volatile commodity link note investors are uninformed fundamentals explain a lot of the futures prices and the commodity prices are, the more price risk is investors); Van der Molen, Speculators Invading the being accepted by the longs (all else being equal). price volatility: Slow growth in production relative Commodity Markets (working paper 2009) (data This means that in volatile markets hedgers that are to demand for biofuels, declining US dollar, rising handling problems: Dataset which covers twenty short will pay higher risk premia to hedge. oil prices, bad weather 2006 to 2007, growing years, while the variable index speculators is only 1642 Haigh, Hranaiova, and Overdahl, Hedge holdings by foreign countries, and increased cost of available for two to three years, and assumes that Funds, Volatility, and Liquidity Provisions in the production for agriculture in general). net position is in indication of index speculators).

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d. Switching Regressions that were market-transition events such price rise.1647 In any event, none of this i. Switching Regression Analysis as ‘‘bubbles,’’ and this method permits price phenomenon can be viewed as a Described the economist to zero-in on that time problem of ‘‘excessive speculation.’’ period and to investigate potential One could still use the ill-defined word In a switching regression analysis, an causes and/or confounding events ‘‘bubble’’ to describe the second state, economist poses the existence of a associated with a suspected market but it would be a dearth of rainfall, not model with more than one state. In the transition.1646 excessive speculation, which created particular context of position limits, this second state. there are typically two states: (1) A iii. Disadvantages The theoretical level of the analysis, normal state—where prices are viewed and in particular the lack of firm This method has a significant as what they theoretically should be empirical data linking non-normal states following market fundamentals and (2) disadvantage that is highlighted in the to speculative ‘‘bubble’’ markets, are a second state—often described as a position limit context. This statistical weaknesses of this statistical method. ‘‘bubble’’ state in these papers. Using technique tests for a second state. There The studies following this method do price data, authors of these studies could, however, be reasons for a non- not provide categorical proof of the calculate the probability of a transition normal state other than a ‘‘bubble’’ state. existence of speculative ‘‘bubble’’ between these two states. The point of This method leaves quite a bit to markets and they do not provide transition between the two states under economic interpretation of the model, statistical evidence of whether positions this methodology is called a structural not raw data analysis, to reach their limits would be effective in ameliorating ‘‘breakpoint.’’ Examination of these inference that the second state is a ‘‘bubble’’ markets.1648 breakpoints permits the researcher to ‘‘bubble’’ state. iv. Analysis of Studies Reviewed That date and time the existence of a second While the existence of a second state Used Switching Regression state, such as a bubble state. may indicate a ‘‘bubble’’ state and may These authors sometimes find indicate a problem with excessive Five studies used a standard form of empirical support in the data for the speculation, this statistical method switching regressions analysis.1649 existence of a second state by cannot definitively prove these calculating the probability of inferences, even if position data were 1647 This example is taken from an academic breakpoints. When the probability is paper not within the administrative record that used in the analysis. The probability of found non-fundamental (or ‘‘bubble’’) prices in high enough, the research will say that the existence of second state in these crude oil and feeder cattle markets. Brooks et al, there is evidence for a second state. studies in only circumstantial evidence Boom and Busts in Commodity Markets: Bubbles or of (1) a ‘‘bubble’’ state and (2) a Fundamentals? (working paper 2014). ii. Advantages 1648 These models are difficult to design well in ‘‘bubble’’ state caused by excessive A variant of this method was first this context for several other reasons. The speculation. economist is making an informed, probabilistic published in 1973. It is fairly well- inference that a transition has occurred. This credentialed within academia. If there Consider an example of why data inference is more than a seat-of-the-pants are two states of the world, it makes alone cannot explain why a deviation determination, but it is less than a mathematical sense that distinct states would have from a normal market state is a bubble certainty. The result of this statistical method is state: The case of feeder cattle. If there also highly dependent upon what set of data the different economic models. Because econometrician selects for analysis. An economic switching regressions uses at least a is a drought and feed becomes scarce model founded on this method should be given two-state regression, this method and expensive, the cattlemen may sell more credence when it is applied to more than one satisfies the economist’s view that off part of their herd. Prices of feeder dataset and the results are replicated with different cattle may then drop in the short term data. Selection of controlling variables that would different states would be better account for position data is a difficult task with this described using different models. A one- as well, because cattleman may sell statistical model. The data-driven nature of the size-fits-all model, applied to varying young calves, too. But subsequently, model does not help in selection of proper economic states, could potentially be because so many cattle have been controlling and explanatory variables. Ingenuity is required to design explanatory variables that would compromised in order to accommodate slaughtered, there is a shortage of feeder account well for position data. disparate states. cattle the next season and the prices of 1649 These are: Cifarelli and Paladino, Commodity This model is flexible, allowing for feeder cattle rise. So in this case, there Futures Returns: A non-linear Markov Regime many different specifications (of model is theoretical and empirical support for Switching Model of Hedging and Speculative design) as explanatory variables of two states, but they correspond to non- Pressures (working paper 2010) (concluding that speculation, not supply and demand factors, drive speculative positions and futures prices. drought and drought states and not some daily price swings in certain energy futures); When using this method, the normal and ‘‘bubble’’ state. Switching Chevallier, Price Relationships in Crude oil Futures: economic researcher permits the data regression analysis if applied to feeder New Evidence from CFTC Disaggregated Data, itself to choose the structural cattle prices during a time period Environmental Economics and Policy Studies (2012) (the influence of financial investors through breakpoints. This differs from some encompassing both drought and non- the S&P GSCI Energy Spot may have contributed to other statistical methods, where the drought state would not establish the price changes in the crude oil market) (discussed economic researcher may choose existence of what we could typically in ensuing text); Hache and Lantz, Speculative exogenously, based on interpretation of view as a ‘‘bubble’’ in the post-drought Trading & Oil Price Dynamic: A Study of the WTI Market, Energy Economics, Vol. 36, 340 (March the data or historical knowledge, where 2013) (cannot reject hypothesis that variations in and when a transition to a supposed 1646 This method is particularly good at the positions of non-commercial players may have bubble state occurs. The model’s ‘‘accommodating’’ abrupt shifts in market data. played a ‘‘destabilising role in petroleum markets’’ selection of the breakpoint permits data Some statistic methods, such as those based on and ‘‘speculative trading can be considered an linear regression, may have difficulty with volatile important factor during market instability and ‘oil to be tested against known historical data or data discontinuity. This method is also bubbling’ process’’); Lammerding, Stephan, Trede, events and thus lend a measure of particularly well-suited for studying policy and Wifling, Speculative Bubbles in Recent Oil credence to the model’s choices for changes. For example, if the Federal Reserve makes Price Dynamics: Evidence from a Bayesian Markov structural breaks. a policy change that is expected to have a long- Switching State-Space Approach, Energy term, but not necessarily an immediate, impact, this Economics Vol. 36 (2013) (claims to find robust The model also permits close study of method will permit an economist to infer, based on evidence of ‘‘bubbles’’ in oil prices associated with particular time periods. An economist the model, the duration of the lag before the policy speculation); and Sigl-Gru¨ b and Schiereck, may well be aware of historical events change begins to affect the markets. Continued

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Three studies used a related and demand fundamentals and other coefficients) for different time-lagged methodologies, multi-state regressions papers that investigate speculative price variables. They then solve for the or conditional correlations.1650 trading. Chevallier employs roots of that characteristic equation and Most of these studies are not helpful macroeconomic variables, proxies for look for the eigenvalues (latent values) because they do not use position data or supply and demand fundamentals, and with absolute value greater than one. because they have technical issues.1651 speculative positions (net open position They conclude that eigenvalue indicates It is difficult to perform these types of of speculators) in his model that the price of the commodity is in an studies well. A study finding the specifications. Using switching ‘‘exploding’’ state or a ‘‘bubble.’’ 1654 existence of transitions between states regression analysis, he concludes that ii. Advantages and Disadvantages can be unconvincing if it does not have one cannot eliminate the possibility of solid theoretical and economic speculation (a reason why the physical This method can be applied after-the- justifications for the data selected and commodity may move into and out of fact to historical data to try to ascertain the model’s design. Many of the storage) as one of the main reasons whether past price changes constituted disadvantages of this methodology, behind the 2008 oil price swings. a ‘‘bubble.’’ Or it can be applied to real- discussed above, find expression in This is an important result. Other time data to predict whether a current these papers. economic studies using models of state of affairs is a ‘‘bubble.’’ For these However, there is one switching supply and demand purport to explain reasons, some economists perceive, as regression study worthy of further the 2008 price swings in crude oil an advantage of this method, the ability discussion in our view. It is well- without incorporating speculation into through statistical means to date and executed and employs position data: demand. Chevallier’s paper suggests time ‘‘bubbles’’ in prices. Chevallier, Price Relationships in Crude that speculation cannot be ruled out as On the other hand, this method is oil Futures: New Evidence from CFTC a cause. Specifically, using net based on a model and the results of any Disaggregated Data.1652 Of course, it speculative positions as one of his analysis are only as strong as the model. inherits all the difficulties of speculative variables in his test, he found that this The model is limited to price data and position data, such as the difficulty variable was statistically significant on a constant. Models using this technique separating hedgers from speculators. Yet crude oil futures natural logarithm of do not permit the study authors to Chevalier’s effort does persuasively price returns during the 2008 time include other explanatory variables. suggest the existence of two states in period.1653 This is a disadvantage because it is price structure during 2008 crude oil This result posits that speculation likely that there are variables of interest market price swings. His paper suggests may have played some role during the other than lagged prices when that with highly inelastic supply and 2008 crude oil futures price swings. It considering whether price instability demand, the influence of financial suggests that studies that look only to exists. For example, someone interested investors through the S&P GSCI Energy supply and demand without in position limits would want to include Spot may have contributed to price incorporating speculative demand to an explanatory variable such as changes in the crude oil market. explain the crude oil market in 2008 speculative positions in the regressions, Using switching regressions, may be overlooking an important factor. but this technique does not permit this. Chevallier attempts to reconcile two The switching regression methodology Further, the model allows for wide strands of economic literature: Papers in this context functions as a cross- discretion in the number of lagged that posit the predominance of supply check to determine whether models of prices used. The studies’ authors often fundamental supply and demand can, in look at ‘‘goodness of fit’’ results to Speculation and Nonlinear Price Dynamics in fact, account for all the price swings in determine how many lags to select, Commodity Futures Markets, Investment crude oil during this time. In at least seeking to set the model based upon the Management and Financial Innovations, Vol. 77, this particular commodity market and data. This step may make the model pp. 59–73 (2010) (‘‘short-run autoregressive behavior’’ of commodity markets is driven not only timeframe, Chevallier’s finding that net uniquely tailored to a particular dataset by fundamentals but also by trading of speculators). speculative positions are correlated with but not easily applicable to another. Put 1650 These are: Fan and Xu, What Has Driven Oil crude oil future prices suggests a price another way, selecting an important Prices Since 2000? A Structural Change Perspective, effect from net speculative positions. model feature based on testing of the Energy Economics (2011) (multi-state); Baldi and data runs the risk of a selection that is Peri, Price Discovery in Agricultural Commodities: e. Eigenvalue Stability The Shifting Relationship Between Spot and not based on any theoretical or Futures Prices (working paper 2011) (multi-state); i. Description economic fact, but instead on ad hoc Silvernnoinen and Thorp, Financialization, Crisis Some economists have run assumptions made by the modelers and and Commodity Correlation Dynamics, Journal of any idiosyncrasies of the dataset.1655 Int’l Financial Markets, Institutions, and Money regressions on price and time-lagged (2013) (conditional correlations). All three of these values of price. They estimate the time- iii. Analysis papers are of mixed methodology, applying lagged regression over short time switching regression analysis to relationships Economists using this methodology internals. They do this to detect, between prices that are viewed by the papers’ attempt to find the existence of price through examination of specific terms in authors as cointegrated. ‘‘bubbles’’ using eigenvalue stability 1651 For example, the study by Sigl-Gru¨ b and their lagged price model, unusual price methods. Three such papers were Schiereck employs a smooth transition (as opposed changes. In technical terms, they use a to an abrupt change) between states. Unfortunately, difference equation for lagged price with the study’s model does not have a high goodness- 1654 See, e.g., Goyal and Tripathi, Regulation and of-fit values (all adjusted-R2 are below 0.05 and different estimated values (i.e., Price Discovery: Oil Spot and Futures Markets at most are below 0.01), nor fundamental economic 15–16 (working paper 2012) (describing explanatory variables (only lagged prices and 1653 Specifically, Chevallier found that in the first methodology in more detail). speculative positions in the transition component state, the coefficient of the logarithmic returns of 1655 Even if there were not such problems, the between states). These are shortcomings. In net speculative positions is positive and significant methodology has an insurmountable theoretical particular, the latter omission may overstate the (1 percent level). In the second state, this coefficient difficulty. The use of the ‘‘unit root’’ test, as a part importance of speculative positions. is negative and mildly significant (10 percent level). of this eigenvalue methodology, is an inherently 1652 Chevallier, Price Relationships in Crude oil Chevallier’s results show statistically significant suspect way of identifying explosive price behavior. Futures: New Evidence from CFTC Disaggregated relationships between the volume of speculative That is because the unit root tests rely upon a small Data, Environmental Economics and Policy Studies positions in particular and logarithmic price a set of observations to approximate long-term price (2012). returns. behavior.

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submitted.1656 All the authors find not expect the real price of an asset, conclusions which could be helpful to ‘‘evidence’’ of various ‘‘bubbles.’’ which is the price is adjusted for position limit skeptics, such as the However, in none of these studies is inflation, to grow without bound. power of the marketplace to ‘‘self- there reasonable empirical evidence to discipline’’ would-be excessive 2. Theoretical Models support the inferential leap between speculators.1664 Some papers offer instability, ‘‘bubbles,’’ and excess Some economic papers cited in this theoretical grounds for the concern that speculation. In particular, for all of rulemaking perform little or no more restrictive or ‘‘extreme’’ position these studies, there is no link made in empirical analysis and instead, present limits might increase price the data between price instability and a general theoretical model that may volatility.1665 positions. These studies do not use bear, directly or indirectly, on the effect Even these papers are not firm in their position data. The problem inheres in of excessive speculation in the opposition. In The Self-Regulation of the method, which, while purporting to commodity marketplace. Within the 26 Commodity Exchanges: The Case of detect the existence of ‘‘bubbles,’’ does theoretical model papers in the Market Manipulation, Journal of Law not permit the research to link supposed administrative record, there is a subset and Economics (1995),1666 Craig Pirrong bubble to speculative positions. of papers which may be viewed as (an economic expert for ISDA/SIFMA in In modern markets, prices can change generally supportive or disapproving of the position limits rulemaking) argues rapidly for many reasons. The position limits. Because these papers do that there ‘‘is no strong theoretical or ‘‘explosion’’ of a price over a short time not include empirical analysis, they empirical reason to believe that self- interval does not necessarily reflect contain many untested assumptions and regulating exchanges effectively deter uneconomic behavior or a price conclusory statements. In the specific corners.’’ 1667 He simply disagrees that ‘‘bubble.’’ It could simply represent a context of academic analysis of position other forms of regulation such as ‘‘shock.’’ That shock need not come limits (as opposed to policy position limits ‘‘could do better.’’ 1668 from speculative activity. The price path formulation) theories are useful but Pirrong does not discount the harm of may not be smooth. For this reason, must be tested empirically. price manipulation. Pirrong’s these models are conceptually flawed Manipulation of the Commodity Futures Theoretical Papers Directly or Indirectly 1669 when applied to commodity prices and Support Position Limits Market Delivery Process, documents commodity futures prices. these harms.1670 For example, in Gilbert, Speculative Two studies presented theoretical Influences on Commodity Futures models establishing the risk of price Other Theoretical Papers Prices,1657 Gilbert uses a variant of this manipulation in the derivatives markets, A set of papers suggest that there can methodology in an early section of his including cash-settled contracts, be excessive speculation in oil without paper to find ‘‘clear evidence’’ of suggesting that position limits might be ‘‘bubble periods’’ for copper and particularly helpful in cash-settled 1664 Pirrong, Manipulation of the Commodity soybeans lasting days and weeks.1658 He contracts.1661 A few studies presented Futures Market Delivery Process, Journal of theoretical reasons why financial Business (1993); Pirrong, The Self-Regulation of finds unexplained price increases in Commodity Exchanges: The Case of Market crude oil for periods of time that are investors might increase or Manipulation, Journal of Law and Economics ‘‘insufficient to qualify as bubbles.’’ 1659 ‘‘destabilize’’ commodity futures (1995); Ebrahim and ap Gwilym, Can Position prices 1662 or the spot price.1663 Limits Restrain Rogue Traders?, at 832 Journal of Using just price data, and not positions, Banking & Finance (2013) (‘‘Our results illustrate Gilbert’s attribution of lingering price Theoretical Studies Indirectly that excess speculation, with or without the intent spikes cannot be attributed to Criticizing at Least Some Position to manipulate the futures markets, is not 1660 worthwhile for the speculator’’ and concluding that speculative positions. Limits There is a subtler disadvantage that position limits are ‘‘counterproductive’’ because On the other hand, there were excessive speculation enriches other market players inheres in the inference between the at the expense of the speculator). identification of price growth without theoretical papers that reached 1665 Pliska and Shalen, The Effects of Regulation bound and the existence of a bubble. To on Trading Activity and Return Volatility in examine intervals where a price series is 1661 Kumar and Seppi, Futures Manipulation with Futures Markets, at 148, Journal of Futures Markets ‘‘Cash Settlement’’, Journal of Finance (1992) (2006) (‘‘[W]ell-meaning regulatory policies can be appearing to grow without bound and to (while, without physical delivery, corners and counterproductive by reducing the liquidity which infer that that implies a bubble is squeezes are infeasible, cash-settled contracts are is characteristic of futures markets,’’ including problematic. A time series for price of still susceptible to cash-to-futures price policies such as ‘‘extreme margins and position an asset is unlikely to tend to infinity manipulation, and this price manipulation transfers limits’’); Lee, Cheng and Koh, An Analysis of liquidity from futures to cash markets); Dutt and Extreme Price Shocks and Illiquidity Among because, eventually, this would likely Harris, Position Limits for Cash-Settled Derivative Systematic Trend Followers (working paper 2010) lead to infeasible prices (generally, in Contracts, Journal of Futures Markets (2005) (using an agent-based model and assuming trend- the absence of hyperinflation). We do (arguing that cash settled contracts appear to be followers in the market, finds no reason to believe particularly susceptible to manipulation, but position limits will help as opposed to leading to appearing to conflate SEC options with CFTC- erratic price behavior). 1656 These are: Phillips and Yu, Dating the regulated commodity contracts). 1666 Pirrong, The Self-Regulation of Commodity Timeline of Financial Bubbles During the Subprime 1662 Lombardi and van Robays, Do Financial Exchanges: The Case of Market Manipulation, Crisis, Quantitative Economics (2011); Czudaj and Investors Destabilize the Oil Price? (working paper, Journal of Law and Economics (1995). Beckman, Spot and Futures Commodity Markets European Central Bank, 2011) (giving theoretical 1667 Id. at 143. and the Unbiasedness Hypothesis—Evidence from grounds for the ability of financial investors in 1668 Id. (asserting that position limits are a Novel Panel Unit Root Test, Economic Bulletin futures to destabilize oil prices, but only in the ‘‘excessively costly’’ and concluding that self- (2013); Gutierrez, Speculative Bubbles in short run); Vansteenkiste, What is Driving Oil Price regulation, along with after-the-fact civil and Agricultural Commodity Markets, European Review Futures? Fundamentals Versus Speculation criminal penalties for manipulation, may be more of Agricultural Economics (2012) (Monte Carlo (working paper, European Central Bank, 2011); Liu, efficient, but this assertion is unaccompanied by variant of eigenvalue stability approach). Financial-Demand Based Commodity Pricing: A quantitative analysis or a detailed qualitative cost- 1657 Gilbert, Speculative Influences on Theoretical Model for Financialization of benefit analysis). Commodity Futures Prices, 2006–2008, UN Commodities (working paper 2011). 1669 Pirrong’s Manipulation of the Commodity Conference on Trade and Development (2010). 1663 Schulmeister, Torero, and von Braun, Futures Market Delivery Process, Journal of 1658 Id. at 9 at ¶ iii. Trading Practices and Price Dynamics in Business (1993). 1659 Id. at ¶ ii. Commodity Markets (working paper 2009) (finding 1670 Id. at 363 (futures market manipulations 1660 This is perhaps why he proceeds to a that price movements in crude oil and wheat are ‘‘distorts prices and creates deadweight losses;’’ Granger-based analysis using position data in the lengthened and strengthened by ‘‘speculation’’ in ‘‘causes shorts to utilize real resources to make second half of his paper. respective futures prices). excessive deliveries;’’ and ‘‘distorts consumption’’).

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a significant increase in crude oil the whole, these survey pieces offer likely to contribute to speculative inventories.1671 The remaining opinion unsupported by rigorous ‘boom/bust’ cycles....’’1681 theoretical papers in the administrative empirical analysis. These papers, if they This set of inferences is problematic record focus on useful economic presented statistics at all, presented for several reasons. First, it depends on background on price manipulation; 1672 descriptive statistics. An inherent the current existence of a price impact comovement effects in the equity or difficulty with this approach is that the from rolling. Yet the roll price impact is 1673 options markets, high-frequency facts that the author presents to support a market phenomenon that may no 1674 trading, or other matters of marginal the author’s theory may be incomplete longer be as substantial as it once was. 1675 The market now has general knowledge relevance. and not fully representative of economic of the influx of commodity index traders reality. 3. Surveys and Opinions and their established rolling behavior. The remaining 73 papers are survey While they may be useful for Moreover, many ETFs announce in their pieces. Some of these papers provide developing hypotheses, they often prospectus how they will trade, and useful background material.1676 But on exhibit policy bias and are not neutral, most large exchange-traded funds now reliable bases for judgments in the ‘‘sunshine’’ their rolls: To announce to 1671 Avriel and Reisman, Optimal Option academic context (again, as opposed to the market in advance when and how Portfolios in Markets with Position Limits and 1677 they will roll.1682 These trends have Margin Requirements, Journal of Risk (2000) (a the judgments of policymakers). theoretical model suggesting that speculation may We have reviewed all 73 papers in lessened the price impact of the rolls. push crude oil prices above the price level is Moreover, the Frenk and Turbeville justified by physical-market fundamentals without this category and discuss below only article ascribes the contango state of necessarily resulting in a significant increase in oil those few that add marginal value to the commodity futures prices to the price inventories); Pierru and Babusiaux, Speculation empirical analyses discussed above. without Oil Stockpiling as a Signature: A Dynamic impact of roll without empirical Perspective (working paper 2010); Routledge, Seppi, a. Frenk and Turbeville (Better Markets) analysis to support a causal link. There and Spatt, Equilibrium Forward Curves for has historically been an alternation Commodities, Journal of Finance (2000) (important Frenk and Turbeville, in Commodity work on the theory of storage). See Parsons, Black between contango and backwardation in Gold & Fool’s Gold: Speculation in the Oil Futures Index Traders and the Boom/Bust Cycle the crude oil commodity market: This Market at 82, 106–107 (Economia 2009) (not a in Commodities Prices,1678 present a phenomenon has been attributed to theoretical model paper, but a survey piece, that survey of economic literature that changes in short-term supply or indicates that if oil prices were driven above the level determined by fundamental factors of supply incorporates some empirical testing for demand, increased market participation and demand by forces such as speculation, storage the price impact of index fund ‘‘rolling’’ on the long side to earn the risk would not necessarily increase; an argument that of commodity index fund positions. premium associated with going long, this would occur ‘‘overlooks how paper oil markets Rolling refers to the time when and other reasons, but not the technical have been transformed’’ and ‘‘successful 1683 innovations in the financial industry made it commodity index funds, such as those aspects of commodity index rolls. possible for paper oil to be a financial asset in a tracking a popular commodity index Frenk and Turbeville’s article is very complete way’’). such as the Standard & Poor’s Goldman unpersuasive in ascribing large boom/ 1672 Kyle and Viswanathan, How to Define Illegal bust cycles in price to waning and Price Manipulation, American Economic Review Sachs Commodity Index (GSCI), must (2008); Westerhoff, Speculative Markets and the roll forward their expiring futures temporary price impacts of rolls. Several other survey papers posit the Effectiveness of Price Limits, Journal of Economic contracts to maintain their (typically Dynamics and Control (2003) (discussing when 1679 existence of a speculative bubble in price limits can be welfare-improving). long) positions. Frenk and price due to speculation along the lines 1673 Dai, Jin and Liu, Illiquidity, Position Limits, Turbeville argue that the index fund roll of the Frenk and Tuberville article. But and Optimal Investment (working paper 2009); ‘‘systematically distorts forward Edirsinghe, Naik, and Uppal, Optimal Replication these studies also do not present an of Options with Transaction Costs and Trading commodities futures price curves empirical analysis to support this Restrictions, Journal of Financial and Quantitative toward a contango 1680 state, which is conclusion.1684 Analysis (1993); Shleifer and Vishney, The Limits of Arbitrage, Journal of Finance (1997). 1677 For example, a CME Group white paper, 1681 Id. at 2. See id. at 4 (focusing on crude oil 1674 Schulmeister, Technical Trading and Excessive Speculation and Position Limits in and wheat price spreads before, during, and after Commodity Price Fluctuations (working paper Energy Derivatives Markets (undated), lacks the role from January 1983 to June 2011). 2012). empirical data or other economically valid 1682 Otherwise, other market participants may 1675 Morris, Speculative Investor Behavior and supporting analysis. It also uses confusing assume that the rolling activity reflects an informed Learning, Quarterly Journal of Economics (1996); terminology. For example, CME quotes a Wall Kyle and Wang, Speculation Duopoly with trader reacting to market fundamentals and the roll Street Journal survey of economists, which in turn Agreement to Disagree: Can Overconfidence could well impair the price discovery function of summarily concludes: ‘‘[t]he global surge in food Survive the Market Test?, Journal of Finance (1997); the commodities market. See Urbanchuk, and energy prices is being driven primarily by Leitner, Inducing Agents to Report Hidden Trades: Speculation and the Commodity Markets, at p. 12 fundamental market conditions, rather than an A Theory of an Intermediary, Review of Finance (working paper 2011) (‘‘traders can misinterpret an investment bubble.’’ Id. at p.5. Even economists (2012); Sockin and Xiong, Feedback Effects of index inflow as a bullish statement by a trader with who find some price impact from outsized Commodity Futures Prices (working paper 2012); superior information’’). While not every large speculative positions would not disagree that, in Froot, Scharfstein, and Stein, Herd on the Street: institutional trader has to ‘‘sunshine,’’ those that the main, prices remain determined ‘‘primarily’’ by Informational Inefficiencies in a Market with Short announce their rolling timing in their prospectus Term Speculation (working paper 1990) (theoretical market fundamentals. And many of these are bound by SEC rules to follow their prospectus paper discussing herding); Dicembrino and economists finding price impact would not ascribe procedures. Scandizzo, The Fundamental and Speculative the result to an ‘‘investment bubble.’’ 1683 See Parsons, Black Gold & Fool’s Gold: Components of the Oil Spot Price: A Real Option 1678 Frenk and Turbeville, Commodity Index Speculation in the Oil Futures Market, at 99–101, Value (working paper 2012). Traders and the Boom/Bust Cycle in Commodities Economia (2009) (discussing crude oil market 1676 Basu and Gavin, What Explains the Growth Prices (Better Markets 2011). economics that explain why crude oil futures prices in Commodity Derivatives?, Federal Reserve Bank 1679 See id. at 8–9 for a description of the are sometimes in contango); id. at 101 (‘‘Although of St. Louis (2011), provides an excellent analysis mechanics of the roll. See also Mou, Limits to oil futures fluctuate between backwardation and of the factors driving rapid increases in volume in Arbitrage and Commodity Index Investment: Front- contango, on average they have been backwarded’’). commodity derivatives trading. See also Running the Goldman Roll (working paper 2011). 1684 See, e.g., Cooper, Excessive Speculation and Easterbrook, Monopoly, Manipulation, and the 1680 See id. at 5–6 for a description of contango, Oil Price Shock Recessions: A Case of Wall Street Regulation of Futures Markets, Journal of Business an upward-sloping forward price curve for a ‘‘De´ja` vu all over again’’, Consumer Federation of (1986); Pirrong, Squeezes, Corners, and the Anti- commodity. Market participants may view contango America (2011); Berg, The Rise of Commodity Manipulation Provisions of the Commodity as evidence that commodity prices will increase in Speculation: From Villainous to Venerable (UN Exchange Act, Regulation (1994). the future. FAO 2011); Eckaus, The Oil Price Really Is a

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b. Senate Reports the crude oil markets, as discussed 2008.1696 The staff report states that the i. Senate Report on Oil and Gas Prices above, demand for ‘‘paper oil’’ may not demand for wheat futures contracts has directly translate into spot price impact itself increased the price of wheat The U.S. Senate staff report on oil due to storage economics.1691 futures contracts relative to the cash prices concludes that increased Regarding price effect, the Senate market for wheat: participation by speculators in the report relies on anecdotal evidence These index traders, who buy wheat energy commodity futures markets has because of the difficulty in had an effect on energy prices.1685 Other futures contracts and hold them without quantification. The Senate report cites regard to the fundamentals of supply and survey pieces assert that market reports from energy industry demand in the cash market for wheat, have fundamentals fully explain commodity created a significant additional demand for 1686 participants that financial speculators price spikes. These survey articles have caused the price of oil to rise.1692 wheat futures contracts that has as much as do not present rigorous statistical The report also acknowledges that doubled the overall demand for wheat models to support their competing futures contracts. Because this significant analyses of the effect of speculation on conclusions. increase in demand in the futures market is these energy markets have reached unrelated to any corresponding supply or The Senate report points out that 1693 fundamental supply and demand were divergent conclusions. demand in the cash market, the price of factors increasing energy prices.1687 But The Senate Report does not analyze wheat futures contracts has risen relative to it determines that these factors ‘‘do not how position limits would ameliorate the price of wheat in the cash market. The very large number of index traders on the tell the whole story.’’ 1688 It asserts that the problem it identifies. While not all the speculators referenced in this report Chicago exchange has, thus, contributed to the large purchases of crude oil futures ‘‘unwarranted changes’’ in the prices of contractors by financial speculators would be affected by a position limit rule, the Senate Report does list Brian wheat futures relative to the price of wheat ‘‘have, in effect, created an additional in the cash market. These ‘‘unwarranted demand for oil....’’1689 The report Hunter, then a trader in natural gas for changes’’ have, in turn, significantly acknowledges that the price effect is Amaranth Advisors hedge fund, among impaired the ability of farmers and other ‘‘difficult to quantify,’’ and cites the top 2005 energy traders.1694 These grain businesses to price crops and manage unspecified analysts on estimated price reports, which include factual recitation price risks over time, thus creating an undue impact.1690 and anecdotal evidence, contain no burden on interstate commerce. The But in the general economics of the models or methods that can be audited activities of these index traders constitute the futures market, demand for futures by economists. type of excessive speculation that the CFTC should diminish or prevent through the contracts does not necessarily increase ii. Senate Report on Wheat imposition and enforcement of position the demand for, or price of, the physical limits as intended by the Commodity commodity. In the particular context of The Senate staff report concerning Exchange Act.1697 wheat 1695 surveys economic literature Speculative Bubble, at p.8, MIT Center for Energy and certain market data, but, like the However, there are other reasons that and Env’l Research (2008) (‘‘there is no reason Senate Report on oil and gas prices, this can also explain this 2008 price based on current and expected supply and demand report does not use statistical or divergence. The CME wheat contract that justifies the current price of oil’’); Parsons, was poorly designed to account for the Black Gold & Fool’s Gold: Speculation in the Oil theoretical models to reach an Futures Market, Economia (2009) (explaining why, economically rigorous conclusion. The cost of storage, and this has been cited on a theoretical level, the absence of large crude oil Senate wheat report does include as a reason for the price divergence inventories does not preclude a crude oil price anecdotal evidence: Virtually all of the between futures and spot wheat bubble); Tokic, Rational destabilizing speculation, contracts during the 2008 time period. positive feedback trading, and the oil bubble of commercial traders interviewed by the 2008, Energy Economics (2011) (survey with Senate staff ‘‘identified the large When CME revised its wheat contract, theoretical model adjunct). See also Urbanchuk, presence of index traders in the Chicago this price divergence dissipated.1698 Speculation and the Commodity Markets, at 8–9 market as a major cause’’ of a problem That said, the more formal statistical (working paper 2011) (observing that the share of studies discussed throughout establish corn futures held by commercial traders has fallen with price convergence in wheat in from more than 70 percent in January 2005 to about rationales for concern with index 40 percent in August 2011); id. at 12 (arguing that 1691 See Parsons, Black Gold & Fool’s Gold: traders that are grounded in more speculators are a major factor behind the sharp Speculation in the Oil Futures Market, Economia rigorous economic reasoning. There are increase in the level and volatility of corn prices in (2009); n.1491, supra. Contra Senate Report on oil circumstances when a large volume of 2011 because ‘‘traders can misinterpret an index and gas prices at 13 (‘‘As far as the market is financial index investment flows may inflow as a bullish statement by a trader with concerned, the demand for a barrel of oil that superior information’’); Inamura, Kimata, et al., results from the purchase of a futures contract by causes market prices to deviate from 1699 Recent Surge in Global Commodity Prices (Bank of a speculator is just as real as the demand for a barrel fundamental values. Alternatively, a Japan Review March 2011) (contending that global that results from a purchase of a futures contract by monetary policies have tended to boost commodity a refiner’’). 1696 Excessive Speculation in the Wheat Market at prices). 1692 Senate Report on oil and gas prices at 22 11–12. 1685 The Role of Market Speculation in Rising Oil (claiming that financial investors have created 1697 Id. at 12. and Gas Prices: A Need to Put the Cop Back on the ‘‘runaway demand’’), 24 n. 128 (traders assert cross- 1698 See supra note 1547. When CME revised its Beat, Permanent Subcommittee on Investigations of market arbitrage in energy between futures and wheat contract, this price divergence dissipated. the U.S. Senate Committee on Homeland Security over-the-counter markets may be driving The futures wheat contract, at expiration, had a and Governmental Affairs at pp. 19–32 (June 27, speculative pressure). valuable real option to store the wheat at a below- 2006) (‘‘Senate Report on oil and gas prices’’). 1693 Id. at 24, 26 (observing that Goldman Sachs market price. This may have been a primary reason 1686 See, e.g., Plante and Yu¨ cel, Did Speculation issued a report concluding that speculators were why it was more valuable at expiration than spot Drive Oil Prices? Futures Market Points to impacting crude oil prices, peaking at $7 per barrel wheat. Fundamentals (Federal Reserve Bank of Dallas in the spring of 2004, and that industry traders and 1699 See Aulerich, Irwin, and Garcia, Bubbles, Econ. Ltr. Oct. 2011) (if speculating were the cause CFTC staff in a 2005 analysis disagreed as to Food Prices, and Speculation: Evidence from the of crude oil spokes, it would ‘‘leave telltale signs whether a speculative price was caused by financial CFTC’s Daily Large Trader Data Files, at pp.2–3, in certain data, such as inventories’’). speculators). NBER Conference on Economics of Food Price 1687 The Role of Market Speculation in Rising Oil 1694 Id. at p.30. Volatility (2012) (summarizing that this could and Gas Prices: A Need to Put the Cop Back on the 1695 Excessive Speculation in the Wheat Market, happen when (1) the futures market is insufficiently Beat at p.12. Majority and Minority Staff Report, Permanent liquid to absorb large order flow, (2) the index 1688 Id. at 13. Subcommittee on Investigations of the U.S. Senate, traders are in effect noise traders who make 1689 Id. Committee on Homeland Security and arbitrage risky, or (3) large order flow on the long 1690 Id. at 14. See id. at 23. Governmental Affairs (June 24, 2009). Continued

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classical economist would argue that submissions are summarized and a. The Markus Henn List of Studies prices are still determined by supply analyzed in this section: and demand, but that the aggregate risk (A) the February 10, 2014, comment Markus Henn’s February 10, 2014, appetite for financial assets affects the letter by Markus Henn of World comment letter acknowledges that there demand for commodities through a Economic, Ecology & Development, is an ongoing debate about whether more complicated process than including, as an attachment, a speculators can dominate a marketplace previously envisioned. November 26, 2013, list of studies and exacerbate market volatility and For reasons similar to the Senate entitled ‘‘Evidence on the Negative market prices. He nonetheless asks the Report on Oil and Gas Prices, the Senate Impact of Commodity Speculation by Commission to take into account a list Report on Wheat is less useful to an Academics, Analysis and Public of studies he submits with his letter. He academic than it may be to Institutions’’ (‘‘Henn Letter’’); 1703 then presents numerous economic policymakers. (B) the analysis of Philip K. Verleger studies as well as media articles. of the economic consulting firm As a group, this list of studies, iii. Senate Report on Natural Gas PKVerleger LLC, attached as Annex A to opinion pieces, and news articles the February 10, 2014 comment letter by A similar analysis applies to the documents the existence of concern and Senate report on natural gas, Excessive the International Swaps and Derivatives Association (ISDA) and the Securities suspicion about large speculative Speculation in the Natural Gas Market. positions in commodity markets. Many The report, which focuses at length on Industry and Financial Markets Association (SIFMA) (‘‘2/10/14 ISDA/ of the studies cited by the Henn Letter Amaranth’s natural gas trading, does not look for evidence of financialization and include a statistical analysis of SIFMA Comment Letter’’); in this sense suffer from interpretational empirical data and, as the minority (C) the analysis of Craig Pirrong, bias.1705 As a group, these opinion report notes, some ‘‘ facts . . . support Professor of Finance at the University of pieces and studies do not consistently the conclusion that Amaranth’s trading Houston Business School, attached as seek alternative explanations for their activity was the primary cause of’’ Annex B to the 2/10/14 ISDA/SIFMA conclusions. As Markus Henn natural gas price spikes,’’ but other facts Comment Letter; point to market fundamentals.1700 (D) two studies by Sanders and Irwin, acknowledges in his cover letter, these The report does argue that if The ‘‘Necessity’’ of New Position Limits papers are part of an ongoing debate in Agricultural Futures Markets: The Amaranth’s large-scale speculative among economists, not conclusive Verdict from Daily Firm-Level Position trading was causing ‘‘large jumps in the evidence of the harmful effects of Data (working paper 2014), and Energy price differences’’ and prices that were excessive speculation. Futures Prices and Commodity Index ‘‘ridiculous,’’ 1701 the current regulatory Three of the most persuasive papers, Investment: New Evidence from Firm- regime would be unable to prevent this persuasive insofar as they employ well- Level Position Data (working paper price disruption.1702 accepted, defensible, scientific 2014); methodology, document and present 4. Comments That Consist of Economic (E) two studies by Hamilton and Wu, facts and results that can be replicated, Studies or Discuss Economics in Depth Effects of Index-Fund Investing on Commodity Futures Prices, International and are on point regarding issues Several comment letters perform Economic Review, Vol. 56, No. 1 relevant to position limits, cited in the substantial summary analysis of other (February 2015), and Risk Premia in Henn Letter involve the crude oil economic studies bearing on position Crude Oil Futures Prices, Journal of market during the financial crisis: limits, present original economic International Money and Finance (2013) Singleton, Investor Flows and the 2008 analysis or formal economic studies. (submitted as second paper in the same Boom/Bust in Oil Prices (March 23, These submissions thus warrant electronic comment submission); and 2011 working paper); 1706 Hamilton and individual analysis. The following (F) materials that CME Group Wu, Risk Premia in Crude Oil Futures submitted for inclusion in the Prices, Journal of International Money side of the market is seen erroneously as traders and Finance (2013) (an earlier working taking bullish positions based on valuable administrative record, include 3 sets of information about market fundamentals). See id. at materials submitted on March 28, 2011 paper version is cited by Henn); and pp.3–4 (observing contrasting findings depending (first set, second set, and third set); an Hamilton, Causes and Consequences of on impact of index trading depending on liquidity undated CME study on conditional spot- the Oil Shock of 2007–2008, Brookings of the agricultural commodity market); Singleton, month limits; and a CME Group’s white Paper on Economic Activity (2009). The Investor Flows and the 2008 Boom/Bust in Oil Prices, at 5–8 (March 23, 2011 working paper) paper, Excessive Speculation and first two conclude that there is a (learning about economic fundamentals with Position Limits in Energy Derivatives statistical link between the volume of heterogeneous information may induce excessive Markets.1704 speculative positions and a component price volatility, drift in commodity prices, and a tendency towards booms and busts); Tang and of price, risk premium, at least for some 1703 Xiong, Index Investment and Financialization of See Letter from Markus Henn, World commodities in some timeframes. Commodities, at p.30, Financial Analysts Journal Economic, Ecology & Development, to CFTC (Feb. Hamilton’s Causes and Consequences of (2012) (‘‘the price of an individual commodity is no 10, 2014), available at http://comments.cftc.gov/ PublicComments/ the Oil Shock of 2007–2008 concludes longer simply determined by its supply and ViewComment.aspx?id=59628&SearchText=henn. demand’’); id. at 29–30 (‘‘Instead, prices are also that the oil price run-up was caused by See also, Markus Henn, Evidence on the Negative determined by a whole set of financial factors such strong demand confronting stagnating Impact of Commodity Speculation by Academics, as the aggregate risk appetite for financial assets’’). Analysis and Public Institutions, (Nov. 26, 2013), world production, but the price collapse 1700 Id. at 135 (while price of natural gas declined available at http://comments.cftc.gov/ was perhaps not driven by after Amaranth’s demise, ‘‘this alone does not prove PublicComments/ fundamentals. Amaranth’s ability to elevate prices above supply ViewComment.aspx?id=59628&SearchText=henn. and demand fundamentals’’). 1704 The CME white paper, while technically not 1701 Id. at 3. submitted formally by CME in the administrative 1705 Id. 1702 Id. at 3 (NYMEX exchange did not have record, warrants individualized analysis. It is cited 1706 Markus Henn cites the 2011 version of the routine access to Amaranth’s trading positions on in the Commission’s December 2013 Position Limits Singleton paper, which is the only version of this ICE, and therefore NYMEX could not have a Proposal; it is posted on the CME Group’s Web site; paper in the administrative record. A subsequent complete and accurate view of whether ‘‘a trader’s and it is cited in arguments by such commenters as May 2012 version is available from Professor position . . . is too large.’’ In addition, there were MFA. (MFA February 9, 2014 comment letter at 11– Singleton’s Stanford Web site at http:// no accountability limits on the ICE exchange). 12, n.26). web.stanford.edu/∼kenneths/.

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b. Verleger’s Analysis, Attached to crude as an example)’’ to avoid liquidity could provide a justification for ISDA/SIFMA Comment Letter impacts. Id. at 12.1708 application of these limits during the 1712 Philip K. Verleger provided an Second, he argues that these spot month,’’ at least in theory. He analysis as a retained expert for ISDA. exploration companies have ‘‘benefited concedes that in theory there is such a Annex A to the 2/10/14 ISDA/SIFMA indirectly because passive investors thing as ‘‘sudden and unwarranted price Comment Letter. He contends, without such as retirement funds have taken fluctuations.’’ 1713 Subject to these quantitative modelling or empirical long positions in commodities through concessions, Pirrong opposes many evidence, that in the energy markets the swap markets,’’ and suggests that aspects of the rule. Overall, Pirrong ‘‘unwarranted price fluctuations’’ have with position limits there would be an argues that position limits are an historically been due to ‘‘confluence of absence of non-commercials to take undesirable solution to an economic positions opposite oil and gas contributing factors’’ such as weather, problem that has not been proven to development companies. Id. at 9. To the 1714 geopolitical events, or changes in exist. We analyze below his contrary, with the Commission’s industry structure. 2/10/14 ISDA/ objections only when and to the extent disaggregation exemption for managed SIFMA Comment Letter, Annex A at pp. that they rest on economic arguments. funds (the independent account 2–3. In passing, he opines, without controller exemption), there is no basis i. Amaranth and the Possible Utility of analysis or citation, that the high energy to believe that there will be a shortage Position Limits in Non-Spot Months prices in 2008 ‘‘are attributable to of long positions in the market. He Pirrong states that the possibility of a environmental regulation.’’ Id. Verleger presents no empirical evidence to corner or a squeeze ‘‘provides no also asserts that his expertise is in the support his thesis that position limits justification of the necessity of imposing energy markets, yet opines (contrary to could thus ‘‘adversely affect[ ] position limits outside the spot many comment letters from other energy investment in the oil and gas month.’’ 1715 Pirrong argues that market participants) that the energy industry.’’ 1709 Amaranth’s market activity in 2006 is markets are ‘‘subject to conditions and Third, the way energy derivatives not evidence of the utility of position dynamics’’ of other commodity markets. markets work, if there is demand on the limits in the non-spot month. Id. at p.2, Id. at p.2. For these reasons, we view short side of the market, this may create ¶ 7. In this context, Pirrong discusses Verleger’s analysis as weak and liquidity on the long side of the market corners and squeezes as the rationale for conclusory and lacking in economic to transact with at some price. Verleger non-spot month position limits. Id. rigor and empirical data. himself notes the diversity of market By way of further example, Verleger However, the Commission’s December participants—commodity-based contends that if the position limits rule 2013 Position Limits Proposal discusses exchange-traded funds, hedge funds, had been in effect in 2013, oil prices rationales other than corners and retirement funds, and the like—and would have been $15 per barrel higher squeezes: Economic factors such as does not document that the exclusion of and the cost to American consumers outsized market power, disorderly a particular long would reduce liquidity would have been roughly $100 billion. liquidation, and the ability to from the marketplace. For example, Annex A at p.3. He provides no manipulate prices. commodity-based exchange-traded quantitative reasoning in support of In the context of non-spot month funds trade intermediate long positions these numbers.1707 position limits, Pirrong focusses just on Verleger also asserts that exploration for their investors, and if the funds corners and squeezes. If that were the for sources of energy has resulted in a themselves could not take long only regulatory concern, his analysis on large increase in oil supply in recent positions in the market, there is no this, see id. at ¶¶ 27–30, would be years, and states that these companies reason to assume that the investors largely correct. Many traders exit futures use swaps and futures to hedge their might through other vehicles take long contracts before the spot month because position. Id. at p.7. He then summarily positions. Verleger has an expressed they are there for the exposure, for price asserts that independent companies fear, not an analysis, that liquidity in risk transfer, not to make or take exploring for and developing oil and gas markets will be harmed by position delivery. 1710 production would ‘‘not have achieved limits. One key reason why ETFs ‘‘sunshine- trade’’ their rolls—announcing in their this success without hedging’’ and that c. Pirrong’s Analysis, Attached to ISDA/ prospectus when they will roll—is hedging would not have occurred if the SIFMA Comment Letter Commission’s position limits had been because rolling these large positions in Professor Pirrong agrees that the non-spot months can have a price in place. Id. at p.8. Verleger overlooks nation’s commodity markets have been several critical facts. impact, apart from corners and subject to significant and disruptive 1716 First, companies actively engaged in squeezes. corners and squeezes, such as the Hunt oil and gas exploration might either A good example of the risk of price Silver episode of 1979–1980.1711 He qualify for bona fide hedging treatment impact in non-spot months from concedes that the ‘‘ability of position or fall within the position limit. As to outsized positions, apart from corners limits to prevent corners and squeezes non-spot month limits, Verleger 1712 concedes that ‘‘it may be argued that the Id. at ¶ 7. 1708 See Berg, The Rise of Commodity 1713 Id. at 6, ¶ 27. initial non-spot month position limits Speculation: From Villainous to Venerable, at p.263 1714 Id. at pp. 3–10. are high enough (109,000 contracts for (UN FAO 2011) (former CBOT trader suggests that 1715 CL–ISDA/SIFMA–59611, Annex B, at p.2. spot month limit positions should be in place for 1716 Sanders and Irwin, The ‘‘Necessity’’ of New 1707 Verleger argues that limits in the non-spot at least a few days in the non-spot months to lesson Position Limits in Agricultural Futures Markets: month would have an especially chilling effect, price distortions from the roll). The Verdict from Daily Firm-Level Position Data, at ‘‘very likely leading to, among other things, higher 1709 Id. p.19 (working paper 2014) (preannounced trades energy prices;’’ and that position limits should not 1710 See, e.g., id. at 12 (after observing that non- can have a ‘‘sunshine trading’’ effect of increasing apply to cash-settled markets because traders spot month limits are high enough to perhaps not liquidity and lowering trading costs). See, e.g., holding cash-settled contracts do not have any impact the market, stating that non-spot limits will Frenk and Turbeville, Commodity Index Traders ability to influence the physical market prices of ‘‘adversely affect the ability of commercial and the Boom/Bust Cycle in Commodities Prices commodities. Id. at 2–3. Pirrong also makes these participants to use some futures market’’). (Better Markets 2011) (very large institutional arguments but provides further analysis, so we 1711 CL–ISDA/SIFMA–59611, Annex B, at 2, players rolls have had a temporary price impact that discuss this critique in subsection C below. ¶¶ 6–9. is expensive to the ETF investors).

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and squeezes, is Amaranth. Amaranth’s market.1718 Pirrong’s discussion of Commission’s December 2013 Position position was so large that it may have Amaranth does not address this Limits Proposal.1720 That study impacted price by virtue of its outsized economic history or its possible observed that not just a Senate market position in not just the spot relevance to non-spot position limits. investigatory committee, but one of the month, but other months. Amaranth Although Pirrong criticizes the exchanges that Amaranth was trading may have influenced prices not just Commission for not engaging in a on, was alarmed by their exercise of upon liquidation, not just when banging ‘‘rigorous empirical analysis’’ of market power in months prior to the the close in the spot month, but also Amaranth (2/10/14 ISDA/SIFMA spot months. The New York Mercantile well before then, according to a Comment Letter, Annex B, at p.2, ¶ 10), Exchange (NYMEX) on August 9, congressional study cited in the the establishment of outsized market 2006: 1721 Commission’s December 2013 Position power in economics is more straight called Amaranth with continued concern Limits Proposal.1717 forward in the case of Amaranth. The about the September 2006 contract and An economist could argue that question is whether the disappearance warned that October 2006 was large as well because the commodity futures price of an Amaranth from the market with its and they should not simply reduce the should reflect all demand, Amaranth’s formerly outsized position led to a September exposure by shifting contracts to very large positions in the non-spot significant decline in price. the October contract. In fact, by the close of month was appropriately incorporated By focusing simply on Amaranth’s business that day, Amaranth increased their in market prices. After all, at a given activities in the spot month, Prof. October 2006 position by 17,560 positions and their ICE positions by 105.75 point in time and price, demand is Pirrong does not discuss the potential defined as the quantity desired by all for harm arising from Amaranth’s This study documents that even those who are willing and able to hold outsized positions in the non-spot though many of the Amaranth positions a commodity futures position. Prof. month. If someone is exerting market were not with NYMEX, and instead Pirrong’s approach does conceive of the power, they can cause a negative with ICE, these positions were possibility that outsized market power externality for other purchases of extremely large relative to the average in the non-spot month or the price natural gas if they, for example, bid up daily trading volume of the largest impact of Amaranth’s positions could the price of natural gas. A higher price natural gas futures exchange. ‘‘In some have deleterious effects on the for a natural gas purchaser due to cases, the positions are hundreds of marketplace. From a classical another entity’s trading may simply be times the 30-day average daily trading economical perspective, Amaranth’s an example of a healthy market at work. volume.’’ 1722 outsized market position in the non-spot However, there is definite harm to Pirrong also argues as a normative months is just an input into price purchasers of natural gas if the price matter that the costs exceed the benefits. demand. they pay is higher for reasons that are While he concedes that it is ‘‘plausible’’ However, outsized market power may associated with another market that a sudden liquidation of a large have economic outcomes that are participant’s price influence though the position by a trader facing distress’’ undesirable. Outsized market power exertion of market power. could ‘‘cause sudden and unwarranted permits a player to do more than ‘‘bang Pirrong does not provide a direct price fluctuations,’’ he argues that there the close,’’ and Amaranth’s natural gas factual rebuttal to the Senate is ‘‘no evidence that this problem occurs trading is an example of this. One could investigative report finding that with sufficient frequency, or has influence prices in the swaps market Amaranth’s speculative activity affected sufficiently damaging effects, to warrant through such aggregation of market overall price levels in natural gas. He continuously imposed constraints on powers or one could manipulate related argues that the Commission’s reliance risk transfer.’’ Id. at 6, ¶ 27. The markets. Amaranth’s exercise of market upon a Senate investigatory report Commission considers the costs and power may have been real and would not be ‘‘accepted as evidence of benefits formally elsewhere in this substantial. Even after it left the natural causation in any peer reviewed release. 1719 gas market, its activities may have left academic work.’’ Id. at 2, ¶ 9. Prof. ii. The Possible Harms of Corners and a lasting price effect. That is, prices of Pirrong is correct that the Commission Squeezes the underlying commodity, natural gas, has not, in the case of Amaranth, shown may have been higher when Amaranth causation: That it was Amaranth’s Pirrong also questions the extent of was in the market (including in the non- departure from the markets that caused harm associated with activities such as spot months), and prices were the natural gas price decline in the Hunt brothers. 2/10/14 ISDA/SIFMA substantially less for a substantial time substantial part, as opposed to Comment Letter, Annex B, at pp. 2–3. period after Amaranth left the confounding factors (such as, in the case He downplays the harms of corners and of natural gas, evidence that the squeezes. Id. at ¶¶ 11–12, 38–43. 1717 There have been other examples of price upcoming winter would be warmer than Prof. Pirrong is incorrect in asserting manipulations that extended over a period of expected). However, proof of causation that the Commission’s view was months. See CFTC staff, A Study of the Silver groundless. In the December 2013 Market, Report To The Congress In Response To is not required for publication in peer Section 21 Of The Commodity Exchange Act, Part reviewed journals in a case such as this. Position Limits Proposal, the One at 2–4, 9–10 (May 29, 1981) (price of silver rose To establish evidence of causation, Commission did ground its concern and fell over a period of months, with long futures one would need a theoretical model and about outsized speculative positions in positions in silver held by members of the Hunt particular examples. The Commission family in the summer and fall of 1979 and prices empirical evidence to support it. There peaking in late January 1980, and prices falling have been peer-reviewed studies on did present evidence of inefficient though the first quarter of 1980); id., Part Two at Amaranth such as one cited in the resource allocation with respect to the p.100 (‘‘behavior of silver prices during 1979–80 Hunt brothers. It is as much a public appears consistent with, but is not entirely explained by, fundamental developments in the 1718 This observation presumes no other 1720 silver market over this period’’); p.112 (Hunt family confounding events such as the occurrence of See Ludwig Chincarini, Natural Gas Futures acquired actual and potential control of warmer winter. Unfortunately, we do not know and Spread Position Risk: Lessons from the approximately 18 percent of world silver market whether or not the lower price resulted from the Collapse of Amaranth Advisors LLC, Journal of and stood for delivery on a significant portion of exit of Amaranth, the warmer winter, something Applied Finance (2008). their futures contracts, causing silver prices to rise else, or some combination of the preceding. 1721 Id. at p.24. significantly). 1719 Id. at 2, ¶ 9. 1722 Id. at p.22.

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policy matter as an economic matter positions at the 25 percent level might iv. Whether Position Limits Cause how position limits fare as a solution to be able to manipulate the market.’’ Id. Economic Harm the question of these negative at p.8, ¶ 41. However, these five traders Pirrong contends that commodity externalities. Even if one assumes away do not all need to collude in order to ETFs, pension funds, and other ‘‘real the existence of market imperfections, permit one of them to manipulate price. money’’ investors would be harmed by as Pirrong does, one is still left to Some of these traders may simply be position limits and that this is unfair contend with the consequences of what those who value the commodity highly, because not all such market participants Pirrong assumes to be natural market much higher than the market price, and impose the same risks. 2/10/14 ISDA/ events. In the case of the Hunt brothers, therefore will not let go of their SIFMA Comment Letter, Annex B, at the Commission gave multiple examples contractual right to delivery. Such pp.3–4, ¶¶ 16–18. The claim that it is of negative externalities in the broader commercials may be willing to stay and ‘‘unfair’’ to impose limits on all market economy. People sold their silverware pay a higher price, even when a corner players uniformly is a policy argument, which was melted down into silver bars. is in effect, because the cost, for not an economic argument. A photo supply company dependent on example, of not providing natural gas to silver supply went out of business.1723 customers to heat their homes is d. Hamilton/Wu Papers on Risk Premia Pirrong’s assumption that persons act substantially more. and Effects of Index Fund Investing optimally at any given moment does not Many exchanges, including CME, set Professors James Hamilton and Jing mean, across time, that resources have position limits lower than 25 percent. It Cynthia Wu of the University of been allocated efficiently. While much is hard for Pirrong to argue that 25 California at San Diego and University of economic analysis is static, dynamic percent is excessively low when it is of Chicago Business School, effects over time can have inefficient higher than CME limits for all of the 19 respectively, authored a well-executed allocation of resources, intertemporally. CME-traded commodities covered by set of papers (well-executed because It may have been optimal for a possessor the proposed CFTC position limits. they used reasonably defensible models of silverware to melt down their silver Pirrong’s final critique of spot month with relatively transparent assumptions into silver bars during the Hunt silver limits is his assertion that application of and data sources) that examine the market disruption, but just a few the same limits to short and long effect of positions on prices. months later a possessor of silverware positions is arbitrary. Id. at p.9, ¶¶ 42– Their paper, Hamilton and Wu, Risk would likely prefer silverware to silver 43. The reasons he gives for this are Premia in Crude Oil Futures Prices, bars. See Pirrong’s Manipulation of the problematic and not well-developed. Journal of International Money and Commodity Futures Market Delivery Pirrong states that for storable Finance (2013), is a well-reasoned Process, at p. 383, Journal of Business commodities, manipulation by long explanation for how outsized (1993) (futures market manipulations traders is more likely than with short speculative futures positions could ‘‘distorts prices and creates deadweight traders. Id., ¶ 42. It may well be more impact risk premium, the return for losses;’’ ‘‘causes shorts to utilize real difficult to manipulate price through a accepting undiversifiable risk, a resources to make excessive deliveries;’’ corner or squeeze as a short because component of the return of holding a and ‘‘distorts consumption’’). there is generally a fixed limit for commodity futures contract. Examining Pirrong thus errs in asserting that the deliverable supply (unless one creates the crude oil futures market, they find Commission does not provide an the impression that there is more that crude oil risk premia fundamentally ‘‘empirical basis’’ for ‘‘inefficient deliverable supply than there is). changed in response to financial allocation of resources.’’ 2/10/14 ISDA/ Moreover, shorts may well have a bona investor flows into the crude oil market. SIFMA Comment Letter, Annex B, at fide hedging exemption anyway. Id. at p.31. p.3. However, for shorts as well as longs, Hamilton and Wu found that, for position limits help to ensure an orderly iii. Claim That the Spot-Month Limits crude oil futures, risk premiums, post- exit and a smoother delivery process. Are Arbitrary 2005, were smaller than they were in For example, a short trader with a large the pre-2005 sample. This study Pirrong claims that spot month limits position might take a partially offsetting contains an important conclusion are set too low at 25 percent of long position in an illiquid market in founded in the interplay of positions deliverable supply. Id. at p.8, ¶¶ 38–40. the spot month; this might cause and prices in the crude oil markets: He contends that a single long trader has unwarranted price volatility due to the While traders taking the long position in to control over 50 percent of deliverable price impact of establishing the supply to perfect a corner. Id. at ¶ 40. He near contracts earned a positive return on offsetting long position. average prior to 2005, that premium is incorrect. Assuming, quite Pirrong criticizes the depth of the decreased substantially after 2005, becoming reasonably, that long commercials are Commission’s basis for treating short negative when the slope of the futures curve going to stay in the market and and long positions symmetrically, he was high. This observation is consistent with consume, because it would be very also does not suggest an alternative or the claim that historically commercial expensive for them to leave the market, explain how a proper ratio should be producers paid a premium to arbitrageurs for a certain percentage of deliverable calculated.1724 the privilege of hedging price risk, but in supply is ‘‘locked up’’ in this sense. For more recent periods financial investors have become natural counterparties for example, a natural gas utility needs to 1724 Pirrong argues that the Commission’s cost- commercial hedgers. deliver natural gas for its customers to benefit analysis fails to identify, let alone analyze, heat their homes (among other things) important potential costs. 2/10/14 ISDA/SIFMA Hamilton and Wu, Risk Premia in Comment Letter, Annex B, at 4–6. The Commission Crude Oil Futures Prices, at p.10, and would therefore still take delivery addresses all commenter criticisms in the cost- of a substantial percentage of the benefit section of this release. Pirrong also argues Journal of International Money and deliverable supply of natural gas. that the Commission’s bona fide hedging Finance (2013). Pirrong says that ‘‘[f]ive or more exemptions are unnecessarily narrow and critiques Their paper tests the idea that risk the Commission’s decision to establish different premia have been bid down by long, perfectly colluding traders each with position limits for cash-settled (as opposed to delivery-settled) contracts. The Commission speculative investments in the crude oil 1723 December 2013 Position Limits Proposal 78 addresses such comments in the relevant sections market. That is, they test the idea that FR at 75680, 75689. of this release. the futures price has become higher as

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it has been bid up by long speculators, and observations about other financial have a significant impact on policy so the return from holding the long assets.1726 Consequently, there may be decisions’’). futures contract has been lowered. In some disconnect between their e. Sanders/Irwin on the ‘‘Necessity’’ of theory, this phenomenon would make theoretical and their empirical model. Limits and Energy Futures Prices hedging cheap for the short side of the This may mean that the study’s market, but would also increase the theoretical price return is on less sound Professors Dwight Sanders and Scott price of the futures, all else being equal. theoretical footing than it may first Irwin submitted two working papers: (1) Hamilton and Wu use a two-factor appear. Nevertheless, the benchmark One paper arguing that new limits on model for price: The futures contract rational expectation return may still be speculation in agricultural futures price less the rational expectation of the a suitable approximation. markets are unnecessary; 1728 and (2) a paper on energy futures prices, using futures price equals the risk premium, In a second paper, Effects of Index- the component of price associated with high frequency daily position data for Fund Investing on Commodity Futures energy markets and concluding that holding the price risk of the futures Prices, International Economic Review, contract. A commodity that is more there is no compelling evidence of (February 2015), Hamilton and Wu were predictive links between commodity likely to be affected by long passives in able to replicate Singleton’s result for this way is crude oil, because (1) crude index investment and changes in energy the crude oil market during the 2006– futures prices.1729 oil as a commodity dominates these 2009 period. They found an effect from indices—substantial portion of the GSFI speculative positions of index investors i. The ‘‘Necessity’’ of New Position for example; (2) the economics of on risk premium in crude oil.1727 Limits storage. Hamilton and Wu also did not find All else being equal, if outsized In Sanders and Irwin, The evidence of speculative positions market positions affect price, we should ‘‘Necessity’’ of New Position Limits in influencing risk premia in crude oil expect risk premium to be the Agricultural Futures Markets: The after 2009. Nor did they find evidence component of price that would be Verdict from Daily Firm-Level Position that speculative positions affected the affected when market participants take Data (working paper 2014), the authors risk premia in the agricultural outsized positions. That is because risk use price and position data shared by an commodities markets. ‘‘Our conclusion premium is a return for taking on unnamed large investment is that although in principle index-fund 1730 undiversifiable risk. A risk premium company. They do various statistical buying of commodity futures could does not include that portion of risk that analyses to concluding that the large influence pricing of risk, we do not find can be easily diversified through other investment company’s roll of its confirmation of that in the week-to- instruments. Through the workings of position does not have any lasting price week variability of the notional value of market, a participant who takes on a impact on the market. The find that the reported commodity index trader price exposure will expect to be price impact of the roll is, at most, a positions.’’ Id. at p.193; see id. at p.195 compensated through a premium for small and temporary price impact; there (no persuasive evidence that changes in is not a day-over-day impact and the bearing this risk. For a futures index trader positions is related to risk impact is smaller than the bid/ask commodity contract, there are many premium in agricultural commodities, spread. components of the return, and the risk whether the data is studied for change This result does not disprove, premium is only one of them. It can be on a weekly or 13-week basis). generally, the possibility that the fund’s a fairly small component, although the Consequently, they find only limited long, speculative positions impact price fraction depends on the commodity and evidence for a theoretically reasonable because it focuses only on one aspect of other the market conditions. the fund’s trading: Its rolling of Hamilton and Wu construct a version of the Master’s hypothesis, i.e., positions. The firm data used is from a theoretical price return: The return of that long speculators bid down the risk large commodity index fund that is holding a long futures contract based on premia and as a result induce a higher futures price in various commodity registered investment company, and a rational expectations model. Hamilton such a firm is likely put into their and Wu, Risk Premia in Crude Oil futures markets. ‘‘Overall,’’ Hamilton and Wu conclude, their work indicates prospectus how they are going to roll Futures Prices, Journal of International their positions. This pre-announcement Money and Finance (2013). Their risk that ‘‘there seems to be little evidence that index-fund investing is exerting a of when the commodity index fund will premium is the difference between roll may dampen the price impact of futures return and theoretical price measurable effect on commodity futures prices.’’ Id. at p.204 (adding that it is these particular changes in position. See return. They find that risk premiums for n.1682 and associated text, supra; crude oil decreased over time and ‘‘difficult to find much empirical foundation for a view that continues to Aulerich, Irwin, and Garcia, Bubbles, became more volatile. While Hamilton Food Prices, and Speculation: Evidence and Wu listed many assets in the from the CFTC’s Daily Large Trader paper’s introductory discussion of the the physical commodity available for near-term use. Also, the storing of the physical commodity has a Data Files, id. at p.29 (NBER Conference theoretical model, in their empirical real option component to it (one can take the crude analysis they use two factors, that oil out of storage and consume it relatively quickly). 1728 Sanders and Irwin, The ‘‘Necessity’’ of New involve only futures price data. This The value of the real option depends on how much Position Limits in Agricultural Futures Markets: The omission fails to take into account society might need crude oil in storage, and that Verdict from Daily Firm-Level Position Data value depends on how much crude oil is stored potentially relevant data about the level (working paper 3/13/2014), comment letter at 1–46. elsewhere. 1729 1725 Sanders and Irwin, Energy Futures Prices and of various commodities in storage 1726 The papers discussed in the financialization Commodity Index Investment: New Evidence from section suggest that the returns of financial assets Firm-Level Position Data (working paper 2/17/ 1725 Risk premia may vary based on the amount may affect commodity returns and vice versa. 2014), comment letter at 47–89. of a commodity in storage at any given time. While 1727 Professor Kenneth Singleton found evidence 1730 Id. at 4–5. They argue that this dataset will discussing storage as a component of risk premia that speculative positions Granger-causing risk be more comprehensive than the CFTC’s seems overly technical, in many of these papers, premium on weekly time intervals during the 2007 commitment of trader data, but they did not test to including the Hamilton and Wu paper, it might play to 2009 period when studying the crude oil futures verify this assumption. They correctly observe that an import role. One could go long a crude oil markets. Singleton, Investor Flows and the 2008 prior work using CFTC data suffers from limitations futures contract, or one could buy crude oil and Boom/Bust in Oil Prices (March 23, 2011 working in the frequency of data and the availability of storage it. If you do the latter, you could draw down paper). swaps data. Id. at 3, 5.

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2012) (firms preannounce their rolls, Sanders and Irwin found no price return from holding the futures contract. and thus these position changes can be impact with respect to rolls that were They studied data over a long time anticipated by the marketplace and thus (assumedly) pre-announced does not period. If their model is correct, they lead to less price impact). Sanders and mean that unannounced rolls might be have found evidence against (at least Irwin’s result thus is not obviously mistaken for informed trading by the their formulation of) the Masters extensible to any price impact of this marketplace and cause a price hypothesis. There is a potential concern, large index fund’s positions apart from impact.1732 however, with their statistical result. its positions and trading at the time of Despite these limitations in scope, The price equation used for their roll. Sanders and Irwin’s article is one of the Granger analysis uses both lagged This fund did have days of heavy more useful Granger analysis papers for returns and changes in positions. See id. trading, apart from rolling, but Sanders several reasons. at p.16 (‘‘Rt-i’’ are lagged returns and and Irwin did not study the price First, it does present a working ‘‘Positions’’ are changes in position in impact arising from these changes in definition of ‘‘excessive speculation:’’ Equation 5a). To the extent that lagged position. The fund traded cotton speculation that is ‘‘causing’’ price returns and position changes are contracts representing 5.8% of average fluctuations that are ‘‘sudden’’ or correlated with each other, their price daily trading in cotton and wheat trades ‘‘unreasonable’’ or ‘‘unwarranted.’’ equation may mask correlations constituting 3.5% of average daily Sanders and Irwin correctly state that between price returns and position volume in the MGEX wheat contract. their ‘‘definition of excessive changes. speculation seemingly excludes Sanders and Irwin did not attempt to ii. Energy Futures Prices study price impact on these un- speculation that cannot be shown to announced trades. They stated that cause price changes. . . .’’ Id. at p.3. It Using the same commodity index because the sizes of the roll transactions is important to note, however, that fund data, Sanders and Irwin examine are ‘‘larger than changes in outright Sanders and Irwin repeatedly use the energy contracts: Crude oil, heating oil, position,’’ ‘‘investigating the impact of word ‘‘necessary’’ to analyze the natural gas, and reformulated blend rolling on market spreads’’ is desirability of position limits, which stock gas (with ethanol added). Sanders ‘‘particularly interesting.’’ Id. at p.10. elevates the requirements for and Irwin, Energy Futures Prices and On the other hand, the non-roll position establishing causation of price Commodity Index Investment: New changes are presumptively not fluctuations to a very high level. High Evidence from Firm-Level Position Data preannounced to the marketplace, so quality economic studies often use (working paper 2014). This paper studying this rich dataset for price empirical data, typically the tools of attempts to challenge the findings of an impacts from those position changes statistics, to achieve reasonable impact on price from positions by might also be interesting. certainty within a specified degree of Singleton, Hamilton and Wu. Sanders This paper by Sanders and Irwin thus error. and Irwin contend that their richer data has a limitation of scope based on its Second, the data source is a novel and source compels a conclusion that focus on just the rolling of positions. fairly comprehensive data set. It positions in commodity energy markets This large commodity index fund includes both swaps and futures, and do not impact price. This paper also has a potential presumptively pre-announced its rolling encompasses many different problem with the price return equation. of positions in its prospectus. However, commodities. The data does indicate the The equation, see id. at p. 15 (Equation this leaves open the question of what volume and nature of this large No. 7), uses lagged returns and positions would be the effect if this same fund did commodity fund’s positions in the to test against a correlation with price. not pre-announce in the future. The market place. All positions taken by the Sometimes they use multiple lagged analysis by Sanders and Irwin, if firm during the 2007–2012 time period returns. For example, for their natural credited as true within a reasonable were long positions, not short positions. gas analysis, they used two sets of degree of certainty, would address Id. at p.5. The fund’s total position size lagged returns. Id. at p.35 (Table 5). whether regulators should employ (including futures and swaps) grew from Again, use of lagged returns in the price position limits prophylactically to under $4 billion in 2007 to $12 billion equation can mask a possible diminish the price impact of any future, in 2011. Id. correlation. non-announced rolls. At least prior to Third, with respect to the paper’s conclusion on rolling of positions, the Sanders and Irwin argue that their sunshine trading of rolls, there is results from a richer data source evidence of a price impact associated statistical result of Sanders and Irwin— concluding that there was no price indicate that Singleton and Hamilton with rolling. Frenk and Turbeville, and Wu’s results may be ‘‘artifacts’’ of Commodity Index Traders and the impact from positions—is stronger than many other studies in some respects. poor data. They contend that these Boom/Bust Cycle in Commodities Prices authors’ use of agricultural data as (Better Markets 2011).1731 Unlike Hamilton and Wu’s work on just a component of the return from holding proxy for energy positions was Moreover, not all large players pre- problematic. Id. at p.3. They suggest this announce their rolls. The fact that a futures contract (risk premium), Sanders and Irwin consider the entire may explain the differing results of Singleton, as well as Hamilton and Wu. 1731 An example of a study that is, in part, forward-looking, is Cheng, Kirilenko, and Xiong, 1732 Sanders and Irwin’s piece does not directly But there are other explanations for Convective Risk Flows in Commodity Futures test the effect of pre-existing position limits in these this difference in results. Singleton, Markets (working paper 2012). The authors use markets. Examining agricultural markets for Hamilton and Wu focus on risk comovement methodology to conclude that in times whether there can be price impact on positions premium, not, as Sanders and Irwin do, of distress, financial traders reduce their net long generally is complicated by the fact that the position, causing risk to flow from financial traders agricultural markets have been subject to federal on price returns. This distinction can be to commercial hedgers. See also Acharya, position limits since 1920s. On the other hand, in quite important in this context. If Ramadorai, and Lochstoer, Limits to Arbitrage and the case of a commodity index fund, they may well positions impact price by impacting risk Hedging: Evidence from the Commodity Markets, not be carrying substantial positions into the spot premium, that effect will not necessarily Journal of Financial Economics (2013) (decreases in month, and so even their large source of firm data financial traders’ risk capacity should lead to may not be useful for testing the impact or reveal itself in a study of just price increases in hedgers’ hedging cost, all else being effectiveness of position limits during the spot returns. Perhaps more fundamentally, equal). month. Sanders and Irwin and are asking a

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slightly different question than and so are covered in the above analysis correlation between large financial Hamilton and Wu or Singleton. Sanders of various studies.1733 trading in the commodity markets and price changes and volatility could be and Irwin are attempting to measure Conclusion speculative position changes impact on driven by a common causal agent such price returns over a long time period, Economists debate whether as macroeconomic factors. February of 2007 to May 2012. Hamilton ‘‘excessive speculation’’ meaning, as an Those studies that use models of and Wu, and also Singleton, use economic matter, a link between large fundamental supply and demand reach narrower timeframes in their papers and speculation positions and unwarranted a whole host of divergent opinions on find a component of return, the risk price changes or price volatility, exists the subject, each opinion only as strong premium, during a narrow time in these regulated markets, and if so to as the many modelling choices. what degree. The question presented is window, during a period of economic In this way, the economic literature is a surprisingly difficult one to answer. stress. inconclusive. Even clearly written, well- All the empirical studies on this respected papers often contain nuances. f. CME Group Study Submissions question have drawbacks, and none is It is telling that Hamilton, Causes and conclusive. This inconclusivity is not Consequences of the Oil Shock of 2007– The CME Group filed in the surprising. It is inevitable, given the 2008, Brookings Paper on Economic administrative record several studies economic uncertainties that inhere in Activity (2009), has been cited by both and reports on March 28, 2011. It did so the data and the complexity of the proponents and opponents of position in three sets, all filed on March 28, question. There are many theoretical limits. 2011. and empirical assumptions and leaps, What can be said with certainty is In the first set, CME filed: Tackling that are needed to transform and summarized in the Commission’s Notice the Challenges in Commodity Markets interpret raw market data into of Proposed Rulemaking: That large and Raw Materials, European meaningful and persuasive results. speculative positions and outsized Commission (2011) (2.2.2011); Issues There is no decisive statistical method market power pose risks to a well- Involving the Use of the Futures Market for establishing evidence for or against functioning marketplace. These risks to Invest in Commodity Indexes, position limits in the commodity. may very well differ depending on Those studies that use Granger Government Accountability Office commodity market structure, but can in causality methodology tend to conclude Letter to the Hon. Collin Peterson, some markets cause real-world price that there is no evidence of excessive Chair, House Committee on Agriculture impacts through a higher risk premium speculation or its consequences on price as a component of total price. There are (June 30, 2009); and Korniotis, Does returns and price volatility, and many Speculation Affect Spot Price Levels? also economic studies indicating some industry commenters opposed to correlation between increased The Case of Metals With and Without position limits used this methodology. Futures Markets, Working Paper of the speculation and price volatility in times But that methodology is peculiarly of financial stress, but this correlation Finance and Economic Discussion sensitive to model design choices, and Series, Federal Reserve Board (2009). does not imply causation. this review has highlighted the Comment letters on either side In a second set, CME filed: Stoll and modelling decisions that may have declaring that the matter is settled in Whaley, Commodity Index Investing affected the ultimate conclusions of their favor among respectable and Commodity Futures Prices, Journal these studies. Moreover, there are economists are simply incorrect. The of Applied Finance (2010); and Irwin countervailing Granger studies showing best economists on both sides of the and Sanders, The Impact of Index and a link between large speculative debate concede that there is a legitimate Swap Funds on Commodity Markets: positions and price volatility. And debate. This analysis concludes that the Preliminary Results (OECD Food, studies such as Cheng, Kirilenko, and academic debate amongst economists Agriculture and Fisheries Working Xiong, Convective Risk Flows in about the effects of outsized market Papers, No. 27 2010). Commodity Futures Markets (working positions has reputable and legitimate paper 2012), indicate that some Granger In a third set, CME filed: Celso standard-bearers for opposing positions. studies may mask the impact of Brunetti and Bahattin Bu¨ yu¨ ks¸ahin, Is speculation in times of financial stress. B. Appendix B—List of Comment Letters Speculation Destabilizing? (working Those studies that use comovement Cited in this Rulemaking paper 2009); Bahattin Bu¨ yu¨ ks¸ahin and and cointegration methods tend to 1. Agri-Mark, Inc.; (CL–Agri–Mark–59609, 2/ Jeffrey H. Harris, The Role of conclude there is evidence of 10/2014) Speculators in the Crude Oil Futures deleterious effects of ‘‘excessive 2. Airlines for America (‘‘A4A’’); (CL–A4A– Market (working paper 2009); and speculation.’’ Yet comovement tests for 59714, 2/10/2014); (CL–A4A–59686, 2/ Interagency Task Force on Commodity correlation, not causation, and a 10/2014) Markets, Interim Report on Crude Oil 3. Alternative Investment Management Association (‘‘AIMA’’); (CL–AIMA– (July 2008). 1733 The undated CME study on conditional spot- 59618, 2/10/2014); (CL–AIMA–59619, 2/ Finally, CME submitted an undated month limits is the only empirical work submitted by CME in is opposition to the position limits 10/2014) CME study on conditional spot-month rulemaking. It has been proven wrong. The 4. American Bakers Association (‘‘Bakers’’); limits and CME Group’s white paper, Commission has previously explained that CME (CL–Bakers–59691, 2/10/2014) Excessive Speculation and Position made technical data errors in doing its analysis. 5. American Benefits Council (‘‘ABC’’); (CL– Limits in Energy Derivatives Markets. Position Limits for Futures and Swaps, 76 FR ABC–59670, 2/10/2014) 71626, 71635 nn. 100–101 (Nov. 18, 2011). The 6. American Cotton Shippers Association As a group, these studies are not new European Commission publication in CME’s first (‘‘ACSA’’); (CL–ASCA–59667, 2/10/ to the Commission. All of these papers, set of submissions, Tackling the Challenges in 2014) Commodity Markets and Raw Materials, European 7. American Farm Bureau Federation except the CME undated submission on Commission (2011) (2.2.2011), is simply a conditional spot limits and the discussion of policy initiatives. It concedes that it (‘‘AFBF’’); (CL–AFBF–59730, 2/10/2014) European Commission publication, is difficult to know which way causation forms 8. American Feed Industry Association (‘‘AFIA’’); (CL–AFIA–60955, 7/13/2016) were cited by the Commission in its between financial and physical markets and states that ‘‘the debate . . . is still open’’ on whether 9. American Gas Association (‘‘AGA’’), (CL– December 2013 Position Limits Proposal financial inflows have affected prices. Id. at 2, 7. AGA–59632, 2/10/2014); (CL–AGA–

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59633, 2/10/2014); (CL–AGA–60382, 3/ 31. Commodity Markets Oversight Coalition IATP–60394, 3/30/2015); (CL–IATP– 30/2015); (CL–AGA–60943, 7/13/2016) (‘‘CMOC’’); (CL–CMOC–59720, 2/10/ 60951, 7/13/2016) 10. American Petroleum Institute (‘‘API’’); 2014); (CL–CMOC–60324, 1/22/2015); 56. IATP and AFR, jointly; (CL–IATP–60323, (CL–API–59694, 2/10/2014); (CL–API– (CL–CMOC–60400, 3/30/2015) 1/22/2015) 59944, 8/4/2014); (CL–API–60939, 7/13/ 32. Committee on Capital Markets Regulation 57. Intercontinental Exchange, Inc. (‘‘ICE’’); 2016) (‘‘CCMR’’); (CL–CCMR–59623, 2/10/ (CL–ICE–59669, 2/10/2014); (CL–ICE– 11. American Public Gas Association 2014) 59962, 8/4/2014); (CL–ICE–59966, 8/4/ (‘‘APGA’’); (CL–APGA–59722, 2/10/ 33. Copperwood Asset Management LP 2014); (CL–ICE–60387, 3/30/2015); (CL– 2014) (‘‘CAM’’); (CL–CAM–60097, 12/22/2014) ICE–60929, 7/13/2016) 12. American Sugar Refining, Inc.; (CL–ASR– 34. Cota, Sean; (CL–Cota–59706, 2/10/2014); 58. International Dairy Foods Association 59668, 2/10/2014); (CL–ASR–60933, 7/ (CL–Cota–60322, 1/22/2015) (‘‘IDFA’’); (CL–IDFA–59771, 2/10/2014) 13/2016) 35. CSC Sugar, LLC (‘‘CSC’’); (CL–CSC– 59. International Energy Credit Association; 13. Americans for Financial Reform (‘‘AFR’’); 59676, 2/10/2014); (CL–CSC–59677, 2/ (CL–IECAssn–9679, 2/10/2014); (CL– (CL–AFR–59711, 2/10/2014); (CL–AFR– 10/2014) IECAssn–59957, 8/4/2014); (CL– 59685, 2/10/2014); (CL–AFR–60953, 7/ 36. Dairy Farmers of America (‘‘DFA’’); (CL– IECAssn–60395, 3/30/2015); (CL– 13/2016) DFA–59621, 2/10/2014); (CL–DFA– IECAssn–60949, 7/13/2016) 14. Archer Daniels Midland Company 59948, 8/4/2014); (CL–DFA–60309, 1/22/ 60. International Swaps and Derivatives (‘‘ADM’’); (CL–ADM–59640, 2/10/2014); 2015); (CL–DFA–60927, 7/13/2016) Association, Inc. (‘‘ISDA’’); (CL–ISDA– (CL–ADM–60300, 1/22/2015); (CL– 37. Darigold; (CL–Darigold–59651, 2/10/ 60370, 3/26/2015); (CL–ISDA–60931, 7/ ADM–60934, 7/13/2016) 2014) 13/2016) 15. Armajaro Asset Management; (CL– 38. Davis Wright Tremaine LLP on behalf of 61. Investment Company Institute (‘‘ICI’’); Armajaro–59729, 2/10/2014) Dairy America, Inc.; (CL–Dairy America– (CL–ICI–59614, 2/10/2014) 16. Atmos Energy Holdings, Inc. (‘‘Atmos’’); 59683, 2/10/2014) 62. ISDA and SIFMA, jointly; (CL–ISDA/ (CL–Atmos–59705, 2/10/2014) 39. DB Commodity Services LLC (‘‘DBCS’’); SIFMA–59611, 2/10/2014); (CL–ISDA/ 17. Better Markets, Inc.; (CL–Better Markets– (CL–DBCS–59569, 2/6/2014) SIFMA–59917, 7/7/2014) 59715, 2/10/2014); (CL–Better Markets– 40. Duke Energy Utilities; (CL–DEU–59627, 63. Just Energy Group Inc.; (CL–Just–59692, 59716, 2/10/2014); (CL–Better Markets– 2/10/2014) 2/10/2014) 60325, 1/22/2015); (CL–Better Markets– 41. Ecom Agro Industrial, Inc.; (CL–Ecom– 64. Leprino Foods Company; (CL–Leprino– 60401, 3/30/2015); (CL–Better Markets– 60308, 1/22/2015) 59707, 2/10/2014) 60928, 7/13/2016) 42. EDF Trading North America, LLC 65. Louis Dreyfus Commodities LLC; (CL– 18. BG Energy Merchants, LLC (‘‘BG Group’’); (‘‘EDF’’); (CL–EDF–59961, 8/4/2014); LDC–59643, 2/10/2014) (CL–BG Group–59656, 2/10/2014); (CL– (CL–EDF–60398, 3/30/2015); (CL–EDF– 66. Managed Funds Association (‘‘MFA’’); BG Group–59937, 8/4/2014); (CL–BG 60944, 7/13/2016) (CL–MFA–59600, 2/7/2014); (CL–MFA– Group–60383, 3/30/2015) 43. Edison Electric Institute (‘‘EEI’’); (CL– 59606, 2/9/2014); (CL–MFA–60385, 3/ 19. Cactus Feeders, Inc., et al.; (CL–Cactus– EEI–59945, 8/4/2014); (CL–EEI–Sup– 30/2015) 59660, 2/10/2014) 60386, 3/30/2015) 67. MidAmerican Energy Holdings Company; 20. Calpine Corporation; (CL–Calpine–59663, 44. Electric Power Supply Association (CL–MidAmerican–59585, 2/7/2014) 2/10/2014) (‘‘EPSA’’); (CL–EPSA–55953, 8/4/2014); 68. Minneapolis Grain Exchange, Inc. 21. Cargill, Incorporated; (CL–Cargill–59638, (CL–EPSA–59999, 11/12/2014); (CL– (‘‘MGEX’’); (CL–MGEX–59610, 2/10/ 2/10/2014) EPSA–60381, 3/30/2015) 2014); (CL–MGEX–59932, 8/1/2014); 22. Castleton Commodities International LLC 45. EEI and EPSA, jointly (‘‘EEI–EPSA’’); (CL–MGEX–60301, 1/22/2015); (CL– (‘‘CCI’’); (CL–CCI–60935, 7/13/2016) (CL–EEI–EPSA–59602, 2/7/2014); (CL– MGEX–60380, 3/30/2015); (CL–MGEX– 23. Center for Capital Markets EEI–EPSA–60925, 7/13/2016) 60936, 7/13/2016); (CL–MGEX–60938, 7/ Competitiveness, U.S. Chamber of 46. Energy Transfer Partners, L.P. (‘‘ETP’’); 13/2016) Commerce (‘‘Chamber’’); (CL–Chamber– (CL–ET–59958, 8/4/2014); (CL–ETP– 69. Morgan Stanley; (CL–MSCGI–59708, 2/ 59684, 2/10/2014); (CL–Chamber–59721, 60915, 7/12/2016) 10/2014) 2/10/2014) 47. FC Stone LLC; (CL–FCS–59675, 2/10/ 70. National Association of Wheat Growers; 24. Chairman, U.S. Senate Permanent 2014) (CL–NAWG–59687, 2/10/2014) Subcommittee on Investigations of the 48. Fonterra Co-operative Group Limited 71. National Cattlemen’s Beef Association Committee on Homeland Security and (‘‘Fonterra’’); (CL–Fonterra–59608, 2/9/ (‘‘NCBA’’); (CL–NCBA–59624, 2/10/ Governmental Affairs; (CL–Sen. Levin– 2014) 2014) 59637, 2/10/2014) 49. Futures Industry Association (‘‘FIA’’), 72. National Corn Growers Association & 25. Citadel LLC; (CL–Citadel–59717, 2/10/ (CL–FIA–59595, 2/7/2014); (CL–FIA– American Soybeans Association, jointly; 2014); (CL–Citadel–59933, 8/1/2014) 59566, 2/6/2014); (CL–FIA–59931, 7/31/ (CL–NCGA–ASA–60917, 7/12/2016) 26. CME Group Inc. (‘‘CME’’); (CL–CME– 2014); (CL–FIA–60303, 1/22/2015); (CL– 73. National Corn Growers Association & 59719, 2/10/2014); (CL–CME–59718, 2/ FIA–60392, 3/30/2015); (CL–FIA–60937, Natural Gas Supply Association, jointly; 10/2014); (CL–CME–59970, 8/4/2014); 7/13/2016) (CL–NCGA–NGSA–60919, 7/13/2016) (CL–CME–59971, 8/4/2014); (CL–CME– 50. Grain Service Corporation (‘‘GSC’’); (CL– 74. National Cotton Council of America, 60307, 1/22/2015); (CL–CME–60406, 3/ GSC–59703, 2/10/2014) American Cotton Shippers Association, 30/2015); (CL–CME–60926, 7/13/2016) 51. HP Hood LLC (‘‘Hood’’), (CL–Hood– and Amcot, jointly; (CL–NCC–ACSA– 27. Coalition of Physical Energy Companies 59582, 2/7/2014) 60972, 7/18/2016) (‘‘COPE’’); (CL–COPE–59662, 2/10/2014); 52. ICE Futures U.S., Inc.; (CL–ICE–59645, 2/ 75. National Council of Farmer Cooperatives; (CL–COPE–59653, 2/10/2014); (CL– 10/2014); (CL–ICE–59649, 2/10/2014); (CL–NCFC–59613, 2/10/2014); (CL– COPE–59950, 8/4/2014); (CL–COPE– (CL–ICE–59938, 8/4/2014); (CL–ICE– NCFC–59942, 8/4/2014); (CL–NCFC– 60388, 3/30/2015); (CL–COPE–60932, 7/ 60310, 1/22/2015); (CL–ICE–60311, 1/22/ 60930, 7/13/2016) 13/2016) 2015); (CL–ICE–60378, 3/30/2015) 76. National Energy Marketers Association; 28. Commercial Energy Working Group; (CL– 53. Industrial Energy Consumers of America; (CL–NEM–59586, 2/7/2014); (CL–NEM– Working Group–59647, 2/10/2014) (CL–IECA–59671, 2/10/2014); (CL– 59620, 2/10/2014) 29. Commodities Working Group of GFMA IECA–59713, 2/10/2014); (CL–IECA– 77. National Grain and Feed Association; (‘‘GFMA’’); (CL–GFMA–60314, 1/22/ 59964, 8/4/2014); (CL–IECA–60389, 3/ (CL–NGFA–59681, 2/10/2014); (CL– 2015) 30/2015) NGFA–59956, 8/4/2014); (CL–NGFA– 30. Commodity Markets Council (‘‘CMC’’); 54. Innovation Center for US Dairy; (CL–US 60267, 1/17/2015); (CL–NGFA–60312, 1/ (CL–CMC–59634, 2/10/2014); (CL–CMC– Dairy–59952, 8/4/2014) 22/2015); (CL–NGFA–60941, 7/13/2016) 59925, 7/25/2014); (CL–CMC–60318, 1/ 55. Institute for Agriculture and Trade Policy 78. National Milk Producers Federation; (CL– 22/2015); (CL–CMC–60391, 3/30/2015); (‘‘IATP’’); (CL–IATP–59701, 2/10/2014); NMPF–59652, 2/10/2014); (CL–NMPF– (CL–CMC–60950, 7/13/2016) (CL–IATP–59704, 2/10/2014); (CL– 60956, 7/13/2016)

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79. National Rural Electric Cooperative 101. Texas Cattle Feeders Association 17 CFR Part 150 Association, American Public Power (‘‘TCFA’’); (CL–TCFA–59680, 2/10/ Association, and the Large Public Power 2014); (CL–TCFA–59723, 2/10/2014) Bona fide hedging, Commodity Council, jointly (the ‘‘NFP Electric 102. The Andersons, Inc.; (CL–Andersons– futures, Cotton, Grains, Position limits, Associations’’); (CL–NFP–59690, 2/10/ 60256, 1/15/2015) Referenced Contracts, Swaps. 2014); (CL–NFP–59934, 8/1/2014); (CL– 103. The McCully Group LLC; (CL–McCully– NFP–60393, 3/30/2015); (CL–NFP– 59592, 2/7/2014) 17 CFR Part 151 60942, 7/13/2016) 104. Thornton, Pamela; (CL–Thornton– Bona fide hedging, Commodity 80. Natural Gas Supply Association; (CL– 59702, 2/10/2014) futures, Cotton, Grains, Position limits, NGSA–59673, 2/10/2014); (CL–NGSA– 105. Traditum Group LLC; (CL–Traditum– Referenced Contracts, Swaps. 59674, 2/10/2014); (CL–NGSA–59900, 6/ 59655, 2/10/2014) 26/2014); (CL–NGSA–59941, 8/4/2014); 106. Tri-State Coalition for Responsible For the reasons stated in the (CL–NGSA–60379, 3/30/2015) Investment, et al.; (CL–Tri-State–59682, preamble, the Commodity Futures 81. Nebraska Cattlemen Inc.; (CL–NC–59696, 2/10/2014) Trading Commission proposes to amend 2/10/2014) 107. United States Commodity Funds LLC 17 CFR chapter I as follows: 82. New York State Department of (‘‘USCF’’); (CL–USCF–59644, 2/10/2014) Agriculture & Markets; (CL–NYS 108. Vectra Capital LLC; (CL–Vectra–60369, PART 1—GENERAL REGULATIONS Agriculture–59657, 2/10/2014) 3/26/2015) UNDER THE COMMODITY EXCHANGE 83. Nodal Exchange, LLC; (CL–Nodal–59695, 109. Wholesale Markets Brokers Association, ACT 2/10/2014); (CL–Nodal–60948, 7/13/ Americas (‘‘WMBA’’); (CL–WMBA– 2016) 60945, 7/13/2016) ■ 1. The authority citation for part 1 84. NRG Energy, Inc.; (CL–NRG–60434, 1/20/ 110. World Economy, Ecology & continues to read as follows: 2015) Development (‘‘WEED’’); (CL–WEED– 85. Occupy the SEC (‘‘OSEC’’); (CL–OSEC– 59628, 2/10/2014) Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, 59972, 8/7/2014) 111. World Gold Council (‘‘WGC’’); (CL– 6d, 6e, 6f, 6g, 6h, 6i, 6k, 6l, 6m, 6n, 6o, 6p, 86. Olam International Limited; (CL–Olam– WGC–59558, 2/6/2014) 6r, 6s, 7, 7a–1, 7a–2, 7b, 7b–3, 8, 9, 10a, 12, 12a, 12c, 13a, 13a–1, 16, 16a, 19, 21, 23, and 59658, 2/10/2014); (CL–Olam–59946, 8/ List of Subjects 4/2014) 24 (2012). 87. Pedestal Commodity Group, LLC; (CL– 17 CFR Part 1 § 1.3(z) [Removed and Reserved] Pedestal–59630, 2/10/2014) 88. Petroleum Marketers Association of Agricultural commodity, Agriculture, ■ 2. Remove and reserve § 1.3(z). America and the New England Fuel Brokers, Committees, Commodity Institute; (CL–PMAA–NEFI–60952, 7/13/ futures, Conflicts of interest, Consumer § 1.47 [Removed and Reserved] 2016) protection, Definitions, Designated ■ 3. Remove and reserve § 1.47. 89. Plains All American Pipeline, L.P.; (CL– contract markets, Directors, Major swap § 1.48 [Removed and Reserved] PAAP–59664, 2/10/2014); (CL–PAAP– participants, Minimum financial 59951, 8/4/2014) requirements for intermediaries, ■ 4. Remove and reserve § 1.48. 90. Private Equity Growth Capital Council Reporting and recordkeeping PART 15—REPORTS—GENERAL (‘‘PEGCC’’); (CL–PEGCC–59650, 2/10/ requirements, Swap dealers, Swaps. 2014); (CL–PEGCC–59913, 7/3/2014); PROVISIONS (CL–PEGCC–59987, 10/24/2014) 17 CFR Part 15 91. Public Citizen, Inc.; (CL–Public Citizen– ■ 5. The authority citation for part 15 59648, 2/10/2014); (CL–Public Citizen– Brokers, Commodity futures, continues to read as follows: 60390, 3/30/2015); (CL–Public Citizen– Reporting and recordkeeping requirements, Swaps. Authority: 7 U.S.C. 2, 5, 6a, 6c, 6f, 6g, 6i, 60313, 1/22/2015); (CL–Public Citizen– 6k, 6m, 6n, 7, 7a, 9, 12a, 19, and 21, as 60940, 7/13/2016) 17 CFR Part 17 amended by Title VII of the Dodd-Frank Wall 92. Rice Dairy LLC; (CL–Rice Dairy–59601, 2/ Street Reform and Consumer Protection Act, 7/2014); (CL–Rice Dairy–59960, 8/4/ Brokers, Commodity futures, Pub. L. 111–203, 124 Stat. 1376 (2010). 2014) Reporting and recordkeeping 93. RightingFinance; (CL–RF–60372, 3/28/ requirements, Swaps. ■ 6. In § 15.00, revise paragraph (p) to 2015) read as follows: 94. Risk Management Work Group, 17 CFR Part 19 Globalization Operating Committee, § 15.00 Definitions of terms used in parts Commodity futures, Cottons, Grains, 15 through 19, and 21 of this chapter. Innovation Center for US Dairy; (CL–US Reporting and recordkeeping Dairy–59597, 2/7/2014) requirements, Swaps. * * * * * 95. Rutkowski, Robert; (CL–Rutkowski– (p) Reportable position means: 60961, 7/14/2016); (CL–Rutkowski- 17 CFR Part 37 (1) For reports specified in parts 17 60962, 7/14/2016) Registered entities, Registration and 18 and in § 19.00(a)(2) and (a)(3) of 96. Sempra Energy; (CL–SEMP–59926, 7/25/ this chapter any open contract position 2014); (CL–SEMP–60384, 3/30/2015) application, Reporting and 97. SIFMA AMG (‘‘SIFMA’’); (CL–AMG– recordkeeping requirements, Swaps, that at the close of the market on any 59709, 2/10/2014); (CL–AMG–59710, 2/ Swap execution facilities. business day equals or exceeds the 10/2014); (CL–AMG–59935, 8/1/2014); quantity specified in § 15.03 of this part (CL–AMG–60946, 7/13/2016) 17 CFR Part 38 in either: 98. Southern Company Services, Inc.; (CL– Block transaction, Commodity (i) Any one futures of any commodity SCS–60399, 3/30/2015) futures, Designated contract markets, on any one reporting market, excluding 99. Sutherland Asbill & Brennan LLP on Reporting and recordkeeping futures contracts against which notices behalf of The Commercial Energy requirements, Transactions off the of delivery have been stopped by a Working Group; (CL–Working Group– centralized market. trader or issued by the clearing 59693, 2/10/2014); (CL–Working Group– organization of a reporting market; or 59955, 8/4/2014); (CL–Working Group– 17 CFR Part 140 59959, 8/4/2014); (CL–Working Group– (ii) Long or short put or call options 60396, 3/30/2015); (CL–Working Group– Authority delegations (Government that exercise into the same future of any 60947, 7/13/2016) agencies), Conflict of interests, commodity, or long or short put or call 100. T.C. Jacoby & Company, Inc.; (CL– Organizations and functions options for options on physicals that Jacoby–59622, 2/10/2014) (Government agencies). have identical expirations and exercise

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into the same physical, on any one (d) Persons, as specified in part 19 of § 15.02 Reporting forms. reporting market. this chapter, who either: Forms on which to report may be (2) For the purposes of reports (1) Hold or control commodity specified in § 19.00(a)(1) of this chapter, obtained from any office of the derivative contracts (as defined in Commission or via the Internet (http:// any position in commodity derivative § 150.1 of this chapter) that exceed a contracts, as defined in § 150.1 of this www.cftc.gov). Forms to be used for the position limit in § 150.2 of this chapter filing of reports follow, and persons chapter, that exceeds a position limit in for the commodities enumerated in that required to file these forms may be § 150.2 of this chapter for the particular section; or commodity. determined by referring to the rule (2) Are merchants or dealers of cotton listed in the column opposite the form * * * * * holding or controlling positions for ■ number. 7. In § 15.01, revise paragraph (d) to future delivery in cotton that equal or read as follows: exceed the amount set forth in § 15.03. § 15.01 Persons required to report. * * * * * * * * * * ■ 8. Revise § 15.02 to read as follows:

Form No. Title Rule

40 ...... Statement of Reporting Trader ...... 18.04 71 ...... Identification of Omnibus Accounts and Sub-accounts ...... 17.01 101 ...... Positions of Special Accounts ...... 17.00 102 ...... Identification of Special Accounts, Volume Threshold Accounts, and Consolidated Accounts ...... 17.01 204 ...... Statement of Cash Positions of Hedgers ...... 19.00 304 ...... Statement of Cash Positions for Unfixed-Price Cotton ‘‘On Call’’ ...... 19.00 504 ...... Statement of Cash Positions for Conditional Spot Month Exemptions ...... 19.00 604 ...... Statement of Pass-Through Swap Exemptions ...... 19.00

(Approved by the Office of Management and § 17.03 Delegation of authority to the Protection Act, Pub. L. 111–203, 124 Stat. Budget under control numbers 3038–0007, Director of the Office of Data and 1376 (2010). 3038–0009, and 3038–0103.) Technology or the Director of the Division of Market Oversight. § 19.00 General provisions. PART 17—REPORTS BY REPORTING * * * * * (a) Who must file series ‘04 reports. MARKETS, FUTURES COMMISSION (h) Pursuant to § 17.00(b), and as The following persons are required to MERCHANTS, CLEARING MEMBERS, specifically provided in § 150.4 of this file series ‘04 reports: AND FOREIGN BROKERS chapter, the authority shall be (1) Persons filing for exemption to designated to the Director of the Office speculative position limits. All persons ■ 9. The authority citation for part 17 of Data and Technology to instruct a holding or controlling positions in continues to read as follows: futures commission merchant, clearing commodity derivative contracts, as defined in § 150.1 of this chapter, in Authority: 7 U.S.C. 2, 6a, 6c, 6d, 6f, 6g, 6i, member or foreign broker to consider otherwise than as a single account for excess of any speculative position limit 6t, 7, 7a, and 12a, as amended by Title VII provided under § 150.2 of this chapter of the Dodd-Frank Wall Street Reform and the purpose of determining special account status and for reporting and for any part of which a person relies Consumer Protection Act, Pub. L. 111–203, on an exemption to speculative position 124 Stat. 1376 (2010). purposes all accounts one person holds or controls, or in which the person has limits under § 150.3 of this chapter as ■ 10. In § 17.00, revise paragraph (b) to a financial interest. follows: (i) Conditional spot month limit read as follows: * * * * * exemption. A conditional spot month ■ 12. Revise part 19 to read as follows: § 17.00 Information to be furnished by limit exemption under § 150.3(c) of this futures commission merchants, clearing PART 19—REPORTS BY PERSONS chapter for any commodity specially members and foreign brokers. HOLDING POSITIONS EXEMPT FROM designated by the Commission under * * * * * POSITION LIMITS AND BY § 19.03 for reporting; (ii) Pass-through swap exemption. A (b) Interest in or control of several MERCHANTS AND DEALERS IN COTTON pass-through swap exemption under accounts. Except as otherwise § 150.3(a)(1)(i) of this chapter and as instructed by the Commission or its Sec. defined in paragraph (2)(ii)(B) of the designee and as specifically provided in 19.00 General provisions. definition of bona fide hedging position § 150.4 of this chapter, if any person 19.01 Reports on stocks and fixed price in § 150.1 of this chapter, reporting holds or has a financial interest in or purchases and sales. separately for: controls more than one account, all such 19.02 Reports pertaining to cotton on call (A) Non-referenced-contract swap accounts shall be considered by the purchases and sales. offset. A swap that is not a referenced 19.03 Reports pertaining to special futures commission merchant, clearing commodities. contract, as that term is defined in member or foreign broker as a single 19.04 Delegation of authority to the Director § 150.1 of this chapter, and which is account for the purpose of determining of the Division of Market Oversight. executed opposite a counterparty for special account status and for reporting 19.05–19.10 [Reserved] which the swap would qualify as a bona purposes. Appendix A to Part 19—Forms 204, 304, 504, fide hedging position and for which the 604, and 704 risk is offset with a referenced contract; * * * * * Authority: 7 U.S.C. 6g, 6c(b), 6i, and and ■ 11. In § 17.03, revise paragraph (h) to 12a(5), as amended by Title VII of the Dodd- (B) Spot-month swap offset. A cash- read as follows: Frank Wall Street Reform and Consumer settled swap, regardless of whether it is

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a referenced contract, executed opposite commodity of soybeans, soybean oil, or (iv) The quantity of unfixed-price sale a counterparty for which the swap soybean meal, the reporting person shall commitments open providing for would qualify as a bona fide hedging show the cash positions of soybeans, delivery of such cash commodity in: position and for which the risk is offset soybean oil and soybean meal. (A) The delivery period for the with a physical-delivery referenced (2) Cross hedges. Cash positions that physical-delivery core referenced contract in its spot month; represent a commodity, or products or futures contract; or (iii) Other exemption. Any other byproducts of a commodity, that is (B) The time period for cash- exemption from speculative position different from the commodity settlement price determination for the limits under § 150.3 of this chapter, underlying a commodity derivative cash-settled core referenced futures including for a bona fide hedging contract that is used for hedging, shall contract; position as defined in § 150.1 of this be shown both in terms of the (v) The quantity of unfixed-price chapter or any exemption granted under equivalent amount of the commodity purchase commitments open providing § 150.3(b) or (d) of this chapter; or underlying the commodity derivative for receipt of such cash commodity in: (A) The delivery period for the (iv) Anticipatory exemption. An contract used for hedging and in terms physical-delivery core referenced anticipatory exemption under § 150.7 of of the actual cash commodity as this chapter. futures contract; or provided for on the appropriate series (B) The time period for cash- (2) Persons filing cotton on call ‘04 form. reports. Merchants and dealers of cotton settlement price determination for the (3) Standards and conversion factors. holding or controlling positions for cash-settled core referenced futures In computing their cash position, every futures delivery in cotton that are contract; and person shall use such standards and reportable pursuant to § 15.00(p)(1)(i) of (vi) The quantity of fixed-price sale conversion factors that are usual in the this chapter; or commitments open providing for (3) Persons responding to a special particular trade or that otherwise reflect delivery of such cash commodity in: call. All persons exceeding speculative the value-fluctuation-equivalents of the (A) The delivery period for the position limits under § 150.2 of this cash position in terms of the commodity physical-delivery core referenced chapter or all persons holding or underlying the commodity derivative futures contract; or controlling positions for future delivery contract used for hedging. Such person (B) The time period for cash- that are reportable pursuant to shall furnish to the Commission upon settlement price determination for the § 15.00(p)(1) of this chapter who have request detailed information concerning cash-settled core referenced futures received a special call for series ‘04 the basis for and derivation of such contract. reports from the Commission or its conversion factors, including: (2) Pass-through swap exemption. designee. Persons subject to a special (i) The hedge ratio used to convert the Persons required to file ’04 reports call shall file CFTC Form 204, 304, 504, actual cash commodity to the equivalent under § 19.00(a)(1)(ii) shall file CFTC or 604 as instructed in the special call. amount of the commodity underlying Form 604: Filings in response to a special call shall the commodity derivative contract used (i) Non-referenced-contract swap be made within one business day of for hedging; and offset. For each swap that is not a receipt of the special call unless (ii) An explanation of the referenced contract and which is otherwise specified in the call. For the methodology used for determining the executed opposite a counterparty for purposes of this paragraph, the hedge ratio. which the transaction would qualify as a bona fide hedging position and for Commission hereby delegates to the § 19.01 Reports on stocks and fixed price which the risk is offset with a Director of the Division of Market purchases and sales. referenced contract, showing: Oversight, or to such other person (A) The underlying commodity or designated by the Director, authority to (a) Information required—(1) Conditional spot month limit commodity reference price; issue calls for series ‘04 reports. (B) Any applicable clearing (b) Manner of reporting. The manner exemption. Persons required to file ’04 reports under § 19.00(a)(1)(i) shall file identifiers; of reporting the information required in (C) The notional quantity; § 19.01 is subject to the following: CFTC Form 504 showing the composition of the cash position of each (D) The gross long or short position in (1) Excluding certain source terms of futures-equivalents in the core commodities, products or byproducts of commodity underlying a referenced contract that is held or controlled referenced futures contract; and the cash commodity hedged. If the (E) The gross long or short positions including: regular business practice of the in the referenced contract for the (i) The as of date; reporting person is to exclude certain offsetting risk position; and source commodities, products or (ii) The quantity of stocks owned of (ii) Spot-month swap offset. For each byproducts in determining his cash such commodity that either: cash-settled swap executed opposite a positions for bona fide hedging (A) Is in a position to be delivered on counterparty for which the transaction positions (as defined in § 150.1 of this the physical-delivery core referenced would qualify as a bona fide hedging chapter), the same shall be excluded in futures contract; or position and for which the risk is offset the report, provided that the amount of (B) Underlies the cash-settled core with a physical-delivery referenced the source commodity being excluded is referenced futures contract; contract held into a spot month, de minimis, impractical to account for, (iii) The quantity of fixed-price showing for such cash-settled swap that and/or on the opposite side of the purchase commitments open providing is not a referenced contract the market from the market participant’s for receipt of such cash commodity in: information required under paragraph hedging position. Such persons shall (A) The delivery period for the (a)(2)(i) of this section and for such furnish to the Commission or its physical-delivery core referenced cash-settled swap that is a referenced designee upon request detailed futures contract; or contract: information concerning the kind and (B) The time period for cash- (A) The gross long or short position quantity of source commodity, product settlement price determination for the for such cash-settled swap in terms of or byproduct so excluded. Provided cash-settled core referenced futures futures-equivalents in the core however, when reporting for the cash contract; referenced futures contract; and

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(B) The gross long or short positions on Form 704, pursuant to § 150.7 (e) of (b) Time and place of filing reports. in the physical-delivery referenced this chapter. Each report shall be made weekly as of contract for the offsetting risk position. (b) Time and place of filing reports— the close of business on Friday and filed (3) Other exemptions. Persons (1) General. Except for reports specified using the procedure under § 19.01(b)(3), required to file ‘04 reports under in paragraphs (b)(2) or (b)(3) of this not later than 9 a.m. Eastern Time on § 19.00(a)(1)(iii) shall file CFTC Form section, each report shall be made the third business day following the 204 reports showing the composition of monthly: date of the report. the cash position of each commodity (i) As of the close of business on the hedged or underlying a reportable last Friday of the month, and § 19.03 Reports pertaining to special position in units of such commodity (ii) As specified in paragraph (b)(4) of commodities. and in terms of futures equivalents of this section, and not later than 9 a.m. From time to time to facilitate the core referenced futures contract, Eastern Time on the third business day surveillance in certain commodity including: following the date of the report. derivative contracts, the Commission (i) The as of date, the commodity (2) Spot month reports. Persons may designate a commodity derivative derivative contract held or controlled, required to file ‘04 reports under contract for reporting under and the equivalent core referenced § 19.00(a)(1)(i) for special commodities § 19.00(a)(1)(i) and will publish such futures contract; as specified by the Commission under determination in the Federal Register (ii) The quantity of stocks owned of § 19.03 or under § 19.00(a)(1)(ii)(B) shall and on its Web site. Persons holding or such commodities and their products file each report: controlling positions in such special and byproducts; (i) As of the close of business for each commodity derivative contracts must, (iii) The quantity of fixed-price day the person exceeds the limit during beginning 30 days after notice is purchase commitments open in such a spot period up to and through the day published in the Federal Register, cash commodities and their products the person’s position first falls below comply with the reporting requirements and byproducts; the position limit; and under § 19.00(a)(1)(i) and file Form 504 (iv) The quantity of fixed-price sale (ii) As specified in paragraph (b)(4) of for conditional spot month limit commitments open in such cash this section, and not later than 9 a.m. exemptions. commodities and their products and Eastern Time on the next business day byproducts; following the date of the report. § 19.04 Delegation of authority to the (v) The quantity of unfixed-price (3) Special calls. Persons required to Director of the Division of Market Oversight. purchase and sale commitments open in file ’04 reports in response to special (1) The Commission hereby delegates, such cash commodities and their calls made under § 19.00(a)(3) shall file until it orders otherwise, to the Director products and byproducts, in the case of each report as specified in paragraph of the Division of Market Oversight or offsetting unfixed-price cash commodity (b)(4) of this section within one business such other employee or employees as sales and purchases; and day of receipt of the special call unless the Director may designate from time to (vi) For cotton, additional information otherwise specified in the call. time, the authority in § 19.01 to provide that includes: (4) Electronic filing. CFTC ‘04 reports instructions or to determine the format, (A) The quantity of equity in cotton must be transmitted using the format, coding structure, and electronic data held, by merchant, producer or agent, by coding structure, and electronic data transmission procedures for submitting the Commodity Credit Corporation transmission procedures approved in data records and any other information under the provisions of the Upland writing by the Commission. required under this part. Cotton Program of the Agricultural (2) The Director of the Division of Stabilization and Conservation Service § 19.02 Reports pertaining to cotton on call purchases and sales. Market Oversight may submit to the of the U.S. Department of Agriculture; Commission for its consideration any (B) The quantity of certificated cotton (a) Information required. Persons matter which has been delegated in this owned; and required to file ‘04 reports under section. § 19.00(a)(2) shall file CFTC Form 304 (C) The quantity of non-certificated (3) Nothing in this section prohibits reports showing the quantity of call stocks owned. the Commission, at its election, from (4) Anticipatory exemptions. Persons cotton bought or sold on which the exercising the authority delegated in required to file ’04 reports under price has not been fixed, together with this section. § 19.00(a)(1)(iv) shall file CFTC Form the respective futures on which the 204 monthly on the remaining unsold, purchase or sale is based. As used §§ 19.05–19.10 [Reserved] unfilled and other anticipated activity herein, call cotton refers to spot cotton for the Specified Period that was bought or sold, or contracted for Appendix A to Part 19—Forms 204, reported on such person’s most recent purchase or sale at a price to be fixed 304, 504, 604, and 704 initial statement or annual update filed later based upon a specified future. BILLING CODE 6351–01–P

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NOTICE: Failure to file a report required by the Commodity Exchange Act (''CEA" or the "Act")2 and the regulations thereunder,3 or the filing of a report with the Commodity Futures Trading Commission ("CFTC" or "Commission") that includes a false, misleading or fraudulent statement or omits material facts that are required to be reported therein or are necessary to make the report not misleading, may (a) constitute a violation of§ 6(c)(2) of the Act (7 U.S.C. 9), § 9(a)(3) of the Act (7 U.S.C. 13(a)(3)), and/or§ 1001 of Title 18, Crimes and Criminal Procedure (18 U.S.C. 1001) and (b) result in punishment by fine or imprisonment, or both.

PRNACY ACT NOTICE

The Commission's authority for soliciting this information is granted in sections 4a, 4c(b), 4i, 4t and 8a(5) of the CEA and related regulations (see,~, 17 CFR § 19.00). The information solicited from entities and individuals engaged in activities covered by the CEA is required to be provided to the CFTC, and failure to comply may result in the imposition of criminal or administrative sanctions (see,~, 7 U.S. C.§§ 9 and 13a-l, and/or 18 U.S. C. 1001). The information requested is most commonly used in the Commission's market and trade practice surveillance activities to (a) provide information concerning the size and composition of the commodity derivatives markets, (b) permit the Commission to monitor and enforce speculative position limits and (c) enhance the Commission's trade surveillance data. The requested information may be used by the Commission in the conduct of investigations and litigation and, in limited circumstances, may be made public in accordance with provisions of the CEA and other applicable laws. It may also be disclosed to other government agencies and to contract markets to meet responsibilities assigned to them by law. The information will be maintained in, and any additional disclosures will be made in accordance with, the CFTC System of Records Notices, available on..!.!-'!-'.!..~~""-'-·

1 This Appendix includes representations of the proposed reporting forms, which would be submitted in an electronic format published pursuant to the proposed rules, either via the Commission's web portal or via XML­ based, secure FTP transmission. 2 7 U.S.C. section 1, et seq. 3 Unless otherwise noted, the rules and regulations referenced in this notice are found in chapter 1 of title 17 of the Code of Federal Regulations; 17 CFR Chapter 1 et seq.

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BACKGROUND & INSTRUCTIONS

Applicable Regulations: • 17 CFR § 19.00(a)(l)(iii) and (iv) specify who must file Form 204. • 17 CFR § 19.00(b) specifies the manner of reporting on series '04 reports, including Form 204. • 17 CFR § 19.0l(a)(3) and (4)(ii) specifies the information required on Form 204. • 17 CFR § 19.0l(b)(l) specifies the frequency (monthly), the as of report date (close of business on the last Friday of the month), and the time (9 a.m. Eastern Time on the third business day following the date of the report), for filing Form 204.

As appropriate, please follow the instructions below to generate and submit the required report or filing. Relevant regulations are cited in parentheses() for reference. Unless the context requires otherwise, the terms used herein shall have the same meaning as ascribed in parts 15 to 21 of the Commission's regulations.

Complete Form 204 as follows:

The trader identification fields should be completed by all filers. This updated Form 204 requires traders to identify themselves using their Public Trader Identification Number, in lieu of the CFTC Code Number required on previous versions of the Form 204. This number is provided to traders who have previously filed Forms 40 and 102 with the Commission. Traders may contact the Commission to obtain this number if it is unknown. If a trader has a National Futures Association Identification Number ("NF AID") and/or a Legal Entity Identifier ("LEI"), he should also identify himself using those numbers. Form 204 requires traders to identify the name of the reporting trader or firm and the contact information (including full name, address, phone number, and email address) for a natural person the Commission may contact regarding the submitted Form 204.

Section A of Form 204 must be completed by all filers who hold stocks and fixed-price cash positions in the cash commodity. Section A contains the following fields: Date...... As-of date for reported position RC or CDC...... Referenced Contract(§ 150.1) used for hedging or Commodity Derivative Contract(§ 150.1) as required by, e.g., a special call(§ 19.00(a)(3)) CRFC ...... Corresponding Core Referenced Futures Contract(§ 150.2(d)) Futures Equivalent in CRFC ...... Quantity of cash commodity hedged, converted to futures equivalents of the CRFC. Short positions should be represented with a minus sign, e.g. 2,000 contract equivalents short= "-2,000" Cash commodity hedged ...... Cash commodity hedged by the CDC positions, e.g. "crude oil" Units ...... Units of measure for cash commodity being hedged, e.g. "barrels" Stock ...... Stocks(§ 19.0l(a)(3)(ii)) Fixed Price Purchases ...... Fixed-price purchase commitments(§ 19.0l(a)(3)(iii)) Fixed Price Sales ...... Fixed-price sale commitments(§ 19.0l(a)(3)(iv)) Remaining Anticipated Activity ...... Remaining Unsold, Unfilled and Other Anticipated Activity for the Specified Period in Form 704 (§ 150.7(g) and§ 19.0l(a)(4))

Section B of Form 204 must be completed by all filers who hold unfixed-price cash positions in the cash commodity. Section B contains the following fields: Date...... As-of date for reported position RC or CDC...... Referenced Contract(§ 150.1) used for hedging or Commodity Derivative Contract(§ 150.1) as required by, e.g., a special call(§ 19.00(a)(3)) CRFC...... Corresponding Core Referenced Futures Contract(§ 150.2(d))

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Futures Equivalent in CRFC ...... Futures Contract Equivalent in terms of CRFC. Short positions should be represented with a minus sign, e.g. 2,000 contract equivalents short = "-2,000" Cash conuuodity hedged ...... Cash conuuodity hedged by the CDC positions, e.g. "crude oil" Units ...... Units of measure for cash conuuodity being hedged, e.g. "barrels" Unfixed-price purchases ...... Unfixed-price purchases(§ 19.0l(a)(3)(v)) Unfixed-price sales ...... Unfixed-price sales(§ 19.0l(a)(3)(v))

Section C of Form 204 must be completed in addition to Sections A and B of Form 204 by filers who hold cotton stocks. Section C contains the following fields: Equity Stocks...... Equity stock in hundreds of 500-lb. bales. Traders must report separately equity stocks held in the trader's capacity as a merchant, producer, and/or agent. (§ 19.01(a)(3)(vi)) Certificated Stocks...... Certificated stock in hundreds of 500-lb. bales. (§ 19.01(a)(3)(vi)) Non-certificated Stocks ...... Non-certificated stock in hundreds of 500-lb. bales. (§ 19.01(a)(3)(vi))

The signature/authorization page must be completed by all filers. This page must include the name and position of the natural person filing Form 204 as well as the name of the reporting trader represented by that person. The trader certifying this Form 204 on the signature/authorization page should note that filing a report that includes a false, misleading or fraudulent statement or omits material facts that are required to be reported therein or are necessary to make the report not misleading, may (a) constitute a violation of§ 6(c)(2) of the Act (7 U.S. C. 9), § 9(a)(3) of the Act (7 U.S.C. 13(a)(3)), and/or§ 1001 of Title 18, Crimes and Criminal Procedure (18 U.S. C. 1001) and (b) result in punishment by fine or imprisonment, or both.

Submitting Form 204: Once completed, please submit this form to the Conuuission pursuant to the instructions on [www.cftc.gov] or as otherwise directed by Commission staff. If submission attempts fail, the reporting trader shall contact the Conuuission at [[email protected]] for further technical support.

Please be advised that pursuant to 5 CFR § 1320.5(b )(2)(i), you are not required to respond to this collection of information unless it displays a currently valid OMB control number.

VerDate Sep<11>2014 23:37 Dec 29, 2016 Jkt 241001 PO 00000 Frm 00230 Fmt 4701 Sfmt 4725 E:\FR\FM\30DEP2.SGM 30DEP2 asabaliauskas on DSK3SPTVN1PROD with PROPOSALS EP30DE16.005 Federal Register / Vol. 81, No. 251 / Friday, December 30, 2016 / Proposed Rules 96933 fine in for (a) by Other may number. Period Unsold, 704 and Form Conuni"ion control punishment Specified in Unfilled Remaining misleading, the OMB Anticipated Activity not Trading result valid (b) Address report Futures and . the Sales currently Emml 1001) a make II I to S.C. Commodity C. Fixed-Price displays the it (18 er lnfom1ation: necessary with um unless are N b P~~ or li II report Procedure a Contact of Purchases therein Fixed-Price information Criminal filing of the and reported or be to Owned collection Crimes 18, this thereunder, to Stocks required Title II are of respond Name that tons, 1001 to bu., regulations Cash d<:.) e.g. facts Address First the or§ for lbs., I I bbls., and and! required Commodity c"t, Units (Specify: material not "Act") are omits 13(a)(3)), the you or or Cash U.S.C. Hedged )(2)(i), Commodity (7 ("CEA'' 5(b statement Act HEDGERS Act 1320. the ~ OF ofthe Cash COMMISSION of Hedged futures of fraudulent of CFR or Exchange 5 CRFC 9(a)(3) to § terms Quantity equivalents in 9), Commodity 204: misleading TRADING pursuant Commodity POSITIONS U.S.C. the that (7 false, a by FORM Act Core Futures (CRFC) Contract CASH the Reterenced advised of includes be required OF that C) report Please G(c)(2) or a for (CDC) of§ file both. to Used or Daivative Hedging Referenced Commodity Contract (R Contract Contract "Commission'') (XX-XX) II violation Failure a or STATEMENT COMMODITY FUTURES 204 Editions Obsolete Date imprisonment, Fmm constitute or ("CFTC" NOTICE: CFTC Previous

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VerDate Sep<11>2014 23:37 Dec 29, 2016 Jkt 241001 PO 00000 Frm 00233 Fmt 4701 Sfmt 4725 E:\FR\FM\30DEP2.SGM 30DEP2 asabaliauskas on DSK3SPTVN1PROD with PROPOSALS EP30DE16.008 96936 Federal Register / Vol. 81, No. 251 / Friday, December 30, 2016 / Proposed Rules a I I 1 of for .•. ·• short ..•. exceed ·I . 704 704 amount MMBtu. . The Other Other to Activity Activity stocks Cnsold, Cnsold: onn position Form f it the and and 0 Specified Specified of sales in in oil. in the the exemption 70,000,000 owns cash equivalent A, for for cause Unfilled Unfilled Remaining Renmining Period Period Anticipated Anticipated crude 50,000,000 II II position long of person hedging futures would fixed-price long Section a 0 cash is Sales Sales The oil fide 5.000,000 Fixed-Price barrels 704, II II long combined reports bona crude the a Price the form position exemption, of MMBtu. on Purchases Purchases and 30,000,000 2o,ooo.ooo Fixed- Fixed-Price Fixed-Price entity than cash II II 30,000,000 to barrels less hedging long is could claim MMBtu Stocks Stocks statement Owned Owned 70,000,000 fide 10,000.000 20,000,000 commercial II II are which entity 5,000,000 bona equivalent initial combined The e.g. e.g. lbs., lhs., etc.) etc.) Cash Cash an the oil, hedged. tor for 70,000,000 cwt, cwt, Bbls bbls., bbls., The in M\1Rtu of Commodity Commodity MMBtu, (Specify: (Specify: Units tons. Units tons, bu., bu., contract, crude absent II II commercial requirements of partially commodity. gas oil that, The is MMBtu. (iv))artd(~)(ii); futures Cash Cash Hedged Hedged Crude cash requirements Natural Commodity Commodity barrels oil 100,000,000 requirements II II the anticipated contract position (H), {ii),JUi), in the the crude contracts. short Cash Cash of of (i), short Hedged Iledged futures futures of of ~ -short to cash of of - of30,000,000 (3)(i), anticipated unfilled 10,000,000 50,000 25,000 sweet the (a) anticipatory (a).'($.) krms terms MMBtu of CRFC- CRfC Quantitv Quantity equivalents equivalents the futures in in purchase Commodity Commodity ?.Ql II II light in _l 19.dJ. unfilled equivalent Hence, purchases unfilled remaining of~< ()fs inventory filed Core Core Futures Futures (CRFC) (CRfC) Contract Contract 120,000,000 hedge, NYMEX fixed-price positions Referenced Referenced CL-NYMEX NG-NY\1EX has has a current of II II oil the as paiagral>)ls paragtapll$ fixed-price remaining in The entity requirements. entity the (RC) (RC) into crude (CDC) (CDC) Hedging Hedging position CRFC gas. speculative of for for (ollowi~~ i.e., follo~ng: Commodity Commodity Derivative Derivative Referenced Referenced CL-NYMEX HH-NY\1EX the Contract Contract or or Contract Contract contracts ~ long ilre Used Used entered short in a II II to natural anticipated barrels commercial commercial has of hedged, limit. A A other 25,000 equals and A- B- to }?4f$uarltto contracts has unfilled being up MMBtu position 20,000,000 Date Date of 5/6/2017 5/6/2017 entity p()sitionspursuant MMBtu, MMBtu 10,000 Example Example and position of remaining c:ll.sli 204, 204, position A. A.Cashpo~itio~ total the speculative I I I 120,000,000 50,000,000 short The commercial of contracts, and position 20,000,000 the Form Form

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NOTICE: Failure to file a report required by the Commodity Exchange Act (''CEA" or the "Act") 1 and the regulations thereunder,2 or the filing of a report with the Commodity Futures Trading Commission ("CFTC" or "Commission") that includes a false, misleading or fraudulent statement or omits material facts that are required to be reported therein or are necessary to make the report not misleading, may (a) constitute a violation of§ 6(c)(2) of the Act (7 U.S.C. 9), § 9(a)(3) of the Act (7 U.S.C. 13(a)(3)), and/or§ 1001 of Title 18, Crimes and Criminal Procedure (18 USC 1001) and (b) result in punishment by fine or imprisonment, or both.

PRNACY ACT NOTICE

The Commission's authority for soliciting this information is granted in sections 4 i and 8 of the CEA and related regulations ~, ~, 17 CFR § 19 .02). The information solicited from entities and individuals engaged in activities covered by the CEA is required to be provided to the CFTC, and failure to comply may result in the imposition of criminal or administrative sanctions (see,~, 7 U.S.C. §§ 9 and 13a-1, and/or 18 U.S. C. 1001). The information requested is most commonly used in the Commission's market and trade practice surveillance activities to (a) provide information concerning the size and composition of the commodity derivatives markets, (b) permit the Commission to monitor and enforce speculative position limits and (c) enhance the Commission's trade surveillance data. The requested information may be used by the Commission in the conduct of investigations and litigation and, in limited circumstances, may be made public in accordance with provisions of the CEA and other applicable laws. It may also be disclosed to other government agencies and to contract markets to meet responsibilities assigned to them by law. The information will be maintained in, and any additional disclosures will be made in accordance with, the CFTC System of Records Notices, available on..!.!...!.'-'-'-'~~""-'-·

1 7 U.S.C. section 1, et seq. 2 Unless otherwise noted, the rules and regulations referenced in this notice are found in chapter 1 of title 17 of the Code of Federal Regulations; 17 CFR Chapter 1 et seq.

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BACKGROUND & INSTRUCTIONS

Applicable Regulations: • 17 CFR § 19.00(a)(2) specifies who must file Form 304.

• 17 CFR § 19.00(b) specifies the manner of reporting on series '04 reports, including Form 304.

• 17 CFR § 19.02(a) specifies the information required on Form 304.

• 17 CFR § 19.02(b) specifies the frequency (weekly), the as of report date (close of business on Friday), and

the time (9 a.m. Eastern Time on the third business day following the date of the report), for filing the Form

304.

As appropriate, please follow the instructions below to generate and submit the required report or filing. Relevant regulations are cited in parentheses() for reference. Unless the context requires otherwise, the terms used herein shall have the same meaning as ascribed in parts 15 to 21 of the Commission's regulations.

Complete Form 304 as follows:

The trader identification fields should be completed by all filers. This updated Form 304 requires traders to identify themselves using their Public Trader Identification Number, in lieu of the CFTC Code Number required on previous versions of the Form 304. This number is provided to traders who have previously filed Forms 40 and 102 with the Commission. Traders may contact the Commission to obtain this number if it is unknown. If a trader has a National Futures Association Identification Number ("NF AID") and/or a Legal Entity Identifier ("LEI"), he should also identify himself using those numbers. Form 304 requires traders to identify the name of the reporting trader or firm and the contact information (including full name, address, phone number, and email address) for a natural person the Commission may contact regarding the submitted Form 304.

Merchants and dealers of cotton must report on Form 304. Report in hundreds of 500-lb. bales unfixed-price cotton "on-call" pursuant to § 19.02(a). Include under "Call Purchases" stocks on hand for which price has not yet been fixed. For each listed stock, report the delivery month, delivery year, quantity of call purchases, and quantity of call sales.

The signature/authorization page must be completed by all filers. This page must include the name and position of the natural person filing Form 304 as well as the name of the reporting trader represented by that person. The trader certifying this Form 304 on the signature/authorization page should note that filing a report that includes a false, misleading or fraudulent statement or omits material facts that are required to be reported therein or are necessary to make the report not misleading, may (a) constitute a violation of§ 6(c)(2) of the Act (7 U.S. C. 9), § 9(a)(3) of the Act (7 U.S.C. 13(a)(3)), and/or§ 1001 of Title 18, Crimes and Criminal Procedure (18 U.S. C. 1001) and (b) result in punishment by fine or imprisonment, or both.

Submitting Form 304: Once completed, please submit this form to the Commission pursuant to the instructions on [www.cftc.gov] or as otherwise directed by Commission staff. If submission attempts fail, the reporting trader shall contact the Commission at [[email protected]] for further technical support.

Please be advised that pursuant to 5 CFR § 1320.5(b )(2)(i), you are not required to respond to this collection of information unless it displays a currently valid OMB control number.

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NOTICE: Failure to file a report required by the Commodity Exchange Act (''CEA" or the "Act")1 and the regulations thereunder,2 or the filing of a report with the Commodity Futures Trading Commission ("CFTC" or "Commission") that includes a false, misleading or fraudulent statement or omits material facts that are required to be reported therein or are necessary to make the report not misleading, may (a) constitute a violation of§ 6(c)(2) of the Act (7 U.S.C. 9), § 9(a)(3) of the Act (7 U.S.C. 13(a)(3)), and/or§ 1001 of Title 18, Crimes and Criminal Procedure (18 U.S.C. 1001) and (b) result in punishment by fine or imprisonment, or both.

PRNACY ACT NOTICE

The Commission's authority for soliciting this information is granted in sections 4a, 4c(b), 4i, 4t and 8a(5) of the CEA and related regulations (see,~, 17 CFR § 19.00). The information solicited from entities and individuals engaged in activities covered by the CEA is required to be provided to the CFTC, and failure to comply may result in the imposition of criminal or administrative sanctions~,~, 7 U.S. C.§§ 9 and 13a-1, and/or 18 U.S. C. 1001). The information requested is most commonly used in the Commission's market and trade practice surveillance activities to (a) provide information concerning the size and composition of the commodity derivatives markets, (b) permit the Commission to monitor and enforce speculative position limits and (c) enhance the Commission's trade surveillance data. The requested information may be used by the Commission in the conduct of investigations and litigation and, in limited circumstances, may be made public in accordance with provisions of the CEA and other applicable laws. It may also be disclosed to other government agencies and to contract markets to meet responsibilities assigned to them by law. The information will be maintained in, and any additional disclosures will be made in accordance with, the CFTC System of Records Notices, available on-'-'--'.!.-!.!..==""-'-·

1 7 U.S.C. section 1, et seq. 2 Unless otherwise noted, the rules and regulations referenced in this notice are found in chapter 1 of title 17 of the Code of Federal Regulations; 17 CFR Chapter 1 et seq.

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BACKGROUND & INSTRUCTIONS

Applicable Regulations: • 17 CFR § 19.00(a)(l)(i) specifies who must file Form 504. • 17 CFR § 19.00(b) specifies the manner of reporting on series '04 reports, including Form 504. • 17 CFR § 19.0l(a)(l) specifies the information required on Form 504. • 17 CFR § 19.0l(b)(2) specifies the frequency (daily during the spot month), the as of report date (close of business for each day a person exceeds the limit, up to and including the day the person's position first falls below the position limit), and the time (9 a.m. Eastern Time on the next business day following the date of the report) for filing Form 504.

As appropriate, please follow the instructions below to generate and submit the required report or filing. Relevant regulations are cited in parentheses() for reference. Unless the context requires otherwise, the terms used herein shall have the same meaning as ascribed in parts 15 to 21 of the Commission's regulations.

Complete Form 504 as follows:

The trader identification fields should be completed by all filers. This new Form 504 requires traders to identify themselves using their Public Trader Identification Number. This number is provided to traders who have previously filed Forms 40 and 102 with the Commission. Traders may contact the Commission to obtain this number if it is unknown. If a trader has a National Futures Association Identification Number ("NF A ID") and/or a Legal Entity Identifier ("LEI"), he should also identify himself using those numbers. Form 504 requires traders to identify the name of the reporting trader or firm and the contact information (including full name, address, phone number, and email address) for a natural person the Commission may contact regarding the submitted Form 504.

Form 504 must be completed for stocks and fixed-price cash positions by all filers claiming a conditional spot month limit exemption. Form 504 contains the following fields: Date ...... As of date for reported position(§ 19.0l(a)(l)(i)) CRFC ...... Core Referenced Futures Contract(§ 150.2(d)) Cash commodity...... Cash commodity identification Units ...... Units of measure for cash commodity Stocks ...... Deliverable stored commodity(§ 19.0l(a)(l)(ii)) Fixed-price Purchase...... Fixed-price purchase commitments(§ 19.0l(a)(l)(iii)) Fixed-price Sale...... Fixed-price sale commitments(§ 19.0l(a)(l)(iv)) Unfixed-price Purchase...... Unfixed-price purchase commitments(§ 19.0l(a)(l)(v)) Unfixed-price Sale...... Unfixed-price sale commitments(§ 19.0l(a)(l)(vi))

The signature/authorization page must be completed by all filers. This page must include the name and position of the natural person filing Form 504 as well as the name of the reporting trader represented by that person. The trader certifying this Form 504 on the signature/authorization page should note that filing a report that includes a false, misleading or fraudulent statement or omits material facts that are required to be reported therein or are necessary to make the report not misleading, may (a) constitute a violation of§ 6(c)(2) of the Act (7 U.S. C. 9), § 9(a)(3) of the Act (7 U.S.C. 13(a)(3)), and/or§ 1001 of Title 18, Crimes and Criminal Procedure (18 U.S.C. 1001) and (b) result in punishment by fine or imprisonment, or both.

Submitting Form 504: Once completed, please submit this form to the Commission pursuant to the instructions on [www.cftc.gov] or as otherwise directed by Commission staff. If submission attempts fail, the reporting trader shall contact the Commission at [[email protected]] for further technical support.

Please be advised that pursuant to 5 CFR § 1320.5(b )(2)(i), you are not required to respond to this collection of information unless it displays a currently valid OMB control number.

VerDate Sep<11>2014 23:37 Dec 29, 2016 Jkt 241001 PO 00000 Frm 00242 Fmt 4701 Sfmt 4725 E:\FR\FM\30DEP2.SGM 30DEP2 asabaliauskas on DSK3SPTVN1PROD with PROPOSALS EP30DE16.017 Federal Register / Vol. 81, No. 251 / Friday, December 30, 2016 / Proposed Rules 96945 II Cash be of§ or Please Commitment violation both. a ("CFTC' Sale Unfixed-price or Suffix constitute 3038-0013 Cash Commission (a) Form: (LEI) No. imprisonment, may Commitment or Trading This Firm: tine OMB Address by Unfixed-price or Purchase . Futures misleading, ldentit1er II not Last Name Last Emml Codes: Regarding I I Trader I Cash punishment report number. in Commodity II Information: the the Commitment Legal Entity result Contact control make II Fixed-price with Sale Jl (b) to ame to Contact Identification Number Middle Phone OMB N and ofReoorting Jdentirvillg.lt1fot~natiol1 r-- I I report I · · a valili of 1001) Person necessary Cash Name of are filing or Commitment U.S.C. currently the a (18 or Name Fixed-price therein Purchase liisplays it Procedure reported or thereunder, he unless to Stock Criminal Cash Name in regulations and . ormation held required NFAlD ~Irst Address the Storage in! I I I I are CFTC] of and Crimes Deliverable that by 18, Commodity "Act'") facts Title collection the of .. or this .hs to material T 1001 [provided etc.) Cash (SpecifY ("CFA" for omits FOR No. CWT, Bbls., responli or Act and/or§ to ID Units Bu., EXEMPTIONS Tons. COMMISSION Commodity statement 13(a)(3)), requireli Fxchange Trader not LIMIT POSITIONS U.S.C. are fraudulent (7 Public you TRADING Conunodity or Commodity i\ct CASH the Cash the MONTH )(2)(i), hy FORM504 of OF misleading 1320.5(b 9(a)(3) SPOT required FUTURES § § false, (XX-XX) Futures a 9), report CFR (CRFC) 504 C. a 5 to U.S. includes file Reference Form (7 to STATEMENT Contract that Act Core pun;uant CFTC Failure COMMODITY that ofthe CONDITIONAL sell vi Date NOTICE: au 6(c)(2) "Commission'')

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VerDate Sep<11>2014 23:37 Dec 29, 2016 Jkt 241001 PO 00000 Frm 00244 Fmt 4701 Sfmt 4725 E:\FR\FM\30DEP2.SGM 30DEP2 asabaliauskas on DSK3SPTVN1PROD with PROPOSALS EP30DE16.019 Federal Register / Vol. 81, No. 251 / Friday, December 30, 2016 / Proposed Rules 96947 j of the Cash the (the any the Sale of month 5,000,000 2,000,000 3,000,000 4,000,000 price of Commitment and As trader cash hold spot spot MMBtu; contracts line contract The not Cash the 2017. report of Each Purchase Unfixed- Unfixed- contracts 5,000,000 4,000,000 2,000,000 3,000,000 contract. price does Commitment 26, 2017. futures also purchase 5,000,000 conditional NG sales 28, of excess trader April Cash month. the must (NG) in and That spot Commitment are Gas 10,000,000 11,000,000 12,000,000 13,000.000 NYMEX fixed-price person Fixed-price trading, Sale contracts the claiming a that 26, 27, of 2017. ), unfixed-price 2017 Natural with Cash 25, day the during 2017, )(2)(i MMBtus; May 24, 25, purchase of Hub and (b last 25, Purchase 5,000,000 8,000,000 7,000,000 6,000,000 the Commitment Fixed-price the cash each April of contract 19.01 Henry April Consistent on § 23, 24, on for in that on NG 10,000,000 to Cash held day as p.m. Storage of limit. April prices or NYMEX of 10,000,000 10,000,000 10,000,000 10.000,000 5:15 settling unfixed-price Stock period Deliverable pursuant NYMEX Commodity business each 2017 position inventory contract on per 2017 through the Lbs., exemption. May gas contracts MMBtu; delivery The 23 however, etc.) May CWT, Commodity limit below percent 17; same Bbls., the MMBtu MMBtu MMBtu MMBtu Cash April natural Tons, month. contracts, 20 20 in for Bu., the falls on MMBtu. referenced month 10,000,000 26, spot (Specify Units fixed holds: of 10,000 first gas have the spot physical-delivery April position business U.S. U.S. U.S. U.S. 5,000,000 on no the in in in in person of exceed natural become during position of contracts Gas Gas Gas Gas for to Commodity the not holds · close conditional settling are Cash commitments do sales Natural Natural Natural Natural the month 2017, person's this contracts that person sales cash-settled of price transactions the spot from but in the contracts contracts sales and is Futures day §I

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NOTICE: Failure to file a report required by the Commodity Exchange Act (''CEA" or the "Act")1 and the regulations thereunder,2 or the filing of a report with the Commodity Futures Trading Commission ("CFTC" or "Commission") that includes a false, misleading or fraudulent statement or omits material facts that are required to be reported therein or are necessary to make the report not misleading, may (a) constitute a violation of§ 6(c)(2) of the Act (7 USC 9), § 9(a)(3) of the Act (7 U.S. C. 13(a)(3)), and/or§ 1001 of Title 18, Crimes and Criminal Procedure (18 U.S.C. 1001) and (b) result in punishment by fine or imprisonment, or both.

PRNACY ACT NOTICE

The Commission's authority for soliciting this information is granted in sections 4a, 4c(b), 4i, 4t and 8a(5) of the CEA and related regulations (see,~, 17 CFR § 19.00). The information solicited from entities and individuals engaged in activities covered by the CEA is required to be provided to the CFTC, and failure to comply may result in the imposition of criminal or administrative sanctions~,~, 7 U.S. C.§§ 9 and 13a-1, and/or 18 U.S. C. 1001). The information requested is most commonly used in the Commission's market and trade practice surveillance activities to (a) provide information concerning the size and composition of the commodity derivatives markets, (b) permit the Commission to monitor and enforce speculative position limits and (c) enhance the Commission's trade surveillance data. The requested information may be used by the Commission in the conduct of investigations and litigation and, in limited circumstances, may be made public in accordance with provisions of the CEA and other applicable laws. It may also be disclosed to other government agencies and to contract markets to meet responsibilities assigned to them by law. The information will be maintained in, and any additional disclosures will be made in accordance with, the CFTC System of Records Notices, available on.!.!..!-'-"'-~~~·

1 7 U.S.C. section 1, et seq. 2 Unless otherwise noted, the rules and regulations referenced in this notice are found in chapter 1 of title 17 of the Code of Federal Regulations; 17 CFR Chapter 1 et seq.

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BACKGROUND & INSTRUCTIONS

Applicable Regulations: • 17 CFR § 19.00(a)(l)(ii) specifies who must file Form 604. • 17 CFR § 19.00(b) specifies the manner of reporting on series '04 reports, including Form 604. • 17 CFR § 19.0l(a)(2)(i) and (ii) specify the information required on Form 604. • For pass-through swaps with non-referenced-contract swap offset: 17 CFR § 19.0 l(b )(1) specifies the frequency (monthly), the as of report date (close of business on the last Friday of the month), and the time (9 a.m. Eastern Time on the third business day following the date of the report) for filing Form 604. • For pass-through swaps with spot-month swap offset: 17 CFR § 19.0l(b)(2) specifies the frequency (daily during the spot month), the as of report date (close of business for each day a person exceeds the limit, up to and including the day the person's position first falls below the position limit), and the time (9 a.m. Eastern Time on the next business day following the date of the report) for filing Form 604.

As appropriate, please follow the instructions below to generate and submit the required report or filing. Relevant regulations are cited in parentheses() for reference. Unless the context requires otherwise, the terms used herein shall have the same meaning as ascribed in parts 15 to 21 of the Commission's regulations.

Complete Form 604 as follows:

The trader identification fields should be completed by all filers. This new Form 604 requires traders to identify themselves using their Public Trader Identification Number. This number is provided to traders who have previously filed Forms 40 and 102 with the Commission. Traders may contact the Commission to obtain this number if it is unknown. If a trader has a National Futures Association Identification Number ("NF A ID") and/or a Legal Entity Identifier ("LEI"), he should also identify himself using those numbers. Form 604 requires traders to identify the name of the reporting trader or firm and the contact information (including full name, address, phone number, and email address) for a natural person the Commission may contact regarding the submitted Form 604.

Section A of Form 604 must be completed by all filers who hold a non-referenced contract swap offset position. Section A contains the following fields: Date...... As of date for reported position Underlying Commodity ...... Underlying Commodity or Commodity Reference Price that is not a Referenced Contract(§ 19.0l(a)(2)(i)(A)) CRFC ...... Corresponding Core Referenced Futures Contract(§ 150.2(d)) Applicable Clearing Identifier...... Clearing Identifier (if swap is cleared)(§ 19.0l(a)(2)(i)(B)) Commodity Quantity Unit (CQU) ...... Unit of Measurement for Commodity Notional Quantity ...... Notional Quantity in CQU (§ 19.0l(a)(2)(i)(C)) Position in FE in CRFC ...... Gross long and short positions in futures equivalents of the CRFC (§ 19.0 l(a)(2)(i)(D)) Position in RC for offsetting risk...... Gross long and short positions in referenced contract offset position(§ 19.0 l(a)(2)(i)(E))

Section B of Form 604 must be completed by all filers who hold a spot-month swap offset position. Section B contains the following fields: Date ...... As of date for reported position RC or non-RC for swap offset ...... Underlying Commodity or Commodity Reference Price or Referenced Contract for swap offsetting counterparty' s bona fide hedging exemption(§ 19.0l(a)(2)(ii)) CRFC ...... Corresponding Core Referenced Futures Contract(§ 150.2(d)) Applicable Clearing Identifier ...... Clearing Identifier (if swap is cleared) (§ 19 .Ol(a)(2)(i)(B)) Commodity Quantity Unit (CQU) ...... Unit of Measurement for Commodity Notional Quantity ...... Notional Quantity in CQU (§ 19.0l(a)(2)(i)(C))

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Position in FE in CRFC...... Gross long and short positions in futures equivalents of the CRFC (§ 19.0 1(a)(2)(ii)(A)) Position in physical delivery RC for offsetting risk...... Gross long and short positions in referenced contract offset position(§ 19.0 1(a)(2)(ii)(B))

The signature/authorization page must be completed by all filers. This page must include the name and position of the natural person filing Form 604 as well as the name of the reporting trader represented by that person. The trader certifying this Form 604 on the signature/authorization page should note that filing a report that includes a false, misleading or fraudulent statement or omits material facts that are required to be reported therein or are necessary to make the report not misleading, may (a) constitute a violation of§ 6(c)(2) of the Act (7 U.S. C. 9), § 9(a)(3) of the Act (7 U.S.C. 13(a)(3)), and/or§ 1001 of Title 18, Crimes and Criminal Procedure (18 U.S.C. 1001) and (b) result in punishment by fine or imprisonment, or both.

Submitting Form 604: Once completed, please submit this form to the Commission pursuant to the instructions on [www.cftc.gov] or as otherwise directed by Commission staff. If submission attempts fail, the reporting trader shall contact the Commission at [[email protected]] for further technical support.

Please be advised that pursuant to 5 CFR § 1320.5(b )(2)(i), you are not required to respond to this collection of information unless it displays a currently valid OMB control number.

VerDate Sep<11>2014 23:37 Dec 29, 2016 Jkt 241001 PO 00000 Frm 00248 Fmt 4701 Sfmt 4725 E:\FR\FM\30DEP2.SGM 30DEP2 asabaliauskas on DSK3SPTVN1PROD with PROPOSALS EP30DE16.023 Federal Register / Vol. 81, No. 251 / Friday, December 30, 2016 / Proposed Rules 96951 I I I I I I I I I . the be Risk CQU Position of§ for in or RC Please Short the violation Offsetting Position in bul11. a ("CFTC' Gros5 or Suffix I II II constitute the 3038-0013 Risk CQU Commission (a) Position for Form: in (LEI) No. imprisonment, RC may Long or the Trading This Offsetting Position in Firm: line OMB Uross Address by or II Name Futures misleading, ldentit1er not Last Email Codes: Regarding I I Trader II I Position Enti~ punishment report : Equivalent CFRC number. in Commodity .. _: II Information: the Short the the X. in Legal result Contact control Futures make II II with Gross (b) to in to II Contact Identification Middle Phone Name Number OMB and ofRe2orting JdentH'Virt!lt1fot~Tiatiol1 I I I I report · in · in a j9~Q'.t(l>)tl valid of 1001) Person § ent necessary Name of are Position filing CRFC or U.S.C. Equlval currenlly the a the long (18 or Name therein Futures Gross displays II il Procedure in reported thereunder, Ul~lltbty{>)ltSila~ttn he unless to CQl: Criminal lD Notional Name Quantity regulations II and ormation required NFA First Address the ilubtmtted in! I I I I I I I I are CFTC] of Lbs., and Crimes etc.) and that Quantity .. by 18, Tons. "Act'") 13bls facts Tille of~Ieasurement cullectiun the of reP~It~a 13u., or this (Specify Commodity Units lu material 1001 [provided II § ("CFA" omits No. respond or Act aml/or EXEMPTIONS lu ID l,~,Ol{a}(l)(i)~ COMMISSION Clearing Identifier § Applicable statement 13(a)(3)), required w Fxchange SWAP Trader II nul U.S.C. are (7 fraudulent Public you TRADING or Commodity contract Act Referenced the (CRFC) !he )(2)(i), Qffsetj)~t hy FORM604 of Futures Core misleading II S)Va~ 1320.5(b 9(a)(3) required FUTURES PASS-THROUGH § § that false, (XX-XX) or a 9), (RC) OF report CFR 604 Price C. a 5 ~!J'ntrMt Referenced a U.S. includes file Underlying Commodity Form (7 to Contract not Commodity that is Reference Act pursuanllu II CFTC Failure COMMODITY lhal uf!he STATEMENT ~ol1~referericeu Date NOTICE: advised 6(c)(2) "Commission") A. I I r I

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VerDate Sep<11>2014 23:37 Dec 29, 2016 Jkt 241001 PO 00000 Frm 00251 Fmt 4701 Sfmt 4725 E:\FR\FM\30DEP2.SGM 30DEP2 asabaliauskas on DSK3SPTVN1PROD with PROPOSALS EP30DE16.026 96954 Federal Register / Vol. 81, No. 251 / Friday, December 30, 2016 / Proposed Rules I I in RC the At rules Shoii in start Offsetting CQU Position using 5,000,000 Com the futures Oro" the contract month com. Risk for swap 2017. Position is (CBOT another II 5, swap Com and the spot 12 CBOT in RC bushels, futures 2017, the for the May the the absent milo Long in 0 May Offsetting 27, for CBOT on CQU Position Com is Gross com, using Risk for the for Position Hence, position 5,000,000 April of II between of CBOT position trading business the of of the in bushels, size hence, Futures month). Short hedging bushels 0 in for 19.Ql(b).(l) day CFRC hedging § physical-delivery Gross one-to-one fide to Equivalent last month; Position be notional the close the fide contract II month 5,000,000 a bona the to of in 3,000,000 the a of the as bona spot to of with in Position a delivery was size The Futures 1,000 CRFC day Long the contract, assumed was in swap permitted m~ntl!ly,p\lrsuant contract is of swap Equivalent Gross not equivalent 11 swap milo day is ratio futures a notional a com position. calendar futures submitted milo limit, The inCQU with Quantity Notional Com 5,000,000 hedge and offset trading offsets 11 Com The fifteenth the of cash-settled month first swap a swap CBOT the Bbls., Tons, reporfe\1 contract. Units CBOT the in hedge. spot com swap Bu for etc.) this Bu., to 2017 Commodity Measurement (Specify for purposes, Lbs., 2017 Quantity futures l(a)(2)(0, prior II May position preceding contract May EI.O • report the exemption Com § day days cash-settled 600 long the a .to a NA An For illustrative Clearing in the Identifier day's Applicable cross-commodity CBOT a For II business business with as pursuant offsets each month. trading. 2017 the two available contract of offset as Core spot person offsets cleared. cleared. (CRFC) person C-CBOT comply not May Referenced contract, A A days Futures day the is s~l? not not represents II trading the A. B. must of five or a C) for was was line Price (R futures during ~ohtr~ct not trading last is and and Milo trader close Each Referenced last Underlying that Commodity the month Example Example Com Contract Commodity Reference the the in 11 contract at spot 604, 604, offset exemption time, CBOT the ~on-referenc,ed Date 6/28/2017 specify the swap counterparty, counterparty, contract of exemption. that futures begins the Form Form 1 I;('

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NOTICE: Failure to file a report required by the Commodity Exchange Act (''CEA" or the "Act")1 and the regulations thereunder,2 or the filing of a report with the Commodity Futures Trading Commission ("CFTC" or "Commission") that includes a false, misleading or fraudulent statement or omits material facts that are required to be reported therein or are necessary to make the report not misleading, may (a) constitute a violation of§ 6(c)(2) of the Act (7 USC 9), § 9(a)(3) of the Act (7 U.S. C. 13(a)(3)), and/or§ 1001 of Title 18, Crimes and Criminal Procedure (18 U.S.C. 1001) and (b) result in punishment by fine or imprisonment, or both.

PRNACY ACT NOTICE

The Commission's authority for soliciting this information is granted in sections 4a, 4c(b), 4i, 4t and 8a(5) of the CEA and related regulations (see,~, 17 CFR § 19.00). The information solicited from entities and individuals engaged in activities covered by the CEA is required to be provided to the CFTC, and failure to comply may result in the imposition of criminal or administrative sanctions (see,~, 7 U.S. C.§§ 9 and 13a-l, and/or 18 U.S. C. 1001). The information requested is most commonly used in the Commission's market and trade practice surveillance activities to (a) provide information concerning the size and composition of the commodity derivatives markets, (b) permit the Commission to monitor and enforce speculative position limits and (c) enhance the Commission's trade surveillance data. The requested information may be used by the Commission in the conduct of investigations and litigation and, in limited circumstances, may be made public in accordance with provisions of the CEA and other applicable laws. It may also be disclosed to other government agencies and to contract markets to meet responsibilities assigned to them by law. The information will be maintained in, and any additional disclosures will be made in accordance with, the CFTC System of Records Notices, available on..!.!..!!-"!..~~""-'-·

1 7 U.S.C. section 1, et seq. 2 Unless otherwise noted, the rules and regulations referenced in this notice are found in chapter 1 of title 17 of the Code of Federal Regulations; 17 CFR Chapter 1 et seq.

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BACKGROUND & INSTRUCTIONS

Applicable Regulations: • 17 CFR § 150.7(a) specifies who must file Form 704. • 17 CFR § 19.00(b) specifies the manner of reporting on series '04 reports, including Form 704. • 17 CFR § 150.7(d) specifies the information required on Form 704. • 17 CFR § 150.7(a) specifies that initial statements on Form 704 must be filed at least 10 days in advance of the date the person expects to exceed position limits. Annual updates must be filed on Form 704 each year thereafter.

As appropriate, please follow the instructions below to generate and submit the required report or filing. Relevant regulations are cited in parentheses() for reference. Unless the context requires otherwise, the terms used herein shall have the same meaning as ascribed in parts 15 to 21 of the Commission's regulations.

Complete Form 704 as follows:

The trader identification fields should be completed by all filers. This new Form 704 requires traders to identify themselves using their Public Trader Identification Number. This number is provided to traders who have previously filed Forms 40 and 102 with the Commission. Traders may contact the Commission to obtain this number if it is unknown. If a trader has a National Futures Association Identification Number ("NF A ID") and/or a Legal Entity Identifier ("LEI"), he should also identify himself using those numbers. Form 704 requires traders to identify the name of the reporting trader or firm and the contact information (including full name, address, phone number, and email address) for a natural person the Commission may contact regarding the submitted Form 704.

Form 704 must be completed by all filers who seek an exemption for anticipated bona fide hedging positions. Form 704 contains the following fields: Initial Statement or Annual Update ...... Select Initial Statement if filing for the first time OR Annual Update if filing an annual update to a previously filed Form 704 (§ 150.7(d)) Anticipated Activity ...... Type of anticipated activity; choose Production, Requirements, Royalty Receipts, Service Contract Payments or Receipts. Traders filing for multiple types of anticipated activity must show each type on a new line of Form 704. (§ 150.1 BFH definition paragraphs 3(iii), 4(i),4(ii), 4(iv) or (5) Cash Commodity ...... Commodity being hedged(§ 150.7 (d)(l)(i)) Units ...... Units of measure for cash commodity being hedged CRFC ...... Corresponding Core Referenced Futures Contract(§ 150.2(d)) Same or Cross-Hedged ...... Identify whether the cash commodity being hedged is the same as the commodity underlying the CRFC (type "S") or whether it is a cross-hedging commodity (type "C-H") (§ 150.7 (d)(l)(iii)) Annual Activity ...... Quantity of annual actual activity for each of the preceding three years if filing an initial statement OR the prior year if filing an annual update. If a filer does not have three years of activity to submit, she may submit a reasonable, supported estimate of anticipated production for review by Commission staff.(§ 150.7 (d)(l)(iv)(A)-(B)) Specific Time Period Claimed ...... Date range for which an anticipatory exemption is being claimed, e.g. 01/01/2017- 12/31/2017. If filing an annual update, select the amount of time remaining since the initial statement(§ 150.7 (d)(l)(v)) Anticipated for Specified Time ...... Quantity of total anticipated activity over entire specified time period in futures equivalents(§ 150.7 (d)(l)(vi))

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Fixed Price Forward Activity ...... Quantity of fixed price forward activity in cash conuuodity being hedged for the specified time period in futures equivalents(§ 150.7 (d)(l)(vii)) Unsold, Unfilled, Anticipated Activity ...... Unsold or unfilled anticipated production, requirements, royalty receipts, or service contract payments or receipts the risks of which have not been offset with cash positions, of such commodity for the specified time period(§ 150.7 (d)(l)(viii)) Maximum Expected Position ...... The maximum number of long or short positions in referenced contracts expected to be used to offset the risks of anticipated activity(§ 150.7 (d)(l)(ix))

The signature/authorization page must be completed by all filers. This page must include the name and position of the natural person filing Form 704 as well as the name of the reporting trader represented by that person. The trader certifying this Form 704 on the signature/authorization page should note that filing a report that includes a false, misleading or fraudulent statement or omits material facts that are required to be reported therein or are necessary to make the report not misleading, may (a) constitute a violation of§ 6(c)(2) of the Act (7 U.S. C. 9), § 9(a)(3) of the Act (7 U.S.C. 13(a)(3)), and/or§ 1001 of Title 18, Crimes and Criminal Procedure (18 U.S. C. 1001) and (b) result in punishment by fine or imprisonment, or both.

Submitting Form 704: Once completed, please submit this form to the Conuuission pursuant to the instructions on [www.cftc.gov] or as otherwise directed by Commission staff. If submission attempts fail, the reporting trader shall contact the Conuuission at [[email protected]] for further technical support.

Please be advised that pursuant to 5 CFR § 1320.5(b )(2)(i), you are not required to respond to this collection of information unless it displays a currently valid OMB control number.

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BILLING CODE 6351–01–C information, this guidance is no longer further about a market participant’s applicable. At such time, a swap execution intentions or open swap positions. PART 37—SWAP EXECUTION facility is required to demonstrate (2) When a board of trade has access to FACILITIES compliance with Core Principle 6(B). sufficient swap position information, this (b) Acceptable practices. [Reserved] guidance is no longer applicable. At such ■ 13. The authority citation for part 37 * * * * * time, a board of trade is required to continues to read as follows: demonstrate compliance with Core Principle Authority: 7 U.S.C. 1a, 2, 5, 6, 6c, 7, 7a– PART 38—DESIGNATED CONTRACT 5(B) with respect to swaps. 2, 7b–3, and 12a, as amended by Titles VII MARKETS (b) Acceptable Practices. [Reserved] and VIII of the Dodd-Frank Wall Street * * * * * Reform and Consumer Protection Act, Pub. L. ■ 16. The authority citation for part 38 111–203, 124 Stat. 1376. continues to read as follows: PART 140—ORGANIZATION, ■ 14. Revise § 37.601 to read as follows: Authority: 7 U.S.C. 1a, 2, 6, 6a, 6c, 6d, 6e, FUNCTIONS, AND PROCEDURES OF THE COMMISSION § 37.601 Additional sources for 6f, 6g, 6i, 6j, 6k, 6l, 6m, 6n, 7, 7a–2, 7b, 7b– compliance. 1, 7b–3, 8, 9, 15, and 21, as amended by the ■ 19. The authority citation for part 140 Dodd-Frank Wall Street Reform and continues to read as follows: A swap execution facility that is a Consumer Protection Act, Pub. L. 111–203, trading facility must meet the 124 Stat. 1376. Authority: 7 U.S.C. 2(a)(12), 12a, 13(c), requirements of part 150 of this chapter, 13(d), 13(e), and 16(b). as applicable. ■ 17. Revise § 38.301 to read as follows: ■ § 140.97 [Removed and reserved] 15. In Appendix B to part 37, under § 38.301 Position limitations and ■ the heading Core Principle 6 of Section accountability. 20. Remove and reserve § 140.97. 5h of the Act—Position Limits or A designated contract market must Accountability, revise paragraphs (A) PART 150—LIMITS ON POSITIONS meet the requirements of part 150 of this and (B) to read as follows: chapter, as applicable. ■ 21. The authority citation for part 150 Appendix B to Part 37—Guidance on, ■ 18. In Appendix B to part 38, under continues to read as follows: and Acceptable Practices in, the heading Core Principle 5 of section Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6c, 6f, Compliance with Core Principles 5(d) of the Act: Position Limitations or 6g, 6t, 12a, 19, as amended by Title VII of the Dodd-Frank Wall Street Reform and * * * * * Accountability, revise paragraphs (A) and (B) to read as follows: Consumer Protection Act, Pub. L. 111–203, Core Principle 6 of Section 5h of the Act— 124 Stat. 1376 (2010). Position Limits or Accountability Appendix B to Part 38—Guidance on, ■ 22. Revise § 150.1 to read as follows: (A) In general. To reduce the potential and Acceptable Practices in, threat of market manipulation or congestion, Compliance with Core Principles § 150.1 Definitions. especially during trading in the delivery * * * * * As used in this part— month, a swap execution facility that is a Bona fide hedging position means— trading facility shall adopt for each of the Core Principle 5 of Section 5(d) of the Act: (1) Hedges of an excluded commodity. contracts of the facility, as is necessary and Position Limitations or Accountability For a position in commodity derivative appropriate, position limitations or position (A) In general.—To reduce the potential contracts in an excluded commodity, as accountability for speculators. threat of market manipulation or congestion (B) Position limits. For any contract that is that term is defined in section 1a(19) of (especially during trading in the delivery subject to a position limitation established by the Act: month), the board of trade shall adopt for the Commission pursuant to section 4a(a), (i) Such position is economically each contract of the board of trade, as is the swap execution facility shall: appropriate to the reduction of risks in necessary and appropriate, position (1) Set its position limitation at a level not the conduct and management of a higher than the Commission limitation; and limitations or position accountability for speculators. commercial enterprise and is (2) Monitor positions established on or enumerated in paragraph (3), (4) or (5) through the swap execution facility for (B) Maximum allowable position compliance with the limit set by the limitation.—For any contract that is subject of this definition; or Commission and the limit, if any, set by the to a position limitation established by the (ii) Is otherwise recognized as a bona swap execution facility. Commission pursuant to section 4a(a), the fide hedging position by the designated (a) Guidance. board of trade shall set the position contract market or swap execution (1) Until a swap execution facility has limitation of the board of trade at a level not facility that is a trading facility, access to sufficient swap position higher than the position limitation pursuant to such market’s rules information, a swap execution facility that is established by the Commission. submitted to the Commission, which (a) Guidance. a trading facility need not demonstrate rules may include risk management compliance with Core Principle 6(B). A swap (1) Until a board of trade has access to execution facility has access to sufficient sufficient swap position information, a board exemptions consistent with Appendix A swap position information if, for example: of trade need not demonstrate compliance of this part; and (i) It has access to daily information about with Core Principle 5(B) with respect to (2) Hedges of a physical commodity— its market participants’ open swap positions; swaps. A board of trade has access to general definition. For a position in or sufficient swap position information if, for commodity derivative contracts in a (ii) It knows, including through knowledge example: physical commodity: gained in surveillance of heavy trading (i) It has access to daily information about (i) Such position: activity occurring on or pursuant to the rules its market participants’ open swap positions; (A) Represents a substitute for of the swap execution facility, that its market or transactions made or to be made, or participants regularly engage in large (ii) It knows, including through knowledge positions taken or to be taken, at a later volumes of speculative trading activity that gained in surveillance of heavy trading would cause reasonable surveillance activity occurring on or pursuant to the rules time in a physical marketing channel; personnel at a swap execution facility to of the designated contract market, that its (B) Is economically appropriate to the inquire further about a market participant’s market participants regularly engage in large reduction of risks in the conduct and intentions or open swap positions. volumes of speculative trading activity that management of a commercial enterprise; (2) When a swap execution facility has would cause reasonable surveillance (C) Arises from the potential change access to sufficient swap position personnel at a board of trade to inquire in the value of—

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(1) Assets which a person owns, contracts in the contract’s underlying in quantity that amount of the same produces, manufactures, processes, or cash commodity by the same person. cash commodity that has been bought merchandises or anticipates owning, (ii) Hedges of cash commodity sales and sold by the same person at unfixed producing, manufacturing, processing, contracts. Long positions in commodity prices: or merchandising; derivative contracts that do not exceed (A) Basis different delivery months in (2) Liabilities which a person owes or in quantity the fixed-price sales the same commodity derivative anticipates incurring; or contracts in the contract’s underlying contract; or (3) Services that a person provides, cash commodity by the same person and (B) Basis different commodity purchases, or anticipates providing or the quantity equivalent of fixed-price derivative contracts in the same purchasing; or sales contracts of the cash products and commodity, regardless of whether the (ii)(A) Pass-through swap offsets. by-products of such commodity by the commodity derivative contracts are in Such position reduces risks attendant to same person. the same calendar month. a position resulting from a swap in the (iii) Hedges of unfilled anticipated (iii) Hedges of anticipated royalties. same physical commodity that was requirements. Provided that such Short positions in commodity derivative executed opposite a counterparty for positions in a physical-delivery contracts offset by the anticipated which the swap would qualify as a bona commodity derivative contract, during change in value of mineral royalty rights fide hedging position pursuant to the lesser of the last five days of trading that are owned by the same person, paragraph (2)(i) of this definition (a or the time period for the spot month in provided that the royalty rights arise out pass-through swap counterparty), such physical-delivery contract, do not of the production of the commodity provided that the bona fides of the pass- exceed the person’s unfilled anticipated underlying the commodity derivative through swap counterparty may be requirements of the same cash contract. determined at the time of the commodity for that month and for the (iv) Hedges of services. Short or long transaction; next succeeding month: positions in commodity derivative (B) Pass-through swaps. Such swap (A) Long positions in commodity contracts offset by the anticipated position was executed opposite a pass- derivative contracts that do not exceed change in value of receipts or payments through swap counterparty and to the in quantity unfilled anticipated due or expected to be due under an extent such swap position has been requirements of the same cash executed contract for services held by offset pursuant to paragraph (2)(ii)(A) of commodity, for processing, the same person, provided that the this definition; or manufacturing, or use by the same contract for services arises out of the (C) Offsets of bona fide hedging swap person; and production, manufacturing, processing, positions. Such position reduces risks (B) Long positions in commodity use, or transportation of the commodity attendant to a position resulting from a derivative contracts that do not exceed underlying the commodity derivative swap that meets the requirements of in quantity unfilled anticipated contract. paragraph (2)(i) of this definition. requirements of the same cash (5) Cross-commodity hedges. (iii) Additional requirements for commodity for resale by a utility to its Positions in commodity derivative enumeration or other recognition. customers. contracts described in paragraph (2)(ii), Notwithstanding the foregoing general (iv) Hedges by agents. Long or short paragraphs (3)(i) through (iv) and definition, a position in commodity positions in commodity derivative paragraphs (4)(i) through (iv) of this derivative contracts in a physical contracts by an agent who does not own definition may also be used to offset the commodity shall be classified as a bona or has not contracted to sell or purchase risks arising from a commodity other fide hedging position only if: the offsetting cash commodity at a fixed than the same cash commodity (A) The position satisfies the price, provided that the agent is underlying a commodity derivative requirements of paragraph (2)(i) of this responsible for merchandising the cash contract, provided that the fluctuations definition and is enumerated in positions that are being offset in in value of the position in the paragraph (3), (4), or (5) of this commodity derivative contracts and the commodity derivative contract, or the definition; agent has a contractual arrangement commodity underlying the commodity (B) The position satisfies the with the person who owns the derivative contract, are substantially requirements of paragraph (2)(ii) of this commodity or holds the cash market related to the fluctuations in value of definition, provided that no offsetting commitment being offset. the actual or anticipated cash position position is maintained in any physical- (4) Other enumerated hedging or pass-through swap and no such delivery commodity derivative contract positions. A bona fide hedging position position is maintained in any physical- during the lesser of the last five days of also includes the following specific delivery commodity derivative contract trading or the time period for the spot positions, provided that no such during the lesser of the last five days of month in such physical-delivery position is maintained in any physical- trading or the time period for the spot commodity derivative contract; or delivery commodity derivative contract month in such physical-delivery (C) The position has been otherwise during the lesser of the last five days of contract. recognized as a non-enumerated bona trading or the time period for the spot (6) Offsets of commodity trade fide hedging position by either a month in such physical-delivery options. For purposes of this definition, designated contract market or swap contract: a commodity trade option, meeting the execution facility, each in accordance (i) Hedges of unsold anticipated requirements of § 32.3 of this chapter for with § 150.9(a); or by the Commission. production. Short positions in a commodity option transaction, may be (3) Enumerated hedging positions. A commodity derivative contracts that do deemed a cash commodity purchase or bona fide hedging position includes any not exceed in quantity unsold sales contract, as appropriate, provided of the following specific positions: anticipated production of the same that such option is adjusted on a (i) Hedges of inventory and cash commodity by the same person. futures-equivalent basis. By way of commodity purchase contracts. Short (ii) Hedges of offsetting unfixed-price example, a commodity trade option positions in commodity derivative cash commodity sales and purchases. with a fixed strike price may be contracts that do not exceed in quantity Short and long positions in commodity converted to a futures-equivalent basis, ownership or fixed-price purchase derivative contracts that do not exceed and, on that futures-equivalent basis,

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deemed a cash commodity sale, in the is exempt from registration under § 4.13 (1) Who specifically is authorized by case of a short call option or long put of this chapter; a commodity trading an eligible entity, as defined in this option, or a cash commodity purchase, advisor; a bank or trust company; a section, independently to control in the case of a long call option or short savings association; an insurance trading decisions on behalf of, but put option. company; or the separately organized without the day-to-day direction of, the Calendar spread contract means a affiliates of any of the above entities: eligible entity; cash-settled agreement, contract, or (1) Which authorizes an independent (2) Over whose trading the eligible transaction that represents the account controller independently to entity maintains only such minimum difference between the settlement price control all trading decisions for control as is consistent with its in one or a series of contract months of positions it holds directly or indirectly, fiduciary responsibilities to fulfill its an agreement, contract or transaction or on its behalf, but without its day-to- duty to supervise diligently the trading and the settlement price of another day direction; and done on its behalf or as is consistent contract month or another series of (2) Which maintains: with such other legal rights or contract months’ settlement prices for (i) Only such minimum control over obligations which may be incumbent the same agreement, contract or the independent account controller as is upon the eligible entity to fulfill; transaction. consistent with its fiduciary (3) Who trades independently of the Commodity derivative contract responsibilities and necessary to fulfill eligible entity and of any other means, for this part, any futures, option, its duty to supervise diligently the independent account controller trading or swap contract in a commodity (other trading done on its behalf; or for the eligible entity; than a security futures product as (ii) If a limited partner or shareholder (4) Who has no knowledge of trading defined in section 1a(45) of the Act). of a commodity pool the operator of decisions by any other independent Commodity index contract means an which is exempt from registration under account controller; and agreement, contract, or transaction that § 4.13 of this chapter, only such limited (5) Who is registered as a futures is not a location basis contract or any control as is consistent with its status. commission merchant, an introducing type of spread contract, based on an Entity means a ‘‘person’’ as defined in broker, a commodity trading advisor, an index comprised of prices of section 1a of the Act. associated person or any such registrant, Excluded commodity means an commodities that are not the same or or is a general partner of a commodity ‘‘excluded commodity’’ as defined in substantially the same. pool the operator of which is exempt Core referenced futures contract section 1a of the Act. from registration under § 4.13 of this means a futures contract that is listed in Futures-equivalent means chapter. § 150.2(d). (1) An option contract, whether an Eligible affiliate. An eligible affiliate option on a future or an option that is Intercommodity spread contract means an entity with respect to which a swap, which has been adjusted by an means a cash-settled agreement, another person: economically reasonable and contract or transaction that represents (1) Directly or indirectly holds either: analytically supported risk factor, or the difference between the settlement (i) A majority of the equity securities delta coefficient, for that option price of a referenced contract and the of such entity, or computed as of the previous day’s close settlement price of another contract, (ii) The right to receive upon or the current day’s close or agreement, or transaction that is based dissolution of, or the contribution of, a contemporaneously during the trading on a different commodity. majority of the capital of such entity; day, and converted to an economically Intermarket spread position means a (2) Reports its financial statements on equivalent amount of an open position long (short) position in one or more a consolidated basis under Generally in a core referenced futures contract, commodity derivative contracts in a Accepted Accounting Principles or provided however, if a participant’s particular commodity, or its products or International Financial Reporting position exceeds position limits as a its by-products, at a particular Standards, and such consolidated result of an option assignment, that designated contract market or swap financial statements include the participant is allowed one business day execution facility and a short (long) financial results of such entity; and to liquidate the excess position without position in one or more commodity (3) Is required to aggregate the being considered in violation of the derivative contracts in that same, or positions of such entity under § 150.4 limits; similar, commodity, or its products or and does not claim an exemption from (2) A futures contract which has been its by-products, away from that aggregation for such entity. converted to an economically equivalent particular designated contract market or 1 Eligible entity means a commodity amount of an open position in a core swap execution facility. pool operator, the operator of a trading referenced futures contract; and Intramarket spread position means a vehicle which is excluded or who itself (3) A swap which has been converted long position in one or more commodity has qualified for exclusion from the to an economically equivalent amount derivative contracts in a particular definition of the term ‘‘pool’’ or of an open position in a core referenced commodity, or its products or its by- ‘‘commodity pool operator,’’ futures contract. products, and a short position in one or respectively, under § 4.5 of this chapter; Independent account controller 2 more commodity derivative contracts in the limited partner or shareholder in a means a person— the same, or similar, commodity, or its commodity pool the operator of which products or its by-products, on the same 2 The definition of the term, independent account designated contract market or swap 1 The definition of the term, eligible entity, was controller, was amended by the Commission in a execution facility. amended by the Commission in a final rule final rule published on December 16, 2016 (81 FR Location basis contract means a published on December 16, 2016 (81 FR 91454, 91454, 91489). The unamended version of the 91489). The unamended version of the definition definition presented here is included solely to commodity derivative contract that is presented here is included solely to maintain the maintain the continuity of this regulatory section cash-settled based on the difference in: continuity of this regulatory section and for the and for the convenience of the reader. The (1) The price, directly or indirectly, convenience of the reader. The definition of the definition of the term, independent account of: term, eligible entity, is not a subject of this controller, is not a subject of this reproposal and reproposal and will be revised when the amended will be revised when the amended definition takes (i) A particular core referenced futures definition takes effect on February 14, 2017. effect on February 14, 2017. contract; or

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(ii) A commodity deliverable on a of a swap, a location basis contract, a fifth business day of the contract month particular core referenced futures commodity index contract, or a trade until the contract expires; contract, whether at par, a fixed option that meets the requirements of (2) For cash-settled core referenced discount to par, or a premium to par; § 32.3 of this chapter. futures contracts: and Short position means, on a futures- (i) [Reserved] (2) The price, at a different delivery equivalent basis, a short call option, a (3) For referenced contracts other than location or pricing point than that of the long put option, a short underlying core referenced futures contracts, the same particular core referenced futures futures contract, or a swap position that spot month means the same period as contract, directly or indirectly, of: is equivalent to a short futures contract. that of the relevant core referenced (i) A commodity deliverable on the Speculative position limit means the futures contract. same particular core referenced futures maximum position, either net long or Spread contract means either a contract, whether at par, a fixed net short, in a commodity derivatives calendar spread contract or an discount to par, or a premium to par; or contract that may be held or controlled intercommodity spread contract. (ii) A commodity that is listed in by one person, absent an exemption, Swap means ‘‘swap’’ as that term is Appendix B to this part as substantially such as an exemption for a bona fide defined in section 1a of the Act and as the same as a commodity underlying the hedging position. This limit may apply further defined in § 1.3 of this chapter. same core referenced futures contract. to a person’s combined position in all Swap dealer means ‘‘swap dealer’’ as Long position means, on a futures- commodity derivative contracts in a that term is defined in section 1a of the equivalent basis, a long call option, a particular commodity (all-months- Act and as further defined in § 1.3 of short put option, a long underlying combined), a person’s position in a this chapter. futures contract, or a swap position that single month of commodity derivative Transition period swap means a swap is equivalent to a long futures contract. contracts in a particular commodity, or entered into during the period Physical commodity means any a person’s position in the spot month of commencing after the enactment of the agricultural commodity as that term is commodity derivative contacts in a Dodd-Frank Act of 2010 (July 21, 2010), defined in § 1.3 of this chapter or any particular commodity. Such a limit may and ending 60 days after the publication exempt commodity as that term is be established under federal regulations in the Federal Register of final defined in section 1a(20) of the Act. or rules of a designated contract market amendments to this part implementing Pre-enactment swap means any swap or swap execution facility. An exchange section 737 of the Dodd-Frank Act of entered into prior to enactment of the may also apply other limits, such as a 2010. Dodd-Frank Act of 2010 (July 21, 2010), limit on gross long or gross short ■ 23. Revise § 150.2 to read as follows: the terms of which have not expired as positions, or a limit on holding or of the date of enactment of that Act. controlling delivery instruments. § 150.2 Speculative position limits. Pre-existing position means any Spot month means— (a) Spot-month speculative position position in a commodity derivative (1) For physical-delivery core limits. No person may hold or control contract acquired in good faith prior to referenced futures contracts, the period positions in referenced contracts in the the effective date of any bylaw, rule, of time beginning at the earlier of the spot month, net long or net short, in regulation or resolution that specifies an close of business on the trading day excess of the level specified by the initial speculative position limit level or preceding the first day on which Commission for: a subsequent change to that level. delivery notices can be issued by the (1) Physical-delivery referenced Referenced contract means a core clearing organization of a contract contracts; and, separately, referenced futures contract listed in market, or the close of business on the (2) Cash-settled referenced contracts; § 150.2(d) or, on a futures equivalent trading day preceding the third-to-last (b) Single-month and all-months- basis with respect to a particular core trading day, until the contract expires, combined speculative position limits. referenced futures contract, a futures except as follows: No person may hold or control contract, options contract, or swap that (i) For ICE Futures U.S. Sugar No. 11 positions, net long or net short, in is: (SB) referenced contract, the spot month referenced contracts in a single month (1) Directly or indirectly linked, means the period of time beginning at or in all months combined (including including being partially or fully settled the opening of trading on the second the spot month) in excess of the levels on, or priced at a fixed differential to, business day following the expiration of specified by the Commission. the price of that particular core the regular option contract traded on the (c) For purposes of this part: referenced futures contract; or expiring futures contract until the (1) The spot month and any single (2) Directly or indirectly linked, contract expires; month shall be those of the core including being partially or fully settled (ii) For ICE Futures U.S. Sugar No. 16 referenced futures contract; and on, or priced at a fixed differential to, (SF) referenced contract, the spot month (2) An eligible affiliate is not required the price of the same commodity means the period of time beginning on to comply separately with speculative underlying that particular core the third-to-last trading day of the position limits. referenced futures contract for delivery contract month until the contract (d) Core referenced futures contracts. at the same location or locations as expires; Speculative position limits apply to specified in that particular core (iii) For Chicago Mercantile Exchange referenced contracts based on the core referenced futures contract. Live Cattle (LC) referenced contract, the referenced futures contracts listed in (3) The definition of referenced spot month means the period of time Table Core Referenced Futures contract does not include any guarantee beginning at the close trading on the Contracts:

CORE REFERENCED FUTURES CONTRACTS

Commodity type Designated contract market Core referenced futures contract 1

Legacy Agricultural ...... Chicago Board of Trade ...... Corn (C).

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CORE REFERENCED FUTURES CONTRACTS—Continued

Commodity type Designated contract market Core referenced futures contract 1

Oats (O). Soybeans (S). Soybean Meal (SM). Soybean Oil (SO). Wheat (W). Hard Winter Wheat (KW). ICE Futures U.S...... Cotton No. 2 (CT). Minneapolis Grain Exchange ...... Hard Red Spring Wheat (MWE). Other Agricultural ...... Chicago Board of Trade ...... Rough Rice (RR). Chicago Mercantile Exchange ...... Live Cattle (LC). ICE Futures U.S...... Cocoa (CC). Coffee C (KC). FCOJ–A (OJ). U.S. Sugar No. 11 (SB). U.S. Sugar No. 16 (SF). Energy ...... New York Mercantile Exchange ...... Light Sweet Crude Oil (CL). NY Harbor ULSD (HO). RBOB Gasoline (RB). Henry Hub Natural Gas (NG). Metals ...... Commodity Exchange, Inc...... Gold (GC). Silver (SI). Copper (HG). New York Mercantile Exchange ...... Palladium (PA). Platinum (PL). 1 The core referenced futures contract includes any successor contracts.

(e) Levels of speculative position referenced futures contract. Unless the the most recent Commission action limits—(1) Initial levels. The initial Commission determines to rely on its establishing such limit levels; levels of speculative position limits are own estimate of deliverable supply, the (3) For legacy agricultural fixed by the Commission at the levels Commission shall utilize the estimated commodities, May 31 of the second listed in Appendix D to this part; spot-month deliverable supply provided calendar year following the most recent provided however, compliance with by a designated contract market. If the Commission action establishing such such initial speculative limits shall not Commission determines to rely on its limit levels; and be required until January 3, 2018, which own estimate of deliverable supply, (4) For other agricultural date shall be the initial establishment then the Commission shall publish such commodities, August 31 of the second date for purposes of paragraphs (e)(3) estimate for public comment in the calendar year following the most recent and (4) of this section. Federal Register; provided however, Commission action establishing such (2) Subsequent levels. (i) The that the Commission may determine to limit levels. Commission shall fix subsequent levels fix the level of the spot-month limit at (B) Notwithstanding paragraph of speculative position limits in a level, recommended by the designated (e)(3)(ii)(A) of this section, each accordance with the procedures in this contract market listing the relevant core designated contract market may petition section and publish such levels on the referenced futures contract for good the Commission not less than two Commission’s Web site at http:// cause shown, that is less than one- calendar months before the due date for www.cftc.gov. quarter of the estimated spot-month submission of an estimate of deliverable (ii) Such subsequent speculative deliverable supply, or not to change the supply under paragraph (e)(3)(ii)(A) of position limit levels shall each apply level of the spot-month limit. this section, recommending that the beginning on the close of business of the (ii) Estimates of deliverable supply. Commission not change the spot-month last business day of the second complete (A) Each designated contract market in limit. Such recommendation should calendar month after publication of a core referenced futures contract shall include a summary of the designated such levels; provided however, if such supply to the Commission an estimated contract market’s experience close of business is in a spot month of spot-month deliverable supply. A administering its spot-month limit. The a core referenced futures contract, the designated contract market may use the Commission shall determine not less subsequent spot-month level shall apply guidance regarding deliverable supply than one calendar month before such beginning with the next spot month for in Appendix C to part 38 of this chapter. due date whether to accept the that contract. Each estimate must be accompanied by designated contract market’s (iii) All subsequent levels of a description of the methodology used recommendation. If the Commission speculative position limits shall be to derive the estimate and any statistical accepts such recommendation, then the rounded up to the nearest hundred data supporting the estimate, and must designated contract market need not contracts. be submitted no later than the submit an estimated spot-month (3) Procedure for computing levels of following: deliverable supply for such due date. spot-month limits. (i) No less frequently (1) For energy commodities, January (4) Procedure for computing levels of than every two calendar years, the 31 of the second calendar year following single-month and all-months-combined Commission shall fix the level of the the most recent Commission action limits. No less frequently than every two spot-month limit no greater than one- establishing such limit levels; calendar years, the Commission shall fix quarter of the estimated spot-month (2) For metals commodities, March 31 the level, for each referenced contract, deliverable supply in the relevant core of the second calendar year following of the single-month limit and the all-

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months-combined limit. Each such limit position is not a pre-enactment or (1) Such positions are: shall be based on 10 percent of the transition period swap then that (i) Bona fide hedging positions that estimated average open interest in position shall be attributed to the person comply with the definition in § 150.1, referenced contracts, up to 25,000 if the person’s position is increased after provided that: contracts, with a marginal increase of the effective date of such limit. (A) For non-enumerated bona fide 2.5 percent thereafter; provided (g) Positions on foreign boards of hedges, the person has not otherwise however, the Commission may trade. The aggregate speculative been notified by the Commission under determine not to change the level of the position limits established under this § 150.9(d)(4) or, under rules adopted single-month limit or the all-months- section shall apply to a person with pursuant to § 150.9(a)(4)(iv)(B), by the combined limit. positions in referenced contracts designated contract market or swap (i) Time periods for average open executed on, or pursuant to the rules of execution facility; and interest. The Commission shall estimate a foreign board of trade, provided that: (B) For anticipatory bona fide hedging average open interest in referenced (1) Such referenced contracts settle positions under paragraphs (3)(iii), contracts based on the largest annual against any price (including the daily or (4)(i), (4)(iii), (4)(iv) and (5) of the bona average open interest computed for each final settlement price) of one or more fide hedging position definition in of the past two calendar years. The contracts listed for trading on a § 150.1, the person complies with the Commission may estimate average open designated contract market or swap filing requirements found in § 150.7 or interest in referenced contracts using execution facility that is a trading the filing requirements adopted, in either month-end open contracts or facility; and accordance with § 150.11(a)(3), by a open contracts for each business day in (2) The foreign board of trade makes designated contract market or swap the time period, as practical. available such referenced contracts to its execution facility, as applicable; (ii) Data sources for average open members or other participants located in (ii) Financial distress positions interest. The Commission shall estimate the United States through direct access exempted under paragraph (b) of this average open interest in referenced to its electronic trading and order section; contracts using data reported to the matching system. (iii) Conditional spot-month limit Commission pursuant to part 16 of this (h) Anti-evasion provision. For the positions exempted under paragraph (c) chapter, and open swaps reported to the purposes of applying the speculative of this section; Commission pursuant to part 20 of this position limits in this section, a (iv) Spread positions recognized by a chapter or data obtained by the commodity index contract used to designated contract market or swap Commission from swap data circumvent speculative position limits repositories collecting data pursuant to execution facility, each in accordance shall be considered to be a referenced with § 150.10(a), or the Commission, part 45 of this chapter. Options listed on contract. designated contract markets shall be provided that the person has not (i) Delegation of authority to the otherwise been notified by the adjusted using an option delta reported Director of the Division of Market to the Commission pursuant to part 16 Commission under § 150.10(d)(4) or by Oversight. (1) The Commission hereby the designated contract market or swap of this chapter. Swaps shall be counted delegates, until it orders otherwise, to on a futures equivalent basis, equal to execution facility under rules adopted the Director of the Division of Market pursuant to § 150.10(a)(4)(iv)(B); or the economically equivalent amount of Oversight or such other employee or core referenced futures contracts (v) Other positions exempted under employees as the Director may designate paragraph (e) of this section; and that reported pursuant to part 20 of this from time to time, the authority in (2) The recordkeeping requirements of chapter or as calculated by the paragraph (e) of this section to fix and paragraph (g) of this section are met; Commission using swap data collected publish subsequent levels of speculative and further that pursuant to part 45 of this chapter. position limits, including the authority (3) The reporting requirements of part (iii) Publication of average open not to change levels of such limits, and 19 of this chapter are met. interest. The Commission shall publish the authority in paragraph (e)(3)(iii) of (b) Financial distress exemptions. estimates of average open interest in this section to relieve a designated Upon specific request made to the referenced contracts on a monthly basis, contract market from the requirement to Commission, the Commission may as practical, after such data is submitted submit an estimate of deliverable exempt a person or related persons to the Commission. supply. (iv) Minimum levels. Provided (2) The Director of the Division of under financial distress circumstances however, notwithstanding the above, the Market Oversight may submit to the for a time certain from any of the minimum levels shall be the greater of Commission for its consideration any requirements of this part. Financial the level of the spot month limit matter which has been delegated in this distress circumstances include determined under paragraph (e)(3) of section. situations involving the potential this section or 5,000 contracts. (3) Nothing in this section prohibits default or bankruptcy of a customer of (f) Pre-existing positions—(1) Pre- the Commission, at its election, from the requesting person or persons, an existing positions in a spot-month. exercising the authority delegated in affiliate of the requesting person or Other than pre-enactment and transition this section. persons, or a potential acquisition target period swaps exempted under (j) The Commission will periodically of the requesting person or persons. § 150.3(d), a person shall comply with update these initial levels for (c) Conditional spot-month limit spot month speculative position limits. speculative position limits and publish exemption. The position limit set forth (2) Pre-existing positions in a non- such subsequent levels on its Web site in § 150.2 may be exceeded for natural spot-month. A single-month or all- at: http://www.cftc.gov. gas cash-settled referenced contracts, months-combined speculative position ■ 24. Revise § 150.3 to read as follows: provided that such positions do not limit established under this section exceed 10,000 contracts and the person shall not apply to any commodity § 150.3 Exemptions. holding or controlling such positions derivative contract acquired in good (a) Positions which may exceed limits. does not hold or control positions in faith prior to the effective date of such The position limits set forth in § 150.2 spot-month physical-delivery referenced limit, provided however, that if such may be exceeded to the extent that: contracts.

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(d) Pre-enactment and transition futures options and swap positions and (a)(1)(i) of this section with respect to period swaps exemption. The transactions, including anticipated such aggregated account or position. speculative position limits set forth in requirements, production and royalties, (j) Delegation of authority to the § 150.2 shall not apply to positions contracts for services, cash commodity Director of the Division of Market acquired in good faith in any pre- products and by-products, and cross- Oversight. (1) The Commission hereby enactment swap, or in any transition commodity hedges, and shall make such delegates, until it orders otherwise, to period swap, in either case as defined books and records, including a list of the Director of the Division of Market by § 150.1; provided however, that a pass-through swap counterparties, Oversight or such other employee or person may net such positions with available to the Commission upon employees as the Director may designate post-effective date commodity request under paragraph (h) of this from time to time, the authority in derivative contracts for the purpose of section. paragraph (b) of this section to provide complying with any non-spot-month (2) Further, a party seeking to rely exemptions in circumstances of speculative position limit. upon the pass-through swap offset in financial distress. (e) Other exemptions. Any person paragraph (2)(B) of the definition of (2) The Director of the Division of engaging in risk-reducing practices ‘‘bona fide hedging position’’ in § 150.1, Market Oversight may submit to the commonly used in the market, which in order to exceed the position limits of Commission for its consideration any they believe may not be specifically § 150.2 with respect to such a swap, matter which has been delegated in this enumerated in the definition of bona may only do so if its counterparty section. fide hedging position in § 150.1, may provides a written representation (e.g., (3) Nothing in this section prohibits request: in the form of a field or other the Commission, at its election, from (1) An interpretative letter from representation contained in a mutually exercising the authority delegated in Commission staff, under § 140.99 of this executed trade confirmation) that, as to this section. chapter, concerning the applicability of such counterparty, the swap qualifies in ■ 25. Revise § 150.5 to read as follows: the bona fide hedging position good faith as a ‘‘bona fide hedging exemption; or position,’’ as defined in § 150.1, § 150.5 Exchange-set position limits. (2) Exemptive relief from the provided that the bona fides of the pass- (a) Requirements and acceptable Commission under section 4a(a)(7) of through swap counterparty may be practices for commodity derivative the Act. determined at the time of the contracts subject to federal position (3) Appendix C to this part provides transaction. That written representation limits. (1) For any commodity derivative a non-exhaustive list of examples of shall be retained by the parties to the contract that is subject to a speculative bona fide hedging positions as defined swap for a period of at least two years position limit under § 150.2, a under § 150.1. following the expiration of the swap and designated contract market or swap (f) Previously granted exemptions. (1) furnished to the Commission upon execution facility that is a trading Exemptions granted by the Commission request. facility shall set a speculative position under § 1.47 of this chapter for risk limit no higher than the level specified management of positions in financial (3) Any person that represents to in § 150.2. instruments shall not apply to positions another person that a swap qualifies as in financial instruments entered into a pass-through swap under paragraph (2) Exemptions to exchange-set after the effective date of initial position (2)(ii)(B) of the definition of ‘‘bona fide limits—(i) Grant of exemption. Any limits implementing section 737 of the hedging position’’ in § 150.1 shall keep designated contract market or swap Dodd-Frank Act of 2010. and make available to the Commission execution facility that is a trading (2) Exemptions for risk management upon request all relevant books and facility may grant exemptions from any of positions in financial instruments records supporting such a speculative position limits it sets under granted by a designated contract market representation for a period of at least paragraph (a)(1) of this section, provided or swap execution facility shall not two years following the expiration of the that exemptions from federal limits apply to positions in financial swap. conform to the requirements specified instruments entered into after the (h) Call for information. Upon call by in § 150.3, and provided further that any effective date of initial position limits the Commission, the Director of the exemptions to exchange-set limits not implementing section 737 of the Dodd- Division of Market Oversight or the conforming to § 150.3 are capped at the Frank Act of 2010, provided that, for Director’s delegee, any person claiming level of the applicable federal limit in positions in financial instruments an exemption from speculative position § 150.2. entered into on or before the effective limits under this section must provide (ii) Application for exemption. Any date of initial position limits to the Commission such information as designated contract market or swap implementing section 737 of the Dodd- specified in the call relating to the execution facility that grants Frank Act of 2010, the exemption shall positions owned or controlled by that exemptions under paragraph (a)(2)(i) of apply for purposes of position limits person; trading done pursuant to the this section: under § 150.2 if the exemption: claimed exemption; the commodity (A) Must require traders to file an (i) Applies to positions outside of the derivative contracts or cash market application requesting such exemption spot month only; and positions which support the claim of in advance of the date that such position (ii) Was granted prior to the exemption; and the relevant business would be in excess of the limits then in compliance date provided under relationships supporting a claim of effect, provided however, that it may § 150.2(e)(1). exemption. adopt rules that allow a trader to file an (g) Recordkeeping. (1) Persons who (i) Aggregation of accounts. Entities application for an enumerated bona fide avail themselves of exemptions under required to aggregate accounts or hedging exemption within five business this section, including exemptions positions under § 150.4 of this part shall days after the trader assumed the granted under section 4a(a)(7) of the be considered the same person for the position that exceeded a position limit. Act, shall keep and maintain complete purpose of determining whether they (B) Must require, for any exemption books and records concerning all details are eligible for a bona fide hedging granted, that the trader reapply for the of their related cash, forward, futures, position exemption under paragraph exemption at least on an annual basis.

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(C) May deny any such application, or contracts in a physical commodity as designated contract market or swap limit, condition, or revoke any such defined in § 150.1 that are not subject to execution facility that is a trading exemption, at any time, including if it the limits set forth in § 150.2—(1) Levels facility, the cash-settled contract should determines such positions would not be at initial listing. At the time of each adopt spot-month, individual non-spot- in accord with sound commercial commodity derivative contract’s initial month, and all-months combined practices, or would exceed an amount listing, a designated contract market or position limits comparable to those of that may be established and liquidated swap execution facility that is a trading the original price referenced contract. in an orderly fashion. facility should base speculative position (2) Adjustments to levels. Designated (3) Pre-enactment and transition limits on the following: contract markets and swap execution period swap positions. Speculative (i) Spot month position limits—(A) facilities that are trading facilities position limits set forth in § 150.2 shall Commodities with a measurable should adjust their speculative limit not apply to positions acquired in good deliverable supply. For all commodity levels as follows: faith in any pre-enactment swap, or in derivative contracts not subject to the (i) Spot month position limits. The any transition period swap, in either limits set forth in § 150.2 that are based spot month position limit level should case as defined by § 150.1. Provided on a commodity with a measurable be reviewed no less than once every however, that a designated contract deliverable supply, the spot month limit twenty-four months from the date of market or swap execution facility that is level should be established at a level initial listing and should be maintained a trading facility shall allow a person to that is no greater than one-quarter of the at a level that is: net such position with post-effective estimated spot month deliverable (A) No greater than one-quarter of the date commodity derivative contracts for supply, calculated separately for each estimated spot month deliverable the purpose of complying with any non- month to be listed (Designated Contract supply, calculated separately for each spot month speculative position limit. Markets and Swap Execution Facilities month to be listed; or (4) Pre-existing positions—(i) Pre- may refer to the guidance in paragraph (B) In the case of a commodity existing positions in a spot-month. A (b)(1)(i) of Appendix C of part 38 of this derivative contract based on a designated contract market or swap chapter for guidance on estimating spot- commodity without a measurable execution facility that is a trading month deliverable supply); deliverable supply, necessary and facility must require compliance with (B) Commodities without a appropriate to reduce the potential spot month speculative position limits measurable deliverable supply. For threat of market manipulation or price for pre-existing positions in commodity commodity derivative contracts that are distortion of the contract’s or the derivative contracts other than pre- based on a commodity with no underlying commodity’s price or index. enactment and transition period swaps. measurable deliverable supply, the spot (ii) Individual non-spot or all-months- (ii) Pre-existing positions in a non- month limit level should be set at a combined position limits. Individual spot month. A single-month or all level that is necessary and appropriate non-spot or all-months-combined levels months-combined speculative position to reduce the potential threat of market should be based on position sizes limit established under § 150.2 shall not manipulation or price distortion of the customarily held by speculative traders apply to any commodity derivative contract’s or the underlying on the contract market or equal to or contract acquired in good faith prior to commodity’s price or index. less than the greater of: The spot-month the effective date of such limit, provided (ii) Individual non-spot or all-months position limit level; 10% of the average however, that such position shall be combined position limits. For combined futures and delta adjusted attributed to the person if the person’s agricultural or exempt commodity option month-end open interest for the position is increased after the effective derivative contracts not subject to the most recent calendar year up to 25,000 date of such limit. limits set forth in § 150.2, the individual contracts, with a marginal increase of (5) Aggregation. Designated contract non-spot or all-months-combined levels 2.5% thereafter; or 5,000 contracts. In markets and swap execution facilities should be equal to or less than the any case, such levels should be that are trading facilities must have greater of: The level of the spot month reviewed no less than once every aggregation rules that conform to limit; or 5,000 contracts, when the twenty-four months from the date of § 150.4. notional quantity per contract is no initial listing. (6) Additional acceptable practices. A larger than a typical cash market (3) Position accountability in lieu of designated contract market or swap transaction in the underlying speculative position limits. A designated execution facility that is a trading commodity. If the notional quantity per contract market or swap execution facility may: contract is larger than the typical cash facility that is a trading facility may (i) Impose additional restrictions on a market transaction, then the individual adopt a bylaw, rule, regulation, or person with a long position in the spot non-spot month limit or all-months resolution, substituting for the month of a physical-delivery contract combined limit level should be scaled exchange-set speculative position limits who stands for delivery, takes that down accordingly. If the commodity specified under this paragraph (b), an delivery, then re-establishes a long derivative contract is substantially the exchange rule requiring traders to position; same as a pre-existing commodity consent to provide information about (ii) Establish limits on the amount of derivative contract, then the designated their position upon request by the delivery instruments that a person may contract market or swap execution exchange and to consent to halt hold in a physical-delivery contract; and facility may adopt the same limit as increasing further a trader’s position or (iii) Impose such other restrictions as applies to that pre-existing commodity to reduce their positions in an orderly it deems necessary to reduce the derivative contract. manner, in each case upon request by potential threat of market manipulation (iii) Commodity derivative contracts the exchange as follows: or congestion, to maintain orderly that are cash-settled by referencing a (i) Physical commodity derivative execution of transactions, or for such daily settlement price of an existing contracts. On a physical commodity other purposes consistent with its contract. For commodity derivative derivative contract that is not subject to responsibilities. contracts that are cash-settled by the limits set forth in § 150.2, having an (b) Requirements and acceptable referencing a daily settlement price of average month-end open interest of practices for commodity derivative an existing contract listed on a 50,000 contracts and an average daily

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volume of 5,000 or more contracts designated contract market or swap maximum extent practicable, ensure during the most recent calendar year execution facility that is a trading sufficient market liquidity for bona fide and a liquid cash market, a designated facility shall include swaps in their hedgers, and not unduly reduce the contract market or swap execution trading volume count only if such effectiveness of position limits to: facility that is a trading facility may entities administer position limits on (1) Diminish, eliminate, or prevent adopt individual non-spot month or all- swap contracts of their facilities. excessive speculation; months-combined position (5) Exemptions—(i) Hedge exemption. (2) Deter and prevent market accountability levels, provided however, (A) Any hedge exemption rules adopted manipulation, squeezes, and corners; that such designated contract market or by a designated contract market or a and swap execution facility that is a trading swap execution facility that is a trading (3) Ensure that the price discovery facility should adopt a spot month facility should conform to the definition function of the underlying market is not speculative position limit with a level of bona fide hedging position in § 150.1 disrupted. no greater than one-quarter of the and may provide for recognition as a (iii) Application for exemption. estimated spot month deliverable non-enumerated bona fide hedge in a Traders should be required to apply to supply. manner consistent with the process the designated contract market or swap (ii) New commodity derivative described in § 150.9(a). execution facility that is a trading contracts that are substantially the same (B) Any hedge exemption rules facility for any exemption from its as an existing contract. On a new adopted under paragraph (b)(5)(i)(A) of speculative position limit rules. In commodity derivative contract that is this section may allow a person to file considering whether to grant such an substantially the same as an existing an application for enumerated hedging application for exemption, a designated commodity derivative contract listed for positions, which application should be contract market or swap execution trading on a designated contract market filed not later than five business days facility that is a trading facility should or swap execution facility that is a after the person assumed the position take into account whether the requested trading facility, which has adopted that exceeded a position limit. exemption is in accord with sound position accountability in lieu of (ii) Other exemptions. A designated commercial practices and results in a position limits, the designated contract contract market or swap execution position that does not exceed an amount market or swap execution facility may facility may grant other exemptions for: that may be established and liquidated adopt for the new contract when it is (A) Financial distress. Upon specific in an orderly fashion. initially listed for trading the position request made to the designated contract (6) Pre-enactment and transition accountability levels of the existing market or swap execution facility that is period swap positions. Speculative contract. a trading facility, the designated position limits should not apply to (4) Calculation of trading volume and contract market or swap execution positions acquired in good faith in any open interest. For purposes of this facility that is a trading facility may pre-enactment swap, or in any transition paragraph, trading volume and open exempt a person or related persons period swap, in either case as defined interest should be calculated by: under financial distress circumstances by § 150.1. Provided however, that a (i) Open interest. (A) Averaging the for a time certain from any of the designated contract market or swap month-end open positions in a futures requirements of this part. Financial execution facility that is a trading contract and its related option contract, distress circumstances include facility may allow a person to net such on a delta-adjusted basis, for all months situations involving the potential position with post-effective date listed during the most recent calendar default or bankruptcy of a customer of commodity derivative contracts for the year; and the requesting person or persons, an purpose of complying with any non- (B) Averaging the month-end futures affiliate of the requesting person or spot month speculative position limit. equivalent amount of open positions in persons, or a potential acquisition target (7) Pre-existing positions—(i) swaps in a particular commodity (such of the requesting person or persons. Preexisting positions in a spot-month. A as, for swaps that are not referenced (B) Conditional spot-month limit designated contract market or swap contracts, by combining the notional exemption. Exchange-set spot-month execution facility that is a trading month-end open positions in swaps in speculative position limits may be facility should require compliance with a particular commodity, including exceeded for cash-settled contracts, spot month speculative position limits options in that same commodity that are provided that such positions should not for pre-existing positions in commodity swaps on a delta-adjusted basis, and exceed two times the level of the spot- derivative contracts other than pre- dividing by a notional quantity per month limit specified by the designated enactment and transition period swaps. contract that is no larger than a typical contract market or swap execution (ii) Pre-existing positions in a non- cash market transaction in the facility that is a trading facility, that lists spot month. A single-month or all- underlying commodity), except that a a physical-delivery contract to which months-combined speculative position designated contract market or swap the cash-settled contracts are directly or limit should not apply to any execution facility that is a trading indirectly linked, and the person commodity derivative contract acquired facility shall include swaps in their holding or controlling such positions in good faith prior to the effective date open interest calculation only if such should not hold or control positions in of such limit, provided however, that entities administer position limits on such spot-month physical-delivery such position should be attributed to the swap contracts of their facilities. contract. person if the person’s position is (ii) Trading volume. (A) Counting the (C) Intramarket spread positions and increased after the effective date of such number of contracts in a futures contract intermarket spread positions, each as limit. and its related option contract, on a defined in § 150.1, provided that the (8) Aggregation. Designated contract delta-adjusted basis, transacted during designated contract market or swap markets and swap execution facilities the most recent calendar year; and execution facility, in considering that are trading facilities must have (B) Counting the futures-equivalent whether to grant an application for such aggregation rules that conform to number of swaps in a particular exemption, should take into account § 150.4. commodity transacted during the most whether exempting the spread position (9) Additional acceptable practices. recent calendar year, except that a from position limits would, to the Particularly in the spot month, a

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designated contract market or swap commodity. If the notional quantity per specified under this paragraph (c), an execution facility that is a trading contract is larger than the typical cash exchange rule requiring traders to facility may: market transaction, then the individual consent to provide information about (i) Impose additional restrictions on a non-spot month limit or all-months their position upon request by the person with a long position in the spot combined limit level should be scaled exchange and to consent to halt month of a physical-delivery contract down accordingly. If the commodity increasing further a trader’s position or who stands for delivery, takes that derivative contract is substantially the to reduce their positions in an orderly delivery, then re-establishes a long same as a pre-existing commodity manner, in each case upon request by position; derivative contract, then the designated the exchange as follows: (ii) Establish limits on the amount of contract market or swap execution (i) Spot month. On an excluded delivery instruments that a person may facility may adopt the same limit as commodity derivative contract for hold in a physical-delivery contract; and applies to that pre-existing commodity which there is a highly liquid cash (iii) Impose such other restrictions as derivative contract. market and no legal impediment to it deems necessary to reduce the (iii) Commodity derivative contracts delivery, a designated contract market potential threat of market manipulation that are cash-settled by referencing a or swap execution facility that is a or congestion, to maintain orderly daily settlement price of an existing trading facility may adopt position execution of transactions, or for such contract. For excluded commodity accountability in lieu of position limits other purposes consistent with its derivative contracts that are cash-settled in the spot month. For an excluded responsibilities. by referencing a daily settlement price commodity derivative contract based on (c) Requirements and acceptable of an existing contract listed on a a commodity without a measurable practices for excluded commodity designated contract market or swap deliverable supply, a designated derivative contracts as defined in execution facility that is a trading contract market or swap execution section 1a(19) of the Act—(1) Levels at facility, the cash-settled contract should facility that is a trading facility may initial listing. At the time of each adopt spot-month, individual non-spot- adopt position accountability in lieu of excluded commodity derivative month, and all-months combined contract’s initial listing, a designated position limits in the spot month. For position limits that are comparable to all other excluded commodity contract market or swap execution those of the original price referenced facility that is a trading facility should derivative contracts, a designated contract. contract market or swap execution base speculative position limits on the (2) Adjustments to levels. Designated facility that is a trading facility should following: contract markets and swap execution adopt a spot-month position limit with (i) Spot month position limits.—(A) facilities that are trading facilities a level no greater than one-quarter of the Excluded commodity derivative should adjust their speculative limit estimated deliverable supply; contracts with a measurable deliverable levels as follows: supply. For all excluded commodity (i) Spot month position limits. The (ii) Individual non-spot or all-months derivative contracts that are based on a spot month position limit level for combined position limits. On an commodity with a measurable excluded commodity derivative excluded commodity derivative deliverable supply, the spot month limit contracts should be reviewed no less contract, a designated contract market or level should be established at a level than once every twenty-four months swap execution facility that is a trading that is no greater than one-quarter of the from the date of initial listing and facility may adopt position estimated spot month deliverable should be maintained at a level that is accountability levels in lieu of position supply, calculated separately for each necessary and appropriate to reduce the limits in the individual non-spot month month to be listed (Designated Contract potential threat of market manipulation or all-months-combined. Markets and Swap Execution Facilities or price distortion of the contract’s or (iii) New commodity derivative may refer to the guidance in paragraph the underlying commodity’s price or contracts that are substantially the same (b)(1)(i) of Appendix C of part 38 of this index. as an existing contract. On a new chapter for guidance on estimating spot- (ii) Individual non-spot or all-months- commodity derivative contract on an month deliverable supply); combined position limits. Individual excluded commodity derivative contract (B) Excluded commodity derivative non-spot or all-months-combined levels that is substantially the same as an contracts without a measurable should be based on position sizes existing commodity derivative contract deliverable supply. For excluded customarily held by speculative traders listed for trading on a designated commodity derivative contracts that are on the contract market or equal to or contract market or swap execution based on a commodity with no less than the greater of: the spot-month facility that is a trading facility, which measurable deliverable supply, the spot position limit level; 10% of the average has adopted position accountability in month limit level should be set at a combined futures and delta adjusted lieu of position limits, the designated level that is necessary and appropriate option month-end open interest for the contract market or swap execution to reduce the potential threat of market most recent calendar year up to 25,000 facility may adopt for the new contract manipulation or price distortion of the contracts, with a marginal increase of when it is initially listed for trading the contract’s or the underlying 2.5% thereafter; or 5,000 contracts. In position accountability levels of the commodity’s price or index. any case, such levels should be existing contract. (ii) Individual non-spot or all-months reviewed no less than once every (4) Calculation of trading volume and combined position limits. For excluded twenty-four months from the date of open interest. For purposes of this commodity derivative contracts, the initial listing. paragraph, trading volume and open individual non-spot or all-months- (3) Position accountability in lieu of interest should be calculated by: combined levels should be equal to or speculative position limits. A designated (i) Open interest. (A) Averaging the less than the greater of: The level of the contract market or swap execution month-end open positions in a futures spot month limit; or 5,000 contracts, facility that is a trading facility may contract and its related option contract, when the notional quantity per contract adopt a bylaw, rule, regulation, or on a delta-adjusted basis, for all months is no larger than a typical cash market resolution, substituting for the listed during the most recent calendar transaction in the underlying exchange-set speculative position limits year; and

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(B) Averaging the month-end futures that may be established and liquidated Commission regulations, including but equivalent amount of open positions in in an orderly fashion. not limited to those relating to swaps in a particular commodity (such (6) Pre-enactment and transition manipulation, attempted manipulation, as, for swaps that are not referenced period swap positions. Speculative corners, squeezes, fraudulent or contracts, by combining the notional position limits should not apply to deceptive conduct or prohibited month-end open positions in swaps in positions acquired in good faith in any transactions, unless incorporated by a particular commodity, including pre-enactment swap, or in any transition reference. options in that same commodity that are period swap, in either case as defined ■ 27. Add §§ 150.7 through 150.11 to swaps on a delta-adjusted basis, and by § 150.1. Provided however, that a read as follows: dividing by a notional quantity per designated contract market or swap § 150.7 Requirements for anticipatory contract that is no larger than a typical execution facility that is a trading bona fide hedging position exemptions. cash market transaction in the facility may allow a person to net such (a) Statement. Any person who underlying commodity), except that a position with post-effective date wishes to avail himself of exemptions designated contract market or swap commodity derivative contracts for the for unfilled anticipated requirements, execution facility that is a trading purpose of complying with any non- unsold anticipated production, facility should include swaps in their spot month speculative position limit. open interest calculation only if such (7) Pre-existing positions—(i) Pre- anticipated royalties, anticipated entities administer position limits on existing positions in a spot-month. A services contract payments or receipts, swap contracts of their facilities. designated contract market or swap or anticipatory cross-commodity hedges (ii) Trading volume. (A) Counting the execution facility that is a trading under the provisions of paragraphs number of contracts in a futures contract facility should require compliance with (3)(iii), (4)(i), 4(iii), 4(iv), or (5), and its related option contract, on a spot month speculative position limits respectively, of the definition of bona delta-adjusted basis, transacted during for pre-existing positions in commodity fide hedging position in § 150.1 shall the most recent calendar year; and derivative contracts. file an application on Form 704 with the (B) Counting the futures-equivalent (ii) Pre-existing positions in a non- Commission in advance of the date the number of swaps in a particular spot month. A single-month or all- person expects to exceed the position commodity transacted during the most months-combined speculative position limits established under this part. recent calendar year, except that a limit should not apply to any Filings in conformity with the designated contract market or swap commodity derivative contract acquired requirements of this section shall be execution facility that is a trading in good faith prior to the effective date effective ten days after submission, facility should include swaps in their of such limit, provided however, that unless otherwise notified by the trading volume count only if such such position should be attributed to the Commission. entities administer position limits on person if the person’s position is (b) Commission notification. At any swap contracts of their facilities. increased after the effective date of such time, the Commission may, by notice to (5) Exemptions—(i) Hedge limit. any person filing an application or exemptions. Any hedge exemption rules (8) Aggregation. Designated contract annual update on Form 704, specify its adopted by a designated contract market markets and swap execution facilities determination as to what portion, if any, or a swap execution facility that is a that are trading facilities should have of the amounts described in such filing trading facility should conform to the aggregation rules for excluded does not meet the requirements for bona definition of bona fide hedging position commodity derivative contracts that fide hedging positions. In no case shall in § 150.1. conform to § 150.4. such person’s anticipatory bona fide (ii) Other exemptions for excluded (9) Additional acceptable practices. A hedging positions exceed the levels commodities. A designated contract designated contract market or swap specified in paragraph (f) of this section. market or swap execution facility may execution facility that is a trading (c) Call for additional information. At grant, in addition to the exemptions facility may impose such other any time, the Commission may request under paragraphs (b)(5)(ii)(A), restrictions on excluded commodity a person who has on file an application (b)(5)(ii)(B), and (b)(5)(ii)(C) of this derivative contracts as it deems or annual update Form 704 under section, a risk management exemption necessary to reduce the potential threat paragraph (a) of this section to file pursuant to rules submitted to the of market manipulation or congestion, specific additional or updated Commission, including for a position to maintain orderly execution of information with the Commission to that is consistent with the guidance in transactions, or for such other purposes support a determination that the Appendix A of this part. consistent with its responsibilities. application or annual update on file (iii) Application for exemption. (d) Requirements for security futures accurately reflects unsold anticipated Traders should be required to apply to products. For security futures products, production, unfilled anticipated the designated contract market or swap position limitations and position requirements, anticipated royalties, or execution facility that is a trading accountability requirements are anticipated services contract payments facility for any exemption from its specified in § 41.25(a)(3) of this chapter. or receipts. speculative position limit rules. Such ■ 26. Revise § 150.6 to read as follows: (d) Initial statement and annual exchange may allow a person to file an update. Initial Form 704 concerning the application after the person assumed the § 150.6 Ongoing application of the Act and classification of positions as bona fide position that exceeded a position limit. Commission regulations. hedging pursuant to paragraphs (3)(iii), In considering whether to grant such an This part shall only be construed as or 4(i), 4(iii), 4(iv) or anticipatory cross- application for exemption, a designated having an effect on position limits set by commodity hedges under paragraph (5) contract market or swap execution the Commission or a designated contract of the definition of bona fide hedging facility that is a trading facility should market or swap execution facility, position in § 150.1 shall be filed with take into account whether the requested including any associated recordkeeping the Commission at least ten days in exemption is in accord with sound and reporting regulations. Nothing in advance of the date that such positions commercial practices and results in a this part shall be construed to affect any would be in excess of limits then in position that does not exceed an amount other provisions of the Act or effect pursuant to section 4a of the Act.

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Each person that has filed an initial commodity for the specified time employees as the Director may designate statement on Form 704 for an period; and from time to time, the authority: anticipatory bona fide hedge exemption (ix) The maximum number of long (i) In paragraph (b) of this section to shall provide annual updates on the positions and short positions in provide notice to a person that some or utilization of the anticipatory referenced contracts expected to be used all of the amounts described in a Form exemption, including actual cash to offset the risks of such anticipated 704 filing does not meet the activity utilizing the anticipatory activity. requirements for bona fide hedging exemption for the preceding year, as (2) Additional information for cross positions; well as the cumulative utilization since hedges. Cash positions that represent a (ii) In paragraph (c) of this section to the filing of the initial or most recent commodity, or products or byproducts request a person who has filed an annual statement. Such statements shall of a commodity, that is different from application or annual update on Form set forth in detail for a specified the commodity underlying a commodity 704 under paragraph (a) of this section operating period the person’s derivative contract that is expected to be to file specific additional or updated anticipated activity, i.e., unfilled used for hedging, shall be shown both information with the Commission to anticipated requirements, unsold in terms of the equivalent amount of the support a determination that the Form anticipated production, anticipated commodity underlying the commodity 704 filed accurately reflects unsold royalties, or anticipated services derivative contract used for hedging and anticipated production, unfilled contract payments or receipts, and in terms of the actual cash commodity anticipated requirements, anticipated explain the method of determination as provided for on Form 704. In royalties, or anticipated services thereof, including, but not limited to, computing their cash position, every contract payments or receipts; and the following information: person shall use such standards and (iii) In paragraph (d)(2) of this section (1) For each anticipated activity: (i) conversion factors that are usual in the to request detailed information The type of cash commodity underlying particular trade or that otherwise reflect concerning the basis for and derivation the anticipated activity; the value-fluctuation-equivalents of the of conversion factors used in computing (ii) The name of the actual cash cash position in terms of the commodity the cash position provided in any commodity underlying the anticipated underlying the commodity derivative applications or annual updates filed on activity and the units in which the cash contract used for hedging. Such person Form 704. commodity is measured; shall furnish to the Commission upon (2) The Director of the Division of (iii) An indication of whether the cash request detailed information concerning Market Oversight may submit to the commodity is the same commodity the basis for and derivation of such Commission for its consideration any (grade and quality) that underlies a core conversion factors, including: matter which has been delegated in this referenced futures contract or whether a (i) The hedge ratio used to convert the section. cross-hedge will be used and, if so, actual cash commodity to the equivalent (3) Nothing in this section prohibits additional information for cross hedges amount of the commodity underlying the Commission, at its election, from specified in paragraph (d)(2) of this the commodity derivative contract used exercising the authority delegated in section; for hedging; and this section. (iv)(A) Annual production, (ii) An explanation of the § 150.8 Severability. requirements, royalty receipts or service methodology used for determining the If any provision of this part, or the contract payments or receipts, in terms hedge ratio. application thereof to any person or of futures equivalents, of such (e) Monthly reporting. Monthly circumstances, is held invalid, such commodity for the three complete fiscal reporting of remaining anticipated invalidity shall not affect other years preceding the current fiscal year, hedge exemption shall be reported on provisions or application of such if filing an initial statement; or Form 204, along with reporting other provision to other persons or (B) For the prior fiscal year if filing an exemptions pursuant to § 19.01(a)(3)(vii) circumstances which can be given effect annual update; of this chapter. without the invalid provision or (v) The specified time period for (f) Maximum sales and purchases. application. which the anticipatory hedge exemption Sales or purchases of commodity is claimed; derivative contracts considered to be § 150.9 Process for recognition of (vi) Anticipated production, bona fide hedging positions under positions as non-enumerated bona fide requirements, royalty receipts or service paragraphs (3)(iii)(A) or (4)(i) of the hedges. contract payments or receipts, in terms bona fide hedging position definition in (a) Requirements for a designated of futures equivalents, of such § 150.1 shall at no time exceed the lesser contract market or swap execution commodity for such specified time of: facility to recognize non-enumerated period; (1) A person’s anticipated activity bona fide hedging positions. (1) A (vii) Fixed-price forward sales, (including production, requirements, designated contract market or swap inventory, and fixed-price forward royalties and services) as described by execution facility that elects to process purchases of such commodity, the information most recently filed non-enumerated bona fide hedging including any quantity in process of pursuant to this section that has not position applications to demonstrate manufacture and finished goods and been offset with cash positions; or why a derivative position satisfies the byproducts of manufacture or (2) Such lesser amount as determined requirements of section 4a(c) of the Act processing (in terms of such by the Commission pursuant to shall maintain rules, submitted to the commodity); paragraph (b) of this section. Commission pursuant to part 40 of this (viii) Unsold anticipated production, (g) Delegation of authority to the chapter, establishing an application unfilled anticipated requirements, Director of the Division of Market process for recognition of non- unsold anticipated royalty receipts, and Oversight. (1) The Commission hereby enumerated bona fide hedging positions anticipated service contract payments or delegates, until it orders otherwise, to consistent with the requirements of this receipts the risks of which have not the Director of the Division of Market section and the general definition of been offset with cash positions, of such Oversight or such other employee or bona fide hedging position in § 150.1. A

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designated contract market or swap (iii) A statement concerning the (C) That the designated contract execution facility may elect to process maximum size of all gross positions in market or swap execution facility has non-enumerated bona fide hedging derivative contracts for which the asked the Commission to consider the position applications for positions in application is submitted; application under paragraph (a)(8) of commodity derivative contracts only if, (iv) Information regarding the this section. in each case: applicant’s activity in the cash markets (5) An applicant’s derivatives position (i) The commodity derivative contract for the commodity underlying the shall be deemed to be recognized as a is a referenced contract; position for which the application is non-enumerated bona fide hedging (ii) Such designated contract market submitted during the past year; and position exempt from federal position or swap execution facility lists such (v) Any other information necessary limits at the time that a designated commodity derivative contract for to enable the designated contract market contract market or swap execution trading; or swap execution facility to determine, facility notifies an applicant that such (iii) Such commodity derivative and the Commission to verify, whether designated contract market or swap contract is actively traded on such it is appropriate to recognize such execution facility will recognize such designated contract market or swap position as a non-enumerated bona fide position as a non-enumerated bona fide execution facility; hedging position. hedging position. (iv) Such designated contract market (4) Under any application process (6) A designated contract market or or swap execution facility has established under this section, a swap execution facility that elects to established position limits for such designated contract market or swap process non-enumerated bona fide commodity derivative contract; and execution facility shall: hedging position applications shall file (v) Such designated contract market (i) Require each person intending to new rules or rule amendments pursuant or swap execution facility has at least exceed position limits to submit an to part 40 of this chapter, establishing or one year of experience and expertise application, to reapply at least on an amending requirements for an applicant administering position limits for a annual basis by updating that to file reports pertaining to the use of referenced contract in a particular application, and to receive notice of any such exemption that has been commodity. A designated contract recognition from the designated contract granted in the manner, form, and market or swap execution facility shall market or swap execution facility of a frequency, as determined by the not recognize a non-enumerated bona position as a non-enumerated bona fide designated contract market or swap fide hedging position involving a hedging position in advance of the date execution facility. commodity index contract and one or that such position would be in excess of (7) After recognition of each unique more referenced contracts. the limits then in effect pursuant to type of derivative position as a non- (2) A designated contract market or section 4a of the Act; enumerated bona fide hedging position, swap execution facility may establish (ii) Notify an applicant in a timely based on novel facts and circumstances, different application processes for manner if a submitted application is not a designated contract market or swap persons to demonstrate why a derivative complete. If an applicant does not execution facility shall publish on its position constitutes a non-enumerated amend or resubmit such application Web site, on at least a quarterly basis, bona fide hedging position under novel within a reasonable amount of time after a summary describing the type of facts and circumstances and under facts such notice, a designated contract derivative position and explaining why and circumstances substantially similar market or swap execution facility may it was recognized as a non-enumerated to a position for which a summary has reject the application; bona fide hedging position. been published on such designated (iii) Determine in a timely manner (8) If a non-enumerated bona fide contract market’s or swap execution whether a derivative position for which hedging position application presents facility’s Web site, pursuant to a complete application has been novel or complex issues or is potentially paragraph (a)(7) of this section. submitted satisfies the requirements of inconsistent with section 4a(c) of the (3) Any application process that is section 4a(c) of the Act and the general Act and the general definition of bona established by a designated contract definition of bona fide hedging position fide hedging position in § 150.1, a market or swap execution facility shall in § 150.1, and whether it is appropriate designated contract market or swap elicit sufficient information to allow the to recognize such position as a non- execution facility may ask the designated contract market or swap enumerated bona fide hedging position; Commission to consider the application execution facility to determine, and the (iv) Have the authority to revoke, at under the process set forth in paragraph Commission to verify, whether the facts any time, any recognition issued (d) of this section. The Commission and circumstances in respect of a pursuant to this section if it determines may, in its discretion, agree to or reject derivative position satisfy the the recognition is no longer in accord any such request by a designated requirements of section 4a(c) of the Act with section 4a(c) of the Act and the contract market or swap execution and the general definition of bona fide general definition of bona fide hedging facility. hedging position in § 150.1, and position in § 150.1; and (b) Recordkeeping. (1) A designated whether it is appropriate to recognize (v) Notify an applicant in a timely contract market or swap execution such position as a non-enumerated bona manner: facility that elects to process non- fide hedging position, including at a (A) That the derivative position for enumerated bona fide hedging position minimum: which a complete application has been applications shall keep full, complete, (i) A description of the position in the submitted has been recognized by the and systematic records, which include commodity derivative contract for designated contract market or swap all pertinent data and memoranda, of all which the application is submitted and execution facility as a non-enumerated activities relating to the processing of the offsetting cash positions; bona fide hedging position under this such applications and the disposition (ii) Information to demonstrate why section, and the details and all thereof, including the recognition by the the position satisfies the requirements of conditions of such recognition; designated contract market or swap section 4a(c) of the Act and the general (B) That its application is rejected, execution facility of any derivative definition of bona fide hedging position including the reasons for such rejection; position as a non-enumerated bona fide in § 150.1; or hedging position, the revocation or

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modification of any such recognition, for the commodity underlying the (2) If the Commission preliminarily the rejection by the designated contract commodity derivative position; and determines that any non-enumerated market or swap execution facility of an (ii) The summary of any non- bona fide hedging position application application, or the withdrawal, enumerated bona fide hedging position or the disposition thereof by a supplementation or updating of an published pursuant to paragraph (a)(7) designated contract market or swap application by the applicant. Included of this section, or revised, since the last execution facility presents novel or among such records shall be: summary submitted to the Commission. complex issues that require additional (i) All information and documents (2) Unless otherwise instructed by the time to analyze, or that an application submitted by an applicant in connection Commission, a designated contract or the disposition thereof by such with its application; market or swap execution facility that designated contract market or swap (ii) Records of oral and written elects to process non-enumerated bona execution facility is potentially communications between such fide hedging position applications shall inconsistent with section 4a(c) of the designated contract market or swap submit to the Commission, no less Act and the general definition of bona execution facility and such applicant in frequently than monthly, any report fide hedging position in § 150.1, the connection with such application; and such designated contract market or Commission shall: (iii) All information and documents in swap execution facility requires to be (i) Notify such designated contract connection with such designated submitted by an applicant to such market or swap execution facility and contract market’s or swap execution designated contract market or swap the applicable applicant of the issues facility’s analysis of and action on such execution facility pursuant to rules identified by the Commission; and application. required under paragraph (a)(6) of this (ii) Provide them with 10 business (2) All books and records required to section. be kept pursuant to this section shall be days in which to provide the kept in accordance with the (3) Unless otherwise instructed by the Commission with any supplemental requirements of § 1.31 of this chapter. Commission, a designated contract information. (c) Reports to the Commission. (1) A market or swap execution facility that (3) The Commission shall determine designated contract market or swap elects to process non-enumerated bona whether it is appropriate to recognize execution facility that elects to process fide hedging position applications shall the derivative position for which such non-enumerated bona fide hedging submit to the Commission the application has been submitted as a position applications shall submit to the information required by paragraphs non-enumerated bona fide hedging Commission a report for each week as (c)(1) and (2) of this section, as follows: position, or whether the disposition of of the close of business on Friday (i) As specified by the Commission on such application by such designated showing the following information: the Forms and Submissions page at contract market or swap execution (i) For each commodity derivative www.cftc.gov; facility is consistent with section 4a(c) position that had been recognized that (ii) Using the format, coding structure, the Act and the general definition of week by the designated contract market and electronic data transmission bona fide hedging position in § 150.1. or swap execution facility as a non- procedures approved in writing by the (4) If the Commission determines that enumerated bona fide hedging position, Commission; and the disposition of such application is and for any revocation or modification (iii) Not later than 9:00 a.m. Eastern inconsistent with section 4a(c) of the of a previously granted recognition: time on the third business day following Act and the general definition of bona (A) The date of disposition, the date of the report. fide hedging position in § 150.1, the (B) The effective date of the (d) Review of applications by the Commission shall notify the applicant disposition, Commission. (1) The Commission may and grant the applicant a commercially (C) The expiration date of any in its discretion at any time review any reasonable amount of time to liquidate recognition, non-enumerated bona fide hedging the derivative position or otherwise (D) Any unique identifier assigned by position application submitted to a come into compliance. This notification the designated contract market or swap designated contract market or swap will briefly specify the nature of the execution facility to track the execution facility, and all records issues raised and the specific provisions application, required to be kept by such designated of the Act or the Commission’s (E) Any unique identifier assigned by contract market or swap execution regulations with which the application the designated contract market or swap facility pursuant to paragraph (b) of this is, or appears to be, inconsistent. execution facility to a type of recognized section in connection with such (e) Review of summaries by the non-enumerated bona fide hedging application, for any purpose, including Commission. The Commission may in position, to evaluate whether the disposition of (F) The identity of the applicant, its discretion at any time review any (G) The listed commodity derivative the application is consistent with summary of a type of non-enumerated contract to which the application section 4a(c) of the Act and the general bona fide hedging position required to pertains, definition of bona fide hedging position be published on a designated contract (H) The underlying cash commodity, in § 150.1. market’s or swap execution facility’s (I) The maximum size of the (i) The Commission may request from Web site pursuant to paragraph (a)(7) of commodity derivative position that is such designated contract market or this section for any purpose, including recognized by the designated contract swap execution facility records required to evaluate whether the summary market or swap execution facility as a to be kept by such designated contract promotes transparency and fair and non-enumerated bona fide hedging market or swap execution facility open access by all market participants to position, pursuant to paragraph (b) of this section information regarding bona fide hedges. (J) Any size limitation established for in connection with such application. If the Commission determines that a such commodity derivative position on (ii) The Commission may request summary is deficient in any way, the the designated contract market or swap additional information in connection Commission shall notify such execution facility, and with such application from such designated contract market or swap (K) A concise summary of the designated contract market or swap execution facility, and grant to the applicant’s activity in the cash markets execution facility or from the applicant. designated contract market or swap

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execution facility a reasonable amount deficient summary, and to grant such (2) Spreads that a designated contract of time to revise the summary. designated contract market or swap market or swap execution facility may (f) Delegation of authority to the execution facility a reasonable amount approve under this section include: Director of the Division of Market of time to revise such summary. (i) Calendar spreads; Oversight. (1) The Commission hereby (2) The Director of the Division of (ii) Quality differential spreads; delegates, until it orders otherwise, to Market Oversight may submit to the (iii) Processing spreads; and (iv) Product or by-product differential the Director of the Division of Market Commission for its consideration any Oversight or such other employee or spreads. matter which has been delegated in this (3) Any application process that is employees as the Director may designate section. from time to time, the authority: established by a designated contract (i) In paragraph (a)(8) of this section (3) Nothing in this section prohibits market or swap execution facility under to agree to or reject a request by a the Commission, at its election, from this section shall elicit sufficient designated contract market or swap exercising the authority delegated in information to allow the designated execution facility to consider a non- this section. contract market or swap execution enumerated bona fide hedging position § 150.10 Process for designated contract facility to determine, and the application; market or swap execution facility exemption Commission to verify, whether the facts (ii) In paragraph (c) of this section to from position limits for certain spread and circumstances demonstrate that it is provide instructions regarding the positions. appropriate to exempt a spread position submission to the Commission of from position limits, including at a (a) Requirements for a designated information required to be reported by minimum: a designated contract market or swap contract market or swap execution (i) A description of the spread execution facility, to specify the manner facility to exempt from position limits position for which the application is for submitting such information on the certain positions normally known to the submitted; Forms and Submissions page at trade as spreads. (1) A designated (ii) Information to demonstrate why www.cftc.gov, and to determine the contract market or swap execution the spread position should be exempted format, coding structure, and electronic facility that elects to process from position limits, including how the data transmission procedures for applications for exemptions from exemption would further the purposes submitting such information; position limits for certain positions of section 4a(a)(3)(B) of the Act; (iii) In paragraph (d)(1) of this section normally known to the trade as spreads (iii) A statement concerning the to review any non-enumerated bona fide shall maintain rules, submitted to the maximum size of all gross positions in hedging position application and all Commission pursuant to part 40 of this derivative contracts for which the records required to be kept by a chapter, establishing an application application is submitted; and designated contract market or swap process for exempting positions (iv) Any other information necessary execution facility in connection with normally known to the trade as spreads to enable the designated contract market such application, to request such consistent with the requirements of this or swap execution facility to determine, records from such designated contract section. A designated contract market or and the Commission to verify, whether market or swap execution facility, and swap execution facility may elect to it is appropriate to exempt such spread to request additional information in process applications for such spread position from position limits. connection with such application from exemptions only if, in each case: (4) Under any application process such designated contract market or (i) Such designated contract market or established under this section, a swap execution facility or from the swap execution facility lists for trading designated contract market or swap applicant; at least one contract that is either a execution facility shall: (iv) In paragraph (d)(2) of this section component of the spread or a referenced (i) Require each person requesting an to preliminarily determine that a non- contract that is a component of the exemption from position limits for its enumerated bona fide hedging position spread; spread position to submit an application or the disposition thereof by (ii) The contract, in paragraph (a)(1)(i) application, to reapply at least on an a designated contract market or swap of this section, in a particular annual basis by updating that execution facility presents novel or commodity is actively traded on such application, and to receive approval in complex issues that require additional designated contract market or swap advance of the date that such position time to analyze, or that such application execution facility; would be in excess of the limits then in or the disposition thereof is potentially effect pursuant to section 4a of the Act; inconsistent with section 4a(c) of the (iii) Such designated contract market (ii) Notify an applicant in a timely Act and the general definition of bona or swap execution facility has manner if a submitted application is not fide hedging position in § 150.1, to established position limits for at least complete. If an applicant does not notify the designated contract market or one contract that is either a component amend or resubmit such application swap execution facility and the of the spread or a referenced contract within a reasonable amount of time after applicable applicant of the issues that is a component of the spread; and such notice, a designated contract identified, and to provide them with 10 (iv) Such designated contract market market or swap execution facility may business days in which to file or swap execution facility has at least reject the application; supplemental information; and one year of experience and expertise (iii) Determine in a timely manner (v) In paragraph (e) of this section to administering position limits for at least whether a spread position for which a review any summary of a type of non- one contract that is either a component complete application has been enumerated bona fide hedging position of the spread or a referenced contract submitted satisfies the requirements of required to be published on a that is a component of the spread. A paragraph (a)(4)(vi) of this section, and designated contract market’s or swap designated contract market or swap whether it is appropriate to exempt such execution facility’s Web site, to execution facility shall not approve a spread position from position limits; determine that any such summary is spread exemption involving a (iv) Have the authority to revoke, at deficient, to notify a designated contract commodity index contract and one or any time, any spread exemption issued market or swap execution facility of a more referenced contracts. pursuant to this section if it determines

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the spread exemption no longer satisfies section 4a(a)(3)(B) of the Act, a (E) Any unique identifier assigned by the requirements of paragraph (a)(4)(vi) designated contract market or swap the designated contract market or swap of this section and it is no longer execution facility may ask the execution facility to a type of exempt appropriate to exempt the spread from Commission to consider the application spread position, position limits; under the process set forth in paragraph (F) The identity of the applicant, (v) Notify an applicant in a timely (d) of this section. The Commission (G) The listed commodity derivative manner: may, in its discretion, agree to or reject contract to which the application (A) That a spread position for which any such request by a designated pertains, a complete application has been contract market or swap execution (H) The underlying cash commodity, submitted has been exempted by the facility. (I) The size limitations on any exempt designated contract market or swap (b) Recordkeeping. (1) A designated spread position, specified by contract execution facility from position limits, contract market or swap execution month if applicable, and and the details and all conditions of facility that elects to process spread (J) Any conditions on the exemption; such exemption; exemption applications shall keep full, and (B) That its application is rejected, complete, and systematic records, (ii) The summary of any exempt including the reasons for such rejection; which include all pertinent data and spread position newly published or memoranda, of all activities relating to pursuant to paragraph (a)(7) of this (C) That the designated contract the processing of such applications and section, or revised, since the last market or swap execution facility has the disposition thereof, including the summary submitted to the Commission. asked the Commission to consider the exemption of any spread position, the (2) Unless otherwise instructed by the application under paragraph (a)(8) of revocation or modification of any Commission, a designated contract this section; and exemption, the rejection by the market or swap execution facility that (vi) Determine whether exempting the designated contract market or swap elects to process applications to exempt spread position from position limits execution facility of an application, or spread positions from position limits would, to the maximum extent the withdrawal, supplementation or shall submit to the Commission, no less practicable, ensure sufficient market updating of an application by the frequently than monthly, any report liquidity for bona fide hedgers, and not applicant. Included among such records such designated contract market or unreasonably reduce the effectiveness of shall be: swap execution facility requires to be position limits to: (i) All information and documents submitted by an applicant to such (A) Diminish, eliminate or prevent submitted by an applicant in connection designated contract market or swap excessive speculation; with its application; execution facility pursuant to rules (B) Deter and prevent market (ii) Records of oral and written required by paragraph (a)(6) of this manipulation, squeezes, and corners; communications between such section. and designated contract market or swap (3) Unless otherwise instructed by the (C) Ensure that the price discovery execution facility and such applicant in Commission, a designated contract function of the underlying market is not connection with such application; and market or swap execution facility that disrupted. (iii) All information and documents in elects to process applications to exempt (5) An applicant’s derivatives position connection with such designated spread positions from position limits shall be deemed to be recognized as a contract market’s or swap execution shall submit to the Commission the spread position exempt from federal facility’s analysis of and action on such information required by paragraphs position limits at the time that a application. (c)(1) and (2) of this section, as follows: designated contract market or swap (2) All books and records required to (i) As specified by the Commission on execution facility notifies an applicant be kept pursuant to this section shall be the Forms and Submissions page at that such designated contract market or kept in accordance with the www.cftc.gov; swap execution facility will exempt requirements of § 1.31 of this chapter. (ii) Using the format, coding structure, such spread position. (c) Reports to the Commission. (1) A and electronic data transmission (6) A designated contract market or designated contract market or swap procedures approved in writing by the swap execution facility that elects to execution facility that elects to process Commission; and process applications to exempt spread spread exemption applications shall (iii) Not later than 9:00 a.m. Eastern positions from position limits shall file submit to the Commission a report for time on the third business day following new rules or rule amendments pursuant each week as of the close of business on the date of the report. to part 40 of this chapter, establishing or Friday showing the following (d) Review of applications by the amending requirements for an applicant information: Commission. (1) The Commission may to file reports pertaining to the use of (i) The disposition of any spread in its discretion at any time review any any such exemption that has been exemption application, including the spread exemption application submitted granted in the manner, form, and exemption of any spread position, the to a designated contract market or swap frequency, as determined by the revocation or modification of any execution facility, and all records designated contract market or swap exemption, or the rejection of any required to be kept by such designated execution facility. application, as well as the following contract market or swap execution (7) After exemption of each unique details: facility pursuant to paragraph (b) of this type of spread position, a designated (A) The date of disposition, section in connection with such contract market or swap execution (B) The effective date of the application, for any purpose, including facility shall publish on its Web site, on disposition, to evaluate whether the disposition of at least a quarterly basis, a summary (C) The expiration date of any the application is consistent with the describing the type of spread position exemption, purposes of section 4a(a)(3)(B) of the and explaining why it was exempted. (D) Any unique identifier assigned by Act. (8) If a spread exemption application the designated contract market or swap (i) The Commission may request from presents complex issues or is potentially execution facility to track the such designated contract market or inconsistent with the purposes of application, swap execution facility records required

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to be kept by such designated contract spread exemptions. If the Commission deficient summary, and to grant such market or swap execution facility determines that a summary is deficient designated contract market or swap pursuant to paragraph (b) of this section in any way, the Commission shall notify execution facility a reasonable amount in connection with such application. such designated contract market or of time to revise such summary. (ii) The Commission may request swap execution facility, and grant to the (2) The Director of the Division of additional information in connection designated contract market or swap Market Oversight may submit to the with such application from such execution facility a reasonable amount Commission for its consideration any designated contract market or swap of time to revise the summary. matter which has been delegated in this execution facility or from the applicant. (f) Delegation of authority to the section. (2) If the Commission preliminarily Director of the Division of Market (3) Nothing in this section prohibits determines that any application to Oversight. (1) The Commission hereby the Commission, at its election, from exempt a spread position from position delegates, until it orders otherwise, to exercising the authority delegated in limits, or the disposition thereof by a the Director of the Division of Market this section. designated contract market or swap Oversight or such other employee or execution facility, presents novel or § 150.11 Process for recognition of employees as the Director may designate positions as bona fide hedges for unfilled complex issues that require additional from time to time, the authority: anticipated requirements, unsold time to analyze, or that an application (i) In paragraph (a)(8) of this section anticipated production, anticipated or the disposition thereof by such to agree to or reject a request by a royalties, anticipated service contract designated contract market or swap designated contract market or swap payments or receipts, or anticipatory cross- execution facility is potentially execution facility to consider a spread commodity hedge positions. inconsistent with the Act, the exemption application; (a) Requirements for a designated Commission shall: (ii) In paragraph (c) of this section to contract market or swap execution (i) Notify such designated contract provide instructions regarding the facility to recognize certain enumerated market or swap execution facility and submission to the Commission of anticipatory bona fide hedging the applicable applicant of the issues information required to be reported by positions. (1) A designated contract identified by the Commission; and a designated contract market or swap market or swap execution facility that (ii) Provide them with 10 business execution facility, to specify the manner elects to process applications for days in which to provide the for submitting such information on the recognition of positions as hedges of Commission with any supplemental Forms and Submissions page at unfilled anticipated requirements, information. www.cftc.gov, and to determine the unsold anticipated production, (3) The Commission shall determine format, coding structure, and electronic anticipated royalties, anticipated service whether it is appropriate to exempt the data transmission procedures for contract payments or receipts, or spread position for which such submitting such information; anticipatory cross-commodity hedges application has been submitted from (iii) In paragraph (d)(1) of this section under the provisions of paragraphs position limits, or whether the to review any spread exemption (3)(iii), (4)(i), (iii), (iv), or (5), disposition of such application by such application and all records required to respectively, of the definition of bona designated contract market or swap be kept by a designated contract market fide hedging position in § 150.1 shall execution facility is consistent with the or swap execution facility in connection maintain rules, submitted to the purposes of section 4a(a)(3)(B) of the with such application, to request such Commission pursuant to part 40 of this Act. records from such designated contract chapter, establishing an application (4) If the Commission determines that market or swap execution facility, and process for such anticipatory bona fide it is not appropriate to exempt the to request additional information in hedges consistent with the requirements spread position for which such connection with such application from of this section. A designated contract application has been submitted from such designated contract market or market or swap execution facility may position limits, or that the disposition of swap execution facility, or from the elect to process such anticipatory hedge such application is inconsistent with applicant; applications for positions in commodity the Act, the Commission shall notify the (iv) In paragraph (d)(2) of this section derivative contracts only if, in each applicant and grant the applicant a to preliminarily determine that a spread case: commercially reasonable amount of exemption application or the (i) The commodity derivative contract time to liquidate the spread position or disposition thereof by a designated is a referenced contract; otherwise come into compliance. This contract market or swap execution (ii) Such designated contract market notification will briefly specify the facility presents complex issues that or swap execution facility lists such nature of the issues raised and the require additional time to analyze, or commodity derivative contract for specific provisions of the Act or the that such application or the disposition trading; Commission’s regulations with which thereof is potentially inconsistent with (iii) Such commodity derivative the application is, or appears to be, the Act, to notify the designated contract is actively traded on such inconsistent. contract market or swap execution derivative contract market; (e) Review of summaries by the facility and the applicable applicant of (iv) Such designated contract market Commission. The Commission may in the issues identified, and to provide or swap execution facility has its discretion at any time review any them with 10 business days in which to established position limits for such summary of a type of spread position file supplemental information; and commodity derivative contract; and required to be published on a (v) In paragraph (e) of this section to (v) Such designated contract market designated contract market’s or swap review any summary of a type of spread or swap execution facility has at least execution facility’s Web site pursuant to exemption required to be published on one year of experience and expertise paragraph (a)(7) of this section for any a designated contract market’s or swap administering position limits for a purpose, including to evaluate whether execution facility’s Web site, to referenced contract in a particular the summary promotes transparency determine that any such summary is commodity. and fair and open access by all market deficient, to notify a designated contract (2) Any application process that is participants to information regarding market or swap execution facility of a established by a designated contract

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market or swap execution facility shall requirements for an applicant to file the (C) The expiration date of any require, at a minimum, the information supplemental reports, as required under recognition, required under § 150.7(d). § 150.7(e), pertaining to the use of any (D) Any unique identifier assigned by (3) Under any application process such exemption that has been granted. the designated contract market or swap established under this section, a (6) A designated contract market or execution facility to track the designated contract market or swap swap execution facility may ask the application, execution facility shall: Commission to consider any application (E) Any unique identifier assigned by (i) Require each person intending to made under this section. The the designated contract market or swap exceed position limits to submit an Commission may, in its discretion, agree execution facility to a bona fide hedge application, and to reapply at least on to or reject any such request by a recognized under this section; an annual basis by updating that designated contract market or swap (F) The identity of the applicant, application, as required under execution facility, provided that, if the (G) The listed commodity derivative § 150.7(d), and to receive notice of Commission agrees to the request, it will contract to which the application recognition from the designated contract have 10 business days from the time of pertains, market or swap execution facility of a the request to carry out its review. (H) The underlying cash commodity, position as a bona fide hedging position (b) Recordkeeping. (1) A designated (I) The maximum size of the in advance of the date that such position contract market or swap execution commodity derivative position that is would be in excess of the limits then in facility that elects to process bona fide recognized by the designated contract effect pursuant to section 4a of the Act; hedging position applications under this market or swap execution facility as a (ii) Notify an applicant in a timely section shall keep full, complete, and bona fide hedging position, manner if a submitted application is not systematic records, which include all (J) Any size limitation established for complete. If the applicant does not pertinent data and memoranda, of all such commodity derivative position on amend or resubmit such application activities relating to the processing of the designated contract market or swap within a reasonable amount of time after such applications and the disposition execution facility, and notification from the designated thereof, including the recognition of any (K) A concise summary of the contract market or swap execution derivative position as a bona fide applicant’s activity in the cash market facility, the designated contract market hedging position, the revocation or for the commodity underlying the or swap execution facility may reject the modification of any recognition, the position for which the application was application; rejection by the designated contract submitted. (iii) Inform an applicant within ten market or swap execution facility of an (2) Unless otherwise instructed by the days of receipt of such application by application, or withdrawal, Commission, a designated contract the designated contract market or swap supplementation or updating of an market or swap execution facility that execution facility that: application. Included among such elects to process bona fide hedging (A) The derivative position for which records shall be: position applications shall submit to the a complete application has been (i) All information and documents Commission the information required submitted has been recognized by the submitted by an applicant in connection by paragraph (c)(1) of this section, as designated contract market or swap with its application; follows: execution facility as a bona fide hedging (ii) Records of oral and written (i) As specified by the Commission on position, and the details and all communications between such the Forms and Submissions page at conditions of such recognition; (B) The application is rejected, designated contract market or swap www.cftc.gov; including the reasons for such rejection; execution facility and such applicant in (ii) Using the format, coding structure, or connection with such application; and and electronic data transmission (C) The designated contract market or (iii) All information and documents in procedures approved in writing by the swap execution facility has asked the connection with such designated Commission; and Commission to consider the application contract market’s or swap execution (iii) Not later than 9:00 a.m. Eastern under paragraph (a)(6) of this section; facility’s analysis of and action on such time on the third business day following and application. the date of the report. (iv) Have the authority to revoke, at (2) All books and records required to (d) Review of applications by the any time, any recognition issued be kept pursuant to this section shall be Commission. (1) The Commission may pursuant to this section if it determines kept in accordance with the in its discretion at any time review any the position no longer complies with the requirements of § 1.31 of this chapter. bona fide hedging position application filing requirements under paragraph (c) Reports to the Commission. (1) A submitted to a designated contract (a)(2) of this section. designated contract market or swap market or swap execution facility under (4) An applicant’s derivatives position execution facility that elects to process this section, and all records required to shall be deemed to be recognized as a bona fide hedging position applications be kept by such designated contract bona fide hedging position at the time under this section shall submit to the market or swap execution facility that a designated contract market or Commission a report for each week as pursuant to paragraph (b) of this section swap execution facility notifies an of the close of business on Friday in connection with such application, for applicant that such designated contract showing the following information: any purpose, including to evaluate market or swap execution facility will (i) The disposition of any application, whether the disposition of the recognize such position as a bona fide including the recognition of any application is consistent with the Act. hedging position. position as a bona fide hedging position, (i) The Commission may request from (5) A designated contract market or the revocation or modification of any such designated contract market or swap execution facility that elects to recognition, as well as the following swap execution facility records required process bona fide hedging position details: to be kept by such designated contract applications shall file new rules or rule (A) The date of disposition, market or swap execution facility amendments pursuant to part 40 of this (B) The effective date of the pursuant to paragraph (b) of this section chapter, establishing or amending disposition, in connection with such application.

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(ii) The Commission may request designated contract market or swap be any requirement to replace a commodity additional information in connection execution facility or from the applicant; derivative contract with a cash market with such application from such and position in order to qualify for a risk designated contract market or swap (iv) In paragraph (d)(2) of this section management exemption. (b) Cross-commodity hedging is permitted. execution facility or from the applicant. to determine that it is not appropriate to Risks that are offset in commodity derivative (2) If the Commission preliminarily recognize a derivative position for contracts in excluded commodities need not determines that any anticipatory hedge which an application for recognition has arise from the same commodities underlying application is inconsistent with the been submitted as a bona fide hedging the commodity derivative contracts. For filing requirements of § 150.11(a)(2), the position, or that the disposition of such example, a trading facility may recognize a Commission shall: application by a designated contract risk management exemption based on the net (i) Notify such designated contract market or swap execution facility is interest rate risk arising from a bank’s market or swap execution facility and inconsistent with the Act, and, in balance sheet of loans and deposits that is the applicable applicant of the offset using Treasury security futures connection with such a determination, contracts or short-term interest rate futures deficiencies identified by the to grant the applicant a reasonable contracts. Commission; and amount of time to liquidate the (3) Examples of risk management (ii) Provide them with 10 business derivative position or otherwise come positions. This section contains examples of days in which to provide the into compliance. risk management positions that may be Commission with any supplemental (2) The Director of the Division of appropriate for management of risk in the information. Market Oversight may submit to the operation of a commercial enterprise. (3) If the Commission determines that (a) Balance sheet hedging. A commercial Commission for its consideration any enterprise may have risks arising from its net the anticipatory hedge application is matter which has been delegated in this inconsistent with the filing position in assets and liabilities. section. (i) Foreign currency translation. One form requirements of § 150.11(a)(2), the (3) Nothing in this section prohibits of balance sheet hedging involves offsetting Commission shall notify the applicant the Commission, at its election, from net exposure to changes in currency and grant the applicant a commercially exercising the authority delegated in exchange rates for the purpose of stabilizing reasonable amount of time to liquidate this section. the domestic dollar accounting value of net the derivative position or otherwise ■ 28. In Part 150, add Appendices A assets and/or liabilities which are come into compliance. This notification through E to read as follows: denominated in a foreign currency. For will briefly specify the specific example, a bank may make loans in a foreign provisions of the filing requirements of Appendix A to Part 150—Guidance on currency and take deposits in that same Risk Management Exemptions for foreign currency. Such a bank is exposed to § 150.11(a)(2), with which the net foreign currency translation risk when application is, or appears to be, Commodity Derivative Contracts in Excluded Commodities the amount of loans is not equal to the inconsistent. amount of deposits. A bank with a net long (e) Delegation of authority to the (1) This appendix provides non-exclusive exposure to a foreign currency may hedge by Director of the Division of Market interpretative guidance on risk management establishing an offsetting short position in a Oversight. (1) The Commission hereby exemptions for commodity derivative foreign currency commodity derivative delegates, until it orders otherwise, to contracts in excluded commodities permitted contract. the Director of the Division of Market under the definition of bona fide hedging (ii) Interest rate risk. Another form of position in § 150.1. The rules of a designated balance sheet hedging involves offsetting net Oversight or such other employee or contract market or swap execution facility exposure to changes in values of assets and employees as the Director may designate that is a trading facility may recognize liabilities of differing durations. Examples from time to time, the authority: positions consistent with this guidance as include: (i) In paragraph (a)(6) of this section bona fide hedging positions. The (A) A pension fund may invest in short to agree to or reject a request by a Commission recognizes that risk management term securities and have longer term designated contract market or swap positions in commodity derivative contracts liabilities. Such a pension fund has a execution facility to consider a bona in excluded commodities may not conform to duration mismatch. Such a pension fund may fide hedge application; the general definition of bona fide hedging hedge by establishing a long position in (ii) In paragraph (c) of this section to positions applicable to commodity derivative Treasury security futures contracts to provide instructions regarding the contracts in physical commodities, as lengthen the duration of its assets to match provided under section 4a(c)(2) of the Act, the duration of its liabilities. This is submission to the Commission of and may not conform to enumerated bona economically equivalent to using a long information required to be reported by fide hedging positions applicable to position in Treasury security futures a designated contract market or swap commodity derivative contracts in physical contracts to shorten the duration of its execution facility, to specify the manner commodities under the definition of bona liabilities to match the duration of its assets. for submitting such information on the fide hedging position in § 150.1. (B) A bank may make a certain amount of Forms and Submissions page at This interpretative guidance for core fixed-rate loans of one maturity and fund www.cftc.gov, and to determine the principle 5 for designated contract markets, such assets through taking fixed-rate deposits format, coding structure, and electronic section 5(d)(5) of the Act, and core principle of a shorter maturity. Such a bank is exposed 6 for swap execution facilities that are to interest rate risk, in that an increase in data transmission procedures for trading facilities, section 5h(f)(6) of the Act, interest rates may result in a greater decline submitting such information; is illustrative only of the types of positions in value of the assets than the decline in (iii) In paragraph (d)(1) of this section for which a trading facility may elect to value of the deposit liabilities. A bank may to review any bona fide hedging provide a risk management exemption and is hedge by establishing a short position in position application and all records not intended to be used as a mandatory short-term interest rate futures contracts to required to be kept by a designated checklist. Other positions might also be lengthen the duration of its liabilities to contract market or swap execution included appropriately within a risk match the duration of its assets. This is facility in connection with such management exemption. economically equivalent to using a short application, to request such records (2)(a) No temporary substitute criterion. position in short-term interest rate futures Risk management positions in commodity contracts, for example, to shorten the from such designated contract market or derivative contracts in excluded commodities duration of its assets to match the duration swap execution facility, and to request need not be expected to represent a substitute of its liabilities. additional information in connection for a subsequent transaction or position in a (b) Unleveraged synthetic positions. An with such application from such physical marketing channel. There need not investment fund may have risks arising from

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a delayed investment in an asset allocation and synthetically gain exposure to an with respect to the underlying commodity. A promised to investors. Such a fund may alternative asset class using a risk bona fide hedging position includes such an synthetically gain exposure to an asset class management strategy of establishing a long owned put that does not exceed in quantity using a risk management strategy of position in another commodity derivative the ownership or fixed-price purchase establishing a long position in commodity contract that does not exceed: the value of contracts in the contract’s underlying cash derivative contracts that does not exceed the existing asset at the time the temporary commodity by the same person. cash set aside in an identifiable manner, asset allocation is established or, in the The Commission also recognizes as bona including short-term investments, any funds alternative, the hedged value of the existing fide hedging positions strategies that provide deposited as margin and accrued profits on asset plus any accrued profits on such risk such commodity derivative contract management positions. For example: protection against a price decline equivalent positions. For example: (i) A collective investment fund that to an owned position in a put option for an (i) A collective investment fund that invests funds in bonds and stocks pursuant existing portfolio of securities owned. A invests funds in stocks pursuant to an asset to an asset allocation strategy may believe dynamically managed short position in a allocation strategy may obtain immediate that market considerations favor a temporary futures contract may replicate the stock market exposure upon receipt of new increase in the fund’s equity exposure characteristics of a long position in a put monies by establishing a long position in relative to its bond holdings. The fund option. stock index futures contracts (‘‘equitizing manager may choose to accomplish the (c) Synthetic short futures contracts. A cash’’). Such a long position may qualify as reallocation using commodity derivative person may establish a synthetic short a risk management exemption under trading contracts, such as a short position in futures position by purchasing a put option facility rules provided such long position Treasury security futures contracts and a long and selling a call option, when each option does not exceed the cash set aside. The long position in stock index futures contracts. The has the same notional amount, strike price, position in stock index futures contracts need short position in Treasury security futures expiration date and underlying commodity. not be converted to a position in stock. contracts may qualify as a hedge of interest Such a synthetic short futures position is a (ii) Upon receipt of new funds from rate risk arising from the bond holdings. A investors, an insurance company that invests trading facility may adopt rules to recognize short position in a commodity derivative in bond holdings for a separate account as a risk management exemption such a long contract with respect to the underlying wishes to lengthen synthetically the duration position in stock index futures. commodity. A bona fide hedging position of the portfolio by establishing a long (ii) Reserved. includes such a synthetic short futures position in Treasury futures contracts. Such (4) Clarification of bona fides of short position that does not exceed in quantity the a long position may qualify as a risk positions. ownership or fixed-price purchase contracts management exemption under trading (a) Calls sold. A seller of a call option in the contract’s underlying cash commodity facility rules provided such long position establishes a short call option. A short call by the same person. does not exceed the cash set aside. The long option is a short position in a commodity position in Treasury futures contracts need derivative contract with respect to the Appendix B to Part 150—Commodities not be converted to a position in bonds. underlying commodity. A bona fide hedging Listed as Substantially the Same for (c) Temporary asset allocations. A position includes such a written call option Purposes of the Definition of Location commercial enterprise may have risks arising that does not exceed in quantity the Basis Contract from potential transactional costs in ownership or fixed-price purchase contracts temporary asset allocations (altering portfolio in the contract’s underlying cash commodity The following table lists core referenced exposure to certain asset classes such as by the same person. futures contracts and commodities that are equity securities and debt securities). Such (b) Puts purchased and portfolio insurance. treated as substantially the same as a an enterprise may hedge existing assets A buyer of a put option establishes a long put commodity underlying a core referenced owned by establishing a short position in an option. However, a long put option is a short futures contract for purposes of the definition appropriate commodity derivative contract position in a commodity derivative contract of location basis contract in § 150.1.

LOCATION BASIS CONTRACT LIST OF SUBSTANTIALLY THE SAME COMMODITIES

Commodities considered substantially the Core referenced futures contract same Source(s) for specification of quality (regardless of location)

NYMEX Light Sweet Crude Oil futures contract 1. Light Louisiana Sweet (LLS) Crude Oil ...... NYMEX Argus LLS vs. WTI (Argus) Trade (CL) Month futures contract (E5). NYMEX LLS (Argus) vs. WTI Financial futures contract (WJ). ICE Futures Europe Crude Diff—Argus LLS vs WTI 1st Line Swap futures contract (ARK). ICE Futures Europe Crude Diff—Argus LLS vs WTI Trade Month Swap futures contract (ARL). NYMEX New York Harbor ULSD Heating Oil fu- 1. Chicago ULSD ...... NYMEX Chicago ULSD (Platts) vs. NY Harbor tures contract (HO) ULSD Heating Oil futures contract (5C). 2. Gulf Coast ULSD ...... NYMEX Group Three ULSD (Platts) vs. NY Harbor ULSD Heating Oil futures contract (A6). NYMEX Gulf Coast ULSD (Argus) Up-Down futures contract (US). NYMEX Gulf Coast ULSD (Argus) Up-Down BALMO futures contract (GUD). NYMEX Gulf Coast ULSD (Platts) Up-Down BALMO futures contract (1L). NYMEX Gulf Coast ULSD (Platts) Up-Down Spread futures contract (LT).

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LOCATION BASIS CONTRACT LIST OF SUBSTANTIALLY THE SAME COMMODITIES—Continued

Commodities considered substantially the Core referenced futures contract same Source(s) for specification of quality (regardless of location)

ICE Futures Europe Diesel Diff—Gulf Coast vs Heating Oil 1st Line Swap futures con- tract (GOH). CME Clearing Europe Gulf Coast ULSD( Platts) vs. New York Heating Oil (NYMEX) Spread Calendar swap (ELT). CME Clearing Europe New York Heating Oil (NYMEX) vs. European Gasoil (IC) Spread Calendar swap (EHA). 3. California Air Resources Board Spec ULSD NYMEX Los Angeles CARB Diesel (OPIS) vs. (CARB no. 2 oil). NY Harbor ULSD Heating Oil futures con- tract (KL). 4. Gas Oil Deliverable in Antwerp, Rotterdam, ICE Futures Europe Gasoil futures contract or Amsterdam Area. (G). ICE Futures Europe Heating Oil Arb—Heating Oil 1st Line vs Gasoil 1st Line Swap futures contract (HOT). ICE Futures Europe Heating Oil Arb—Heating Oil 1st Line vs Low Sulphur Gasoil 1st Line Swap futures contract (ULL). NYMEX NY Harbor ULSD Heating Oil vs. Gasoil futures contract (HA). NYMEX RBOB Gasoline futures contract (RB) 1. Chicago Unleaded 87 gasoline ...... NYMEX Chicago Unleaded Gasoline (Platts) vs. RBOB Gasoline futures contract (3C). NYMEX Group Three Unleaded Gasoline (Platts) vs. RBOB Gasoline futures contract (A8). 2. Gulf Coast Conventional Blendstock for NYMEX Gulf Coast CBOB Gasoline A1 Oxygenated Blending (CBOB) 87. (Platts) vs. RBOB Gasoline futures contract (CBA). NYMEX Gulf Coast Unl 87 (Argus) Up-Down futures contract (UZ). 3. Gulf Coast CBOB 87 (Summer Assess- NYMEX Gulf Coast CBOB Gasoline A2 ment). (Platts) vs. RBOB Gasoline futures contract (CRB). 4. Gulf Coast Unleaded 87 (Summer Assess- NYMEX Gulf Coast 87 Gasoline M2 (Platts) ment). vs. RBOB Gasoline futures contract (RVG). NYMEX Gulf Coast 87 Gasoline M2 (Platts) vs. RBOB Gasoline BALMO futures con- tract (GBB). NYMEX Gulf Coast 87 Gasoline M2 (Argus) vs. RBOB Gasoline BALMO futures con- tract (RBG). 5. Gulf Coast Unleaded 87 ...... NYMEX Gulf Coast Unl 87 (Platts) Up-Down BALMO futures contract (1K). NYMEX Gulf Coast Unl 87 Gasoline M1 (Platts) vs. RBOB Gasoline futures contract (RV). CME Clearing Europe Gulf Coast Unleaded 87 Gasoline M1 (Platts) vs. New York RBOB Gasoline (NYMEX) Spread Calendar swap (ERV). 6. Los Angeles California Reformulated NYMEX Los Angeles CARBOB Gasoline Blendstock for Oxygenate Blending (OPIS) vs. RBOB Gasoline futures contract (CARBOB) Regular. (JL). 7. Los Angeles California Reformulated NYMEX Los Angeles CARBOB Gasoline Blendstock for Oxygenate Blending (OPIS) vs. RBOB Gasoline futures contract (CARBOB) Premium. (JL). 8. Euro-BOB OXY NWE Barges...... NYMEX RBOB Gasoline vs. Euro-bob Oxy NWE Barges (Argus) (1000mt) futures con- tract (EXR). CME Clearing Europe New York RBOB Gaso- line (NYMEX) vs. European Gasoline Euro- bob Oxy Barges NWE (Argus) (1000mt) Spread Calendar swap (EEXR). 9. Euro-BOB OXY FOB Rotterdam ...... ICE Futures Europe Gasoline Diff—RBOB Gasoline 1st Line vs. Argus Euro-BOB OXY FOB Rotterdam Barge Swap futures con- tract (ROE).

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Appendix C to Part 150—Examples of purchase the gold from Bank B at a a substitute for a fixed-price sales transaction Bona Fide Hedging Positions for differential to the prevailing price of the to be taken at a later time in the physical Physical Commodities Commodity Exchange, Inc. (COMEX) Gold marketing channel either to Elevator A or to futures contract (i.e., an open-price purchase another commercial party. The position is A non-exhaustive list of examples meeting agreement is embedded in the terms of the economically appropriate to the reduction of the definition of bona fide hedging position loan). Jewelry Fabricator J intends to use the risk in the conduct and management of the under § 150.1 is presented below. With gold to make jewelry and reimburse Bank B commercial enterprise (Bank B) because the respect to a position that does not fall within for the loan using the proceeds from jewelry notional quantity of the short position in an example in this appendix, a person sales and either purchase gold from Bank B referenced contracts held by Bank B is not seeking to rely on a bona fide hedging by paying the market price for gold or return position exemption under § 150.3 may seek the equivalent amount of gold to Bank B by larger than the quantity of cash wheat guidance from the Division of Market purchasing gold at the market price. Because purchased by Bank B. Finally, the short Oversight. References to paragraphs in the Bank B has retained the price risk on gold, position in the CBOT Wheat futures contract examples below are to the definition of bona the bank is concerned about its potential loss reduces the price risk associated with owning fide hedging position in § 150.1. if the price of gold drops. The bank reduces cash wheat. 1. Portfolio Hedge Under Paragraph (3)(i) of the risk of a potential loss in the value of the 4. Utility Hedge of Anticipated Customer the Bona Fide Hedging Definition gold by establishing a ten contract short Requirements Under Paragraph (3)(iii)(B) of position in the COMEX Gold futures contract, the Bona Fide Hedging Position Definition Fact Pattern: It is currently January and which has a unit of trading of 100 ounces of Participant A owns seven million bushels of gold. The ten contract short position is Fact Pattern: A Natural Gas Utility A, corn located in its warehouses. Participant A equivalent to 1,000 ounces of gold. regulated by State Public Utility Commission, has entered into fixed-price forward sale Analysis: This position meets the general decides to hedge its purchases of natural gas contracts with several processors for a total requirements for bona fide hedging positions in order to reduce natural gas price risk on of five million bushels of corn that will be under paragraphs (2)(i)(A)–(C) and the behalf of its residential customers. State delivered by May of this year. Participant A requirements associated with owning a cash Public Utility Commission considers the has no fixed-price corn purchase contracts. commodity under paragraph (3)(i). The hedging practice to be prudent and allows Participant A’s gross long cash position is physical commodity that is being hedged is gains and losses from hedging to be passed equal to seven million bushels of corn. the underlying cash commodity for the on to Natural Gas Utility A’s residential Because Participant A has sold forward five COMEX Gold futures contract. Bank B’s short natural gas customers. Natural Gas Utility A million bushels of corn, its net cash position hedge of the gold represents a substitute for has about one million residential customers is equal to long two million bushels of corn. a transaction to be made in the physical To reduce price risk associated with who have average historical usage of about marketing channel (e.g., completion of the 71.5 mmBTUs of natural gas per year per potentially lower corn prices, Participant A open-price sale to Jewelry Fabricator J). chooses to establish a short position of 400 residence. The utility decides to hedge about Because the notional quantity of the short 70 percent of its residential customers’ contracts in the CBOT Corn futures contract, position in the gold futures contract is equal anticipated requirements for the following equivalent to two million bushels of corn, in to the amount of gold that Bank B owns, the year, equivalent to a 5,000 contract long the same crop year as the inventory. hedge is economically appropriate to the Analysis: The short position in a contract reduction of risk. Finally, the short position position in the NYMEX Henry Hub Natural month in the current crop year for the CBOT in the commodity derivative contract offsets Gas futures contract. To reduce the risk of Corn futures contract, equivalent to the the potential change in the value of the gold higher prices to residential customers, amount of inventory held, satisfies the owned by Bank B. Natural Gas Utility A establishes a 5,000 general requirements for a bona fide hedging contract long position in the NYMEX Henry 3. Repurchase Agreements and Hedge of position under paragraphs (2)(i)(A)–(C) and Hub Natural Gas futures contract. Since the the provisions associated with owning a Inventory Under Paragraph (3)(i) of the Bona Fide Hedging Position Definition utility is only hedging 70 percent of commodity under paragraph (3)(i).1 Because historical usage, Natural Gas Utility A is the firm’s net cash position is two million Fact Pattern: Elevator A purchased 500,000 highly certain that realized demand will bushels of unsold corn, the firm is exposed bushels of wheat in April and reduced its exceed its hedged anticipated residential to price risk. Participant A’s hedge of the two price risk by establishing a short position of customer requirements. million bushels represents a substitute for a 100 contracts in the CBOT Wheat futures Analysis: Natural Gas Utility A’s position fixed-price forward sale at a later time in the contract, equivalent to 500,000 bushels of physical marketing channel. The position is wheat. Because the price of wheat rose meets the general requirements for a bona economically appropriate to the reduction of steadily since April, Elevator A had to make fide hedging position under paragraphs price risk because the short position in a substantial maintenance margin payments. (2)(i)(A)–(C) and the provisions for hedges of referenced contract does not exceed the To alleviate its cash flow concern about unfilled anticipated requirements by a utility quantity equivalent risk exposure (on a net meeting further margin calls, Elevator A under paragraph (3)(iii)(B). The physical basis) in the cash commodity in the current decides to enter into a repurchase agreement commodity that is being hedged involves a crop year. Last, the hedge arises from a with Bank B and offset its short position in commodity underlying the NYMEX Henry potential change in the value of corn owned the wheat futures contract. The repurchase Hub Natural Gas futures contract. The long by Participant A. agreement involves two separate contracts: a position in the commodity derivative 2. Lending a Commodity and Hedge of Price fixed-price sale from Elevator A to Bank B at contract represents a substitute for Risk Under Paragraph (3)(i) of the Bona Fide today’s spot price; and an open-price transactions to be taken at a later time in the Hedging Position Definition purchase agreement that will allow Elevator physical marketing channel. The position is A to repurchase the wheat from Bank B at the Fact Pattern: Bank B owns 1,000 ounces of economically appropriate to the reduction of prevailing spot price three months from now. price risk because the price of natural gas gold that it lends to Jewelry Fabricator J at Because Bank B obtains title to the wheat LIBOR plus a differential. Under the terms of may increase. The commodity derivative under the fixed-price purchase agreement, it contract position offsets the price risk of the loan, Jewelry Fabricator J may later is exposed to price risk should the price of natural gas that the utility anticipates wheat drop. Bank B establishes a short purchasing on behalf of its residential 1 Participant A could also choose to hedge on a position of 100 contracts in the CBOT Wheat gross basis. In that event, Participant A could futures contract, equivalent to 500,000 customers. As provided under paragraph establish a short position in the March Chicago bushels of wheat. (3)(iii), the risk-reducing position qualifies as Board of Trade Corn futures contract equivalent to Analysis: Bank B’s position meets the a bona fide hedging position in the natural seven million bushels of corn to offset the price risk general requirements for a bona fide hedging gas physical-delivery referenced contract of its inventory and establish a long position in the during the spot month, provided that the May Chicago Board of Trade Corn futures contract position under paragraphs (2)(i)(A)–(C) and equivalent to five million bushels of corn to offset the provisions for owning the cash position does not exceed the unfilled the price risk of its fixed-price forward sale commodity under paragraph (3)(i). The short anticipated requirements for that month and contracts. position in referenced contracts by Bank B is for the next succeeding month.

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5. Processor Margins Hedge Using Unfilled anticipated requirements for soybeans for responsible for merchandising the cash Anticipated Requirements Under Paragraph that month and the next succeeding month positions that are being offset in commodity (3)(iii)(A) of the Bona Fide Hedging Position qualifies as a bona fide hedging position derivative contracts. The agent has a Definition and Anticipated Production Under during the last five days of trading in the contractual arrangement with the persons Paragraph (4)(i) of the Definition physical-delivery referenced contract. As who own the cotton being offset. provided under paragraph (4)(i), the risk Fact Pattern: Soybean Processor A has a 7. Sovereign Hedge of a Pass-Through Swap reducing short position in the soybean meal total throughput capacity of 200 million Under Paragraph (2)(ii) of the Bona Fide and oil futures contract do not qualify as a bushels of soybeans per year (equivalent to Hedging Position Definition Opposite a bona fide hedging position in a physical- 40,000 CBOT soybean futures contracts). Deemed Bona Fide Hedge of Unsold delivery referenced contract during the last Soybean Processor A crushes soybeans into Anticipated Production Under Paragraph 4(i) five days of trading in the event the Soybean products (soybean oil and soybean meal). It Processor A does not have unsold products Fact Pattern: A Sovereign induces a farmer currently has 40 million bushels of soybeans in inventory. to sell his anticipated production of 100,000 in storage and has offset that risk through The combination of the long and short bushels of corn forward to User A at a fixed fixed-price forward sales of the amount of positions in soybean, soybean meal, and price for delivery during the expected products expected to be produced from soybean oil futures contracts are harvest, by, in effect, granting that farmer a crushing 40 million bushels of soybeans, thus economically appropriate to the reduction of cash-settled call option at no cost. In return locking in its processor margin on one risk. However, unlike in this example, an for the farmer entering into the fixed-price million metric tons of soybeans. Because it unpaired position (e.g., only a long position forward sale at the prevailing market price, has consistently operated its plants at full in a commodity derivative contract) that is the Sovereign agrees to pay the farmer the capacity over the last three years, it not offset by either a cash market position difference between the market price at the anticipates purchasing another 160 million (e.g., a fixed-price sales contract) or time of harvest and the price of the fixed- bushels of soybeans to be delivered to its derivative position (e.g., a short position in price forward, in the event that the market storage facility over the next year. It has not a commodity derivative contract) would not price at the time of harvest is above the price sold the 160 million bushels of anticipated represent an economically appropriate of the forward. The fixed-price forward sale production of crushed products forward. reduction of risk. This is because the of 100,000 bushels of corn offsets the farmer’s Processor A faces the risk that the difference commercial enterprise’s crush spread risk is price risk associated with his anticipated in price relationships between soybeans and relatively low in comparison to the price risk agricultural production. The call option the crushed products (i.e., the crush spread) from taking an outright long position in the provides the farmer with upside price could change adversely, resulting in reduced futures contract in the underlying commodity participation. The Sovereign faces anticipated processing margins. To hedge its or an outright short position in the futures commodity price risk from the option it processing margins and lock in the crush contracts in the products and by-products of granted at no cost to the farmer. To reduce spread, Processor A establishes a long processing. The price fluctuations of the that risk, the Sovereign establishes a long position of 32,000 contracts in the CBOT crush spread, that is, the risk faced by the position of 20 call options on the Chicago Soybean futures contract (equivalent to 160 commercial enterprise, would not be Board of Trade (CBOT) Corn futures contract, million bushels of soybeans) and expected to be substantially related to the equivalent to 100,000 bushels of corn. corresponding short positions in CBOT price fluctuations of either an outright long Analysis: The farmer was induced by a Soybean Meal and Soybean Oil futures or outright short futures position. long call option granted at no cost, in return contracts, such that the total notional for the farmer entering into a fixed-price quantity of soybean meal and soybean meal 6. Agent Hedge Under Paragraph (3)(iv) of the forward sale at the prevailing market futures contracts are equivalent to the Bona Fide Hedging Position Definition price.The risk profile of the combination of expected production from crushing 160 Fact Pattern: Cotton Merchant A is in the the forward sale and the long call is million bushels of soybeans into soybean business of merchandising (selling) cash approximately equivalent to the risk profile meal and soybean oil. cotton. Cotton Merchant A does not own any of a synthetic long put.2 A synthetic long put Analysis: These positions meet the general cash commodity, but has purchased the right offsets the downside price risk of anticipated requirements for bona fide hedging positions to redeem a producer’s cotton held as production. Under these circumstances of a under paragraphs (2)(i)(A)–(C) and the collateral by USDA (that is, ‘‘cotton Sovereign granting a call option to a farmer provisions for hedges of unfilled anticipated equities’’) and, thereby, Cotton Merchant A at no cost, the Commission deems the requirements under paragraph (3)(iii)(A) and has incurred price risk. A producer of cotton synthetic position of the farmer as satisfying unsold anticipated production under may borrow from the USDA’s Commodity the general requirements for a bona fide paragraph (4)(i). The physical commodities Credit Corporation, posting their cotton as hedging position under paragraphs (2)(i)(A)– being hedged are commodities underlying collateral on the loan. USDA permits the (C) and meeting the requirements for the CBOT Soybean, Soybean Meal, and producer to assign the right to redeem cotton anticipated agricultural production under Soybean Oil futures contracts. Such positions held as collateral. Once Cotton Merchant A paragraph (4)(i), for purposes of the are a substitute for purchases and sales to be purchases from a producer the right to Sovereign’s pass-through swap offset under made at a later time in the physical redeem cotton from USDA, Cotton Merchant paragraph (2)(ii). The agreement between the marketing channel and are economically A, in effect, is responsible for merchandising Sovereign and the farmer involves the appropriate to the reduction of risk. The of the cash cotton held as collateral by production of a commodity underlying the positions in referenced contracts offset the USDA. For the volumes of cotton it is CBOT Corn futures contract. Also under potential change in the value of soybeans that authorized to redeem from USDA, Cotton these circumstances, the Commission deems the processor anticipates purchasing and the Merchant A enters into economically the synthetic long put as a substitute for potential change in the value of products and appropriate short positions in cotton transactions that the farmer has made in the by-products the processor anticipates commodity derivative contracts that offset physical marketing channel, because a long producing and selling. The size of the the price risks of the cash commodities. put would reduce the price risk associated permissible long hedge position in the Analysis: The positions meet the with the farmer’s anticipated agricultural soybean futures contract must be reduced by requirements of paragraphs (2)(1)(A)–(C) for production. any inventories and fixed-price purchases hedges of a physical commodity and The Sovereign is the counterparty to the because they would reduce the processor’s paragraph (3)(iv) for hedges by an agent. The farmer, who under these circumstances the unfilled requirements. Similarly, the size of positions represent a substitute for Commission deems to be a bona fide hedger the permissible short hedge positions in transactions to be made in the physical for purposes of the Sovereign’s pass-through soybean meal and soybean oil futures marketing channel, are economically swap offset. That is, the Commission contracts must be reduced by any fixed-price appropriate to the reduction of risks arising considers the Sovereign’s long call position sales because they would reduce the from cotton owned by the agent’s contractual to be a pass-through swap meeting the processor’s unsold anticipated production. counterparties, and arise from the potential As provided under paragraph (3)(iii)(A), the change in the value of such cotton. The agent 2 Put-call parity describes the mathematical risk reducing long position in the soybean does not own and has not contracted to relationship between price of a put and call with futures contract that is not in excess of the purchase such cotton at a fixed price, but is identical strike prices and expiry.

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requirements of paragraph (2)(ii)(B). As contracts. As provided under paragraph (4), Analysis: For the swap dealer, because the provided under paragraph (2)(ii)(A), the the risk-reducing position does not qualify as SPV enters the cash-settled swap as a bona Sovereign’s risk-reducing position in the a bona fide hedging position in the crude oil fide hedger under paragraph (4)(iii) (i.e., a CBOT Corn option would qualify as a pass- physical-delivery referenced contract during pass-through swap counterparty), the offset through swap offset as a bona fide hedging the spot month. of the risk of the swap in a futures contract position, or, alternatively, if the pass-through 9. Anticipated Royalties Hedge Under by Swap Dealer C qualifies as a bona fide swap is not a referenced contract, then the Paragraph (4)(iii) of the Bona Fide Hedging hedging position (i.e., a pass-through swap pass-through swap offset may qualify as a Position Definition and Pass-Through Swaps offset) under paragraph (2)(ii)(A). Since the cross-commodity hedge under paragraph (5), Hedge Under Paragraph (2)(ii) of the swap was executed opposite a pass-through provided the fluctuations in value of the Definition swap counterparty and was offset, the swap pass-through swap offset are substantially itself also qualifies as a bona fide hedging a. Fact Pattern: In order to develop an oil related to the fluctuations in value of the position (i.e., a pass-through swap) under pass-through swap. Such a pass-through field, Company A approaches Bank B for financing. To facilitate the loan, Bank B first paragraph (2)(ii)(B). If the cash-settled swap swap offset will not qualify as a bona fide is not a referenced contract, then the pass- hedging position in a physical-delivery establishes an independent legal entity commonly known as a special purpose through swap offset may qualify as a cross- futures contract during the last five days of commodity hedge under paragraph (5), trading under paragraphs (2)(iii)(B) or (5); vehicle (SPV). Bank B then provides a loan to the SPV. The SPV is obligated to repay provided the fluctuations in value of the however, since the CBOT Corn option will pass-through swap offset are substantially exercise into a physical-delivery CBOT Corn principal and interest to the Bank based on a fixed price for crude oil. The SPV in turn related to the fluctuations in value of the futures contract prior to the last five days of pass-through swap. trading in that physical-delivery futures makes a production loan to Company A. The contract, the Sovereign may continue to hold terms of the production loan require 10. Anticipated Royalties Hedge Under its option position as a bona fide hedging Company A to provide the SPV with Paragraph (4)(iii) of the Bona Fide Hedging position through option expiry. volumetric production payments (VPPs) Position Definition and Cross-Commodity based on a specified share of the production Hedge Under Paragraph (5) of the Definition 8. Hedge of Offsetting Unfixed Price Sales to be sold at the prevailing price of crude oil Fact Pattern: An eligible contract and Purchases Under Paragraph (4)(ii) of the (i.e., the index price) as oil is produced. Bona Fide Hedging Position Definition participant (ECP) owns royalty interests in a Because the price of crude oil may fall, the portfolio of oil wells. Royalties are paid at the Fact Pattern: Currently it is October and SPV reduces that risk by entering into a prevailing (floating) market price for the crude oil swap with Swap Dealer C. The Oil Merchandiser A has entered into cash commodities produced and sold at major swap requires the SPV to pay Swap Dealer forward contracts to purchase 600,000 of trading hubs, less transportation and crude oil at a floating price that references C the floating price of crude oil (i.e., the gathering charges. The large portfolio and the January contract month (in the next index price) and for Swap Dealer C to pay a well-established production history for most calendar year) for the ICE Futures Brent fixed price to the SPV. The notional quantity of the oil wells provide a highly certain Crude futures contract and to sell 600,000 for the swap is equal to the expected production stream for the next 24 months. barrels of crude oil at a price that references production underlying the VPPs to the SPV. The ECP also determined that changes in the the February contract month (in the next The SPV will receive a floating price at index cash market prices of 50 percent of the oil calendar year) for the NYMEX Light Sweet on the VPP and will pay a floating price at production underlying the portfolio of Crude Oil futures contract. Oil Merchandiser index on the swap, which will offset. The royalty interests historically have been A is concerned about an adverse change in SPV will receive a fixed price payment on closely correlated with changes in the the price spread between the January ICE the swap and repay the loan’s principal and Futures Brent Crude futures contract and the interest to Bank B. The SPV is highly certain calendar month average of daily settlement February NYMEX Light Sweet Crude Oil that the VPP production volume will occur, prices of the nearby NYMEX Light Sweet futures contract. To reduce that risk, Oil since the SPV’s engineer has reviewed the Crude Oil futures contract. The ECP decided Merchandiser A establishes a long position of forecasted production from Company A and to hedge some of the royalty price risk by 600 contracts in the January ICE Futures required the VPP volume to be set with a entering into a cash-settled swap with a term Brent Crude futures contract, price risk cushion (i.e., a hair-cut) below the forecasted of 24 months. Under terms of the swap, the equivalent to buying 600,000 barrels of oil, production. ECP will receive a fixed payment and make and a short position of 600 contracts in the Analysis: For the SPV, the swap between monthly payments based on the calendar February NYMEX Light Sweet Crude Oil Swap Dealer C and the SPV meets the general month average of daily settlement prices of futures contract, price risk equivalent to requirements for a bona fide hedging position the nearby NYMEX Light Sweet Crude Oil selling 600,000 barrels of oil. under paragraphs (2)(i)(A)–(C) and the futures contract and notional amounts equal Analysis: Oil Merchandiser A’s positions requirements for anticipated royalties under to 50 percent of the expected production meet the general requirements for bona fide paragraph (4)(iii). The SPV will receive volume of oil underlying the royalties. hedging positions under paragraphs (2)(i)(A)– payments under the VPP royalty contract Analysis: This position meets the (C) and the provisions for offsetting sales and based on the unfixed price sale of anticipated requirements of paragraphs (2)(i)(A)–(C) for purchases in referenced contracts under production of the physical commodity hedges of a physical commodity, paragraph paragraph (4)(ii). The physical commodity underlying the royalty contract, i.e., crude (4)(iii) for hedges of anticipated royalties, and that is being hedged involves a commodity oil. The swap represents a substitute for the paragraph (5) for cross-commodity hedges. underlying the NYMEX Light Sweet Crude price of sales transactions to be made in the The long position in the commodity Oil futures contract. The long and short physical marketing channel. The SPV’s swap derivative contract represents a substitute for positions in commodity derivative contracts position qualifies as a hedge because it is transactions to be taken at a later time in the represent substitutes for transactions to be economically appropriate to the reduction of physical marketing channel. The position is taken at a later time in the physical price risk. The swap reduces the price risk economically appropriate to the reduction of marketing channel. The positions are associated with a change in value of a royalty price risk because the price of oil may economically appropriate to the reduction of asset. The fluctuations in value of the SPV’s decrease. The commodity derivative contract risk because the price spread between the ICE anticipated royalties are substantially related position offsets the price risk of royalty Futures Brent Crude futures contract and the to the fluctuations in value of the crude oil payments, based on oil production, that the NYMEX Light Sweet Crude Oil futures swap with Swap Dealer C. ECP anticipates receiving. The ECP is contract could move adversely to Oil b. Continuation of Fact Pattern: Swap exposed to price risk arising from the Merchandiser A’s interests in the two cash Dealer C offsets the price risk associated with anticipated production volume of oil forward contracts, that is, the price of the ICE the swap to the SPV by establishing a short attributable to her royalty interests. The Futures Brent Crude futures contract could position in cash-settled crude oil futures physical commodity underlying the royalty increase relative to the price of the NYMEX contracts. The notional quantity of the short portfolio that is being hedged involves a Light Sweet Crude Oil futures contract. The position in futures contracts held by Swap commodity with fluctuations in value that positions in commodity derivative contracts Dealer C exactly matches the notional are substantially related to the fluctuations in offset the price risk in the cash forward quantity of the swap with the SPV. value of the swap.

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11. Hedges of Services Under Paragraph Because the City is responsible for paying the strategies, Airline A decides to cross hedge (4)(iv) of the Bona Fide Hedging Position cash price for the natural gas used under the its anticipated jet fuel requirements in ultra- Definition services contract, the long hedge is a low sulfur diesel (ULSD) commodity a. Fact Pattern: Company A enters into a substitute for transactions to be taken at a derivative contracts. Airline A determined risk service agreement to drill an oil well later time in the physical marketing channel. that price fluctuations in its average cost for jet fuel were substantially related to the price with Company B. The risk service agreement The position is economically appropriate to fluctuations of the calendar month average of provides that a portion of the revenue the reduction of price risk because the total the first nearby physical-delivery NYMEX receipts to Company A depends on the value notional quantity of the long position in a New York Harbor ULSD Heating Oil (HO) of the light sweet crude oil produced. commodity derivative contract equals the futures contract and determined an Company A is exposed to the risk that the expected volume of natural gas to be used appropriate hedge ratio, based on a price of oil may fall, resulting in lower over the life of the contract. The position in regression analysis, of the HO futures anticipated revenues from the risk service the commodity derivative contract reduces contract to the quantity equivalent amount of agreement. To reduce that risk, Company A the price risk associated with an increase in its anticipated requirements. Airline A establishes a short position in the New York anticipated costs that the City may incur decided that it would use the HO futures Mercantile Exchange (NYMEX) Light Sweet under the services contract in the event that contract to cross hedge part of its jet fuel Crude Oil futures contract, in a notional the price of natural gas increases. As price risk. In addition, Airline A decided to amount equivalent to the firm’s anticipated provided under paragraph (4), the risk protect against jet fuel price increases by share of the expected quantity of oil to be reducing position will not qualify as a bona cross hedging another part of its anticipated produced. Company A is highly certain of its fide hedge during the spot month of the jet fuel requirements with a long position in anticipated share of the expected quantity of physical-delivery futures contract. cash-settled calls in the NYMEX Heating Oil oil to be produced. 12. Cross-Commodity Hedge Under Average Price Option (AT) contract. The AT Analysis: Company A’s hedge of a portion Paragraph (5) of the Bona Fide Hedging call option is settled based on the price of the of its revenue stream from the risk service Position Definition and Inventory Hedge HO futures contract. The sum of the notional agreement meets the general requirements for Under Paragraph (3)(i) of the Definition amounts of the long position in AT call bona fide hedging positions under Fact Pattern: Copper Wire Fabricator A is options and the long position in the HO paragraphs (2)(i)(A)–(C) and the provisions concerned about possible reductions in the futures contract will not exceed the quantity for services under paragraph (4)(iv). The price of copper. Currently it is November and equivalent of 80 percent of Airline A’s contract for services involves the production it owns inventory of 100 million pounds of anticipated requirements for jet fuel. of a commodity underlying the NYMEX Light copper and 50 million pounds of finished Analysis: The positions meet the Sweet Crude Oil futures contract. A short copper wire. Copper Wire Fabricator A requirements of paragraphs (2)(i)(A)–(C) for position in the NYMEX Light Sweet Crude expects to sell 150 million pounds of hedges of a physical commodity, paragraph Oil futures contract is a substitute for finished copper wire in February of the (3)(iii)(A) for unfilled anticipated transactions to be taken at a later time in the following year. To reduce its price risk, requirements and paragraph (5) for cross- physical marketing channel, with the value Copper Wire Fabricator A establishes a short commodity hedges. The positions represent a of the revenue receipts to Company A position of 6,000 contracts in the February substitute for transactions to be made in the dependent on the price of the oil sales in the COMEX Copper futures contract, equivalent physical marketing channel, are physical marketing channel. The short to selling 150 million pounds of copper. The economically appropriate to the reduction of position in the futures contract held by fluctuations in value of copper wire are risks arising from anticipated requirements Company A is economically appropriate to expected to be substantially related to for jet fuel, and arise from the potential the reduction of risk, because the total fluctuations in value of copper. change in the value of such jet fuel. The notional quantity underlying the short Analysis: The Copper Wire Fabricator A’s aggregation notional amount of the airline’s position in the futures contract held by position meets the general requirements for positions in the call option and the futures Company A is equivalent to its share of the a bona fide hedging position under contract does not exceed the quantity expected quantity of future production under paragraphs (2)(i)(A)–(C) and the provisions equivalent of anticipated requirements for jet the risk service agreement. Because the price for owning a commodity under paragraph fuel. The value fluctuations in jet fuel are of oil may fall, the short position in the (3)(i) and for a cross-hedge of the finished substantially related to the value fluctuations futures contract reduces price risk from a copper wire under paragraph (5). The short in the HO futures contract. potential reduction in the payments to position in a referenced contract represents a Airline A may hold its long position in the Company A under the service contract with substitute for transactions to be taken at a cash-settled AT call option contract as a cross Company B. Under paragraph (4)(iv), the later time in the physical marketing channel. hedge against jet fuel price risk without risk-reducing position will not qualify as a The short position is economically having to exit the contract during the spot bona fide hedging position during the spot appropriate to the reduction of price risk in month. month of the physical-delivery oil futures the conduct and management of the 14. Position Aggregation Under § 150.4 and contract. commercial enterprise because the price of Inventory Hedge Under Paragraph (3)(i) of b. Fact Pattern: A City contracts with Firm copper could drop. The short position in the the Bona Fide Hedging Position Definition A to provide waste management services. referenced contract offsets the risk of a The contract requires that the trucks used to possible reduction in the value of the Fact Pattern: Company A owns 100 percent transport the solid waste use natural gas as inventory that it owns. Since the finished of Company B. Company B buys and sells a a power source. According to the contract, copper wire is a product of copper that is not variety of agricultural products, including the City will pay for the cost of the natural deliverable on the commodity derivative wheat. Company B currently owns five gas used to transport the solid waste by Firm contract, 2,000 contracts of the short position million bushels of wheat. To reduce some of A. In the event that natural gas prices rise, are a cross-commodity hedge of the finished its price risk, Company B establishes a short the City’s waste transport expenses will copper wire and 4,000 contracts of the short position of 600 contracts in the CBOT Wheat increase. To mitigate this risk, the City position are a hedge of the copper inventory. futures contract, equivalent to three million establishes a long position in the NYMEX bushels of wheat. After communicating with Henry Hub Natural Gas futures contract in an 13. Cross-Commodity Hedge Under Company B, Company A establishes an amount equivalent to the expected volume of Paragraph (5) of the Bona Fide Hedging additional short position of 400 CBOT Wheat natural gas to be used over the life of the Position Definition and Anticipated futures contracts, equivalent to two million service contract. Requirements Hedge Under Paragraph bushels of wheat. Analysis: This position meets the general (3)(iii)(A) of the Definition Analysis: The aggregate short position in requirements for bona fide hedging positions Fact Pattern: Airline A anticipates using a the wheat referenced contract held by under paragraphs (2)(i)(A)–(C) and the predictable volume of jet fuel every month Company A and Company B meets the provisions for services under paragraph based on scheduled flights and decides to general requirements for a bona fide hedging (4)(iv). The contract for services involves the hedge 80 percent of that volume for each of position under paragraphs (2)(i)(A)–(C) and use of a commodity underlying the NYMEX the next 12 months. After a review of various the provisions for owning a cash commodity Henry Hub Natural Gas futures contract. commodity derivative contract hedging under paragraph (3)(i). Because Company A

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owns more than 10 percent of Company B, Company B represents a substitute for five million bushels of wheat, does not Company A and B are aggregated together as transactions to be taken at a later time in the exceed the five million bushels of wheat that one person under § 150.4. Entities required to physical marketing channel. The aggregate is owned by Company B. The price risk aggregate accounts or positions under § 150.4 short position in the futures contract held by exposure for Company A and Company B are the same person for the purpose of Company A and Company B is economically results from a potential change in the value determining whether a person is eligible for appropriate to the reduction of price risk of that wheat. a bona fide hedging position exemption because the aggregate short position in the under § 150.3. The aggregate short position in CBOT Wheat futures contract held by Appendix D to Part 150—Initial the futures contract held by Company A and Company A and Company B, equivalent to Position Limit Levels

Single month Contract Spot-month and all months

Legacy Agricultural: Chicago Board of Trade Corn (C) ...... 600 62,400 Chicago Board of Trade Oats (O) ...... 600 5,000 Chicago Board of Trade Soybeans (S) ...... 600 31,900 Chicago Board of Trade Soybean Meal (SM) ...... 720 16,900 Chicago Board of Trade Soybean Oil (SO) ...... 540 16,700 Chicago Board of Trade Wheat (W) ...... 600 32,800 ICE Futures U.S. Cotton No. 2 (CT) ...... 1,600 9,400 Chicago Board of Trade KC HRW Wheat (KW) ...... 600 12,000 Minneapolis Grain Exchange Hard Red Spring Wheat (MWE) ...... 1,000 12,000 Other Agricultural: Chicago Board of Trade Rough Rice (RR) ...... 600 5,000 Chicago Mercantile Exchange Live Cattle (LC) ...... 450 12,200 ICE Futures U.S. Cocoa (CC) ...... 5,500 10,200 ICE Futures U.S. Coffee C (KC) ...... 2,400 8,800 ICE Futures U.S. FCOJ–A (OJ) ...... 2,800 5,000 ICE Futures U.S. Sugar No. 11 (SB) ...... 23,300 38,400 ICE Futures U.S. Sugar No. 16 (SF) ...... 7,000 7,000 Energy: New York Mercantile Exchange Henry Hub Natural Gas (NG) ...... 2,000 200,900 New York Mercantile Exchange Light Sweet Crude Oil (CL) ...... 10,400 148,800 New York Mercantile Exchange NY Harbor ULSD (HO) ...... 2,900 21,300 New York Mercantile Exchange RBOB Gasoline (RB) ...... 6,800 15,300 Metal: Commodity Exchange, Inc. Copper (HG) ...... 1,000 7,800 Commodity Exchange, Inc. Gold (GC) ...... 6,000 19,500 Commodity Exchange, Inc. Silver (SI) ...... 3,000 7,600 New York Mercantile Exchange Palladium (PA) ...... 100 5,000 New York Mercantile Exchange Platinum (PL) ...... 500 5,000

Appendix E To Part 150—Guidance Guidance for Swap Execution Facilities PART 151—[REMOVED AND Regarding Exchange-Set Speculative (1) Until such time that a swap execution RESERVED] Position Limits facility that is a trading facility has access to ■ Guidance for Designated Contract Markets sufficient swap position information, the 29. Under the authority of section swap execution facility need not demonstrate 8a(5) of the Commodity Exchange Act, (1) Until such time that a boards of trade compliance with Core Principle 6(A) or (B). 7 U.S.C. 12a(5), remove and reserve part has access to sufficient swap position A swap execution facility should have access information, a board of trade need not 151. to sufficient swap position information if, for demonstrate compliance with Core Principle Issued in Washington, DC, on December 5, example: (1) It had access to daily 5 with respect to swaps. A board of trade 2016, by the Commission. information about its market participants’ should have access to sufficient swap Christopher J. Kirkpatrick, position information if, for example: (1) It open swap positions; or (2) if it knows that had access to daily information about its its market participants regularly engage in Secretary of the Commission. large volumes of speculative trading activity, market participants’ open swap positions; or Note: The following appendices will not including through knowledge gained in (2) it knows that its market participants appear in the Code of Federal Regulations. regularly engage in large volumes of surveillance of heavy trading activity, that would cause reasonable surveillance speculative trading activity, including Appendices to Position Limits for through knowledge gained in surveillance of personnel at an exchange to inquire further heavy trading activity, that would cause about a market participant’s intentions or Derivatives—Commission Voting reasonable surveillance personnel at an total open swap positions. Summary, Chairman’s Statement, and exchange to inquire further about a market (2) When a swap execution facility has Commissioners’ Statements participant’s intentions or total open swap access to sufficient swap position Appendix 1—Commission Voting positions. information, this guidance would no longer Summary (2) When a board of trade has access to be applicable. At such time, a swap sufficient swap position information, this execution facility is required to file rules On this matter, Chairman Massad and guidance would no longer be applicable. At with the Commission to implement the Commissioners Bowen and Giancarlo voted such time, a board of trade is required to file relevant position limits and demonstrate in the affirmative. No Commissioner voted in rules with the Commission to implement the compliance with Core Principle 6(A) and (B). the negative. relevant position limits and demonstrate compliance with Core Principle 5(A) and (B).

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Appendix 2—Statement of Chairman including the recommendations of the of position limits as directed by Congress in Timothy G. Massad exchanges and other data to which the 2010. CFTC staff has worked laboriously with exchanges do not have access. For some market users and the exchanges we regulate Today, the Commission is issuing a revised contracts, the proposed limits for the spot to craft a rule that will protect investors from position limits proposal. We are also month are higher than the exchange-set disruptive practices and manipulation, while finalizing a separate but related rule on the limits today. There have been, for example, simultaneously allowing our markets to serve aggregation of positions. I am pleased that substantial increases in estimates of their critical price-discovery function. I today’s actions are unanimous. deliverable supply in the energy sector. In commend staff on their hard work and thank Congress directed us to implement a other cases, we have accepted the hundreds of commenters for their position limits rule to limit excessive recommendations of the exchanges to set insightful feedback. I would also like to speculation. While speculators play a federal limits that are actually lower than 25 thank Chairman Massad and Commissioner necessary and important role in our markets, percent of deliverable supply, because we Giancarlo on their commitment to this position limits can prevent the type of determined that the requested lower limit important rule and look forward to its excessive speculation by a few large was consistent with the overall policy goals finalization in the near future. participants that leads to corners, squeezes and would not compromise market liquidity. and other activity that can distort markets We have proposed further adjustments to Appendix 4—Statement of and be unfair to other participants. Position the bona fide hedging position definition, to Commissioner J. Christopher Giancarlo limits can also promote convergence without eliminate certain requirements that we have Since taking my seat on the Commission, compromising market liquidity. There are decided are unnecessary, and to address I have traveled to well over a dozen states many issues to consider in this rule, but other concerns raised by market participants. where I met with many family farmers and position limits are not a new or untested Another substantial difference from the toured numerous energy utilities and concept. They have been in place in our 2013 text is our proposal first made this manufacturing facilities. I have heard the markets for decades, either through federal summer to allow the exchanges to grant non- concerns of agriculture and energy producers limits or exchange-set limits, and they have enumerated hedge exemptions. This process and consumers about market speculation and worked well. must be subject to our oversight as a matter the role of position limits. There are two reasons why I am supporting of law and as a matter of policy, given the I have always been open to supporting a issuing a reproposal. First, we have made inherent tension in the roles of the exchanges well-conceived and practical position limits many changes to the 2013 proposal we as market overseers and beneficiaries of rule that restricts excessive speculation. That inherited that are reflected in today’s higher trading volumes. is so long as it protects the ability of reproposal. Certain aspects have been The proposal we are issuing today provides America’s farmers, ranchers and processors previously proposed in separate pieces, and extensive analysis of the impact of the to hedge risks of agricultural commodities I believe the public would benefit from proposed spot and all months limits, which and the ability of America’s energy producers seeing the proposal in its entirety, to better I believe supports the view that the limits and distributors to control risks of energy understand how the various changes work should not compromise liquidity while production, storage and distribution. together. addressing excessive speculation. The That is why I believe it is so important to Second, the Commission is now in a time analysis shows few existing positions would carefully consider the impact of this very of transition. I do not want to adopt a final exceed the limits, and that is without complex rule on America’s almost nine rule today that the Commission would considering possible exemptions. thousand grain elevators,1 two million family choose not to implement or defend next year. I recognize there will still be those that are farms 2 and 147 million electric utility Our markets and the many end-users and critical of the proposal. Some will complain customers.3 That is why I support putting out consumers who rely on them are served best simply because of the length of the this rule as a proposal. by having reasonable and predictable proposal—even though most of that is not My concern regarding previous earlier regulation. Uncertainty and inconsistency rule text, but rather the summaries of the proposals has been that they would restrict from one year to the next are not helpful. extensive comments and analysis required by bona fide hedging activity or harm America’s Our staff has done a tremendous amount of law. Others may suggest broadening the bona agriculture and energy industries that have work to devise a position limits rule that fide hedge exemption so that it encompasses been sorely impacted by plummeting meets the requirements of the law and practically any activity with a business commodity prices and service provider balances the various concerns at stake. This purpose, which is not what Congress said in consolidation. I am simply not willing to work has spanned several years, involved the law. Still others will argue position limits support a poorly designed and unworkable review of literally thousands of pages of are not necessary. But while the Commission rule that ever after needs to be adjusted comments from participants, and included should consider all comments, it is important through a series of no-action letters and ad many meetings and public roundtables. to remember that the Commission has a hoc staff interpretations and advisories that Commissioners Bowen, Giancarlo, and I responsibility to implement a balanced rule had become too common at the CFTC in prior have also spent substantial time on this issue. that achieves the objectives Congress has years. We took office together in June 2014 and established. While some may view position limits as inherited a proposal that the Commission Finally, while the Commission works to the ‘‘eternal rule,’’ I disagree. The current had issued six months before. As I promised finalize this rule, we still have federal limits proposal is very detailed and highly then, we have been working hard to get the for nine agricultural commodities and complex. It is over 700 pages in length and rule right. In addition to discussing the issues exchange-set spot month limits for all the has over one thousand footnotes. In some extensively with staff, we have each had physical delivery contracts covered by this areas, concerns expressed by market many meetings with market participants and rule, which the Commission will continue to participants regarding the 2011 rule that was other members of the public. We have each enforce. struck down by the court and the 2013 traveled around the country and heard from I want to thank the staff again for their proposal have been well addressed. In other users of these markets. In particular, I have extensive work on this rule, particularly our staff in the Division of Market Oversight, the heard from many smaller, traditional users 1 U.S. Grain Storage Data, National Grain and about the importance of position limits. I Office of the Chief Economist and the Office Feed Association Web site (last visited Dec. 5, have also had the benefit of sponsoring the of the General Counsel. Their expertise and 2016), https://www.ngfa.org/news-policy-center/ Agricultural Advisory Committee, whose dedication on this matter is truly exemplary. resources/grain-industry-data/. members have provided important input on I also want to thank Commissioners Bowen 2 News Release, Family Farms are the Focus of these issues. and Giancarlo for their very constructive New Agriculture Census Data, U.S. Department of We have revised the proposed limits engagement on this issue. Agriculture, Mar. 17, 2015, http://www.usda.gov/ wps/portal/usda/usdamediafb?contentid=2015/03/ themselves in light of substantial work our Appendix 3—Statement of 0066.xml&printable=true. staff has done to make sure they are based Commissioner Sharon Y. Bowen 3 2015–2016 Annual Directory & Statistical on the latest and best information as to Report, American Public Power Association, at 26 estimated deliverable supply. We have With today’s repreposal, the Commission (2016), http://www.publicpower.org/files/PDFs/ considered a wide range of information, moves one step closer to the implementation USElectricUtilityIndustryStatistics.pdf.

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areas, they do not appear to have been as I feel comfortable that the proposal before I welcome commenters’ views on the well addressed. us provides the basis for the implementation proposal. I expect that with their added Notably, the proposal introduces a series of of a final position limits rule that I could insight we can finalize a position limits rule new estimates of deliverable supply that have support. I commend the staff responsible for in 2017 that is workable and does not undo not been previously presented to the public. this proposal for all their hard work in years of standard practice in these markets. It also incorporates concepts introduced in making the significant improvements that are the 2016 supplemental proposal. Given these before us. I also extend my gratitude to [FR Doc. 2016–29483 Filed 12–29–16; 8:45 am] new additions and the complexity of the Chairman Massad and Commissioner Bowen BILLING CODE 6351–01–P proposal, one more round of public comment for agreeing to put this proposal before the is appropriate. public for comment.

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