11596 Federal Register / Vol. 85, No. 39 / Thursday, February 27, 2020 / Proposed Rules

COMMODITY FUTURES TRADING All comments must be submitted in F. § 150.8—Severability COMMISSION English, or if not, be accompanied by an G. § 150.9—Process for Recognizing Non- English translation. Comments will be Enumerated Bona Fide Hedging 17 CFR Parts 1, 15, 17, 19, 40, 140, 150, posted as received to https:// Transactions or Positions With Respect and 151 to Federal Speculative Limits comments.cftc.gov. You should submit H. Part 19 and Related Provisions— RIN 3038–AD99 only information that you wish to make Reporting of Cash-Market Positions available publicly. If you wish the I. Removal of Part 151 Position Limits for Derivatives Commission to consider information III. Legal Matters that you believe is exempt from A. Introduction AGENCY: Futures Trading disclosure under the Freedom of B. Key Statutory Provisions Commission. Information Act (‘‘FOIA’’), a petition for C. Ambiguity of Section 4a With Respect ACTION: Proposed rule. to Necessity Finding confidential treatment of the exempt D. Resolution of Ambiguity SUMMARY: The Commodity Futures information may be submitted according E. Evaluation of Considerations Relied Trading Commission (‘‘Commission’’ or to the procedures established in § 145.9 Upon by the Commission in Previous 1 ‘‘CFTC’’) is proposing amendments to of the Commission’s regulations. Interpretation of Paragraph 4a(a)(2) regulations concerning speculative The Commission reserves the right, F. Necessity Finding but shall have no obligation, to review, G. Request for Comment position limits to conform to the Wall IV. Related Matters Street Transparency and Accountability pre-screen, filter, redact, refuse, or remove any or all submissions from A. Cost-Benefit Considerations Act of 2010 (‘‘Dodd-Frank Act’’) B. Paperwork Reduction Act amendments to the Commodity https://www.comments.cftc.gov that it C. Regulatory Flexibility Act Exchange Act (‘‘CEA’’ or ‘‘Act’’). Among may deem to be inappropriate for D. Antitrust Considerations publication, such as obscene language. other amendments, the Commission I. Background proposes new and amended federal spot All submissions that have been redacted month limits for 25 physical commodity or removed that contain comments on A. Introduction the merits of the rulemaking will be derivatives; amended single month and The Commission has established retained in the public comment file and all-months-combined limits for most of and enforced speculative position limits will be considered as required under the the agricultural contracts currently for futures and options on futures Administrative Procedure Act and other subject to federal limits; new and contracts on various agricultural applicable laws, and may be accessible amended definitions for use throughout as authorized by the CEA.2 under FOIA. the position limits regulations, The existing part 150 position limits including a revised definition of ‘‘bona FOR FURTHER INFORMATION CONTACT: regulations 3 include three components: fide hedging transactions or positions’’ Aaron Brodsky, Senior Special Counsel, (1) The level of the limits, which and a new definition of ‘‘economically (202) 418–5349, [email protected]; currently apply to nine agricultural equivalent swaps’’; amended rules Steven Benton, Industry Economist, commodity derivatives contracts and set governing exchange-set limit levels and (202) 418–5617, [email protected]; a maximum that restricts the number of grants of exemptions therefrom; a new Jeanette Curtis, Special Counsel, (202) speculative positions that a person may streamlined process for bona fide 418–5669, [email protected]; Steven hold in the spot month, individual hedging recognitions for purposes of Haidar, Special Counsel, (202) 418– month, and all-months-combined; 4 (2) federal limits; new enumerated hedges; 5611, [email protected]; Harold Hild, exemptions for positions that constitute and amendments to certain regulatory Policy Advisor, 202–418–5376, hhild@ bona fide hedges and for certain other provisions that would eliminate Form cftc.gov; or Lillian Cardona, Special types of transactions; 5 and (3) 204, enabling the Commission to Counsel, (202) 418–5012, lcardona@ regulations to determine which leverage cash-market reporting cftc.gov; Division of Market Oversight, accounts and positions a person must submitted directly to the exchanges. in each case at the Commodity Futures aggregate for the purpose of determining DATES: Comments must be received on Trading Commission, Three Lafayette compliance with the position limit or before April 29, 2020. Centre, 1155 21st Street NW, levels.6 The existing federal speculative Washington, DC 20581. ADDRESSES: You may submit comments, position limits function in parallel to identified by ‘‘Position Limits for SUPPLEMENTARY INFORMATION: exchange-set limits required by Derivatives’’ and RIN 3038–AD99, by Table of Contents any of the following methods: 2 7 U.S.C. 1 et seq. • CFTC Comments Portal: https:// I. Background 3 17 CFR part 150. Part 150 of the Commission’s A. Introduction regulations establishes federal position limits (that comments.cftc.gov. Select the ‘‘Submit B. Executive Summary is, position limits established by the Commission, Comments’’ link for this rulemaking and C. Summary of Proposed Amendments as opposed to exchange-set limits) on nine follow the instructions on the Public D. The Commission Preliminarily agricultural contracts. Agricultural contracts refers Comment Form. Construes CEA Section 4a(a) To Require to the list of commodities contained in the • definition of ‘‘commodity’’ in CEA section 1a; 7 Mail: Send to Christopher the Commission To Make a Necessity U.S.C. 1a. This list of agricultural contracts Kirkpatrick, Secretary of the Finding Before Establishing Position currently includes nine contracts: CBOT Corn (and Commission, Commodity Futures Limits for Physical Commodities Other Mini-Corn) (C), CBOT Oats (O), CBOT Trading Commission, Three Lafayette Than Excluded Commodities (and Mini-Soybeans) (S), CBOT Wheat (and Mini- Centre, 1155 21st Street NW, II. Proposed Rules Wheat) (W), CBOT Oil (SO), CBOT A. § 150.1—Definitions Soybean Meal (SM), MGEX Hard Red Spring Wheat Washington, DC 20581. (MWE), CBOT KC Hard Red Winter Wheat (KW), • B. § 150.2—Federal Limit Levels Hand Delivery/Courier: Follow the C. § 150.3—Exemptions From Federal and ICE Cotton No. 2 (CT). See 17 CFR 150.2. The position limits on these agricultural contracts are same instructions as for Mail, above. Position Limits Please submit your comments using referred to as ‘‘legacy’’ limits because these D. § 150.5—Exchange-Set Position Limits contracts have been subject to federal position only one of these methods. To avoid and Exemptions Therefrom limits for decades. possible delays with mail or in-person E. § 150.6—Scope 4 See 17 CFR 150.2. deliveries, submissions through the 5 See 17 CFR 150.3. CFTC Comments Portal are encouraged. 1 17 CFR 145.9. 6 See 17 CFR 150.4.

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designated contract market (‘‘DCM’’) exchanges 13 to recognize certain Commission proposes new regulations, Core Principle 5.7 Certain contracts are positions as bona fide hedges, and thus rather than finalizing the 2016 thus subject to both federal and DCM- exempt from position limits. Reproposal.16 set limits, whereas others are subject To date, the Commission has not First, the Commission preliminarily only to DCM-set limits and/or position issued any final rulemaking based on believes that any position limits regime accountability. the 2013 Proposal, 2016 Supplemental must take into account differences As part of the Dodd-Frank Act, Proposal, or 2016 Reproposal. The 2016 across commodity and contract types. Congress amended the CEA’s position Reproposal generally addressed The existing federal position limits limits provisions, which, since 1936, comments received in response to those regulations apply only to nine contracts, have authorized the Commission (and prior rulemakings. In a companion all of which are physically-settled its predecessor) to impose limits on proposed rulemaking, the CFTC also futures on agricultural commodities. speculative positions to prevent the proposed, and later adopted in 2016, Limits on these commodities have been amendments to rules governing in place for decades, as have the federal harms caused by excessive . aggregation of positions for purposes of program for exemptions from these As discussed below, the Commission compliance with federal position limits and the federal rules governing interprets these amendments as, among limits.14 These aggregation rules DCM-set limits on such commodities. other things, tasking the Commission currently apply only to the nine The existing framework is largely a with establishing such position limits as agricultural contracts subject to existing historical remnant of an approach that it finds are ‘‘necessary’’ for the purpose federal limits, and going forward would predates cash-settled futures contracts, of ‘‘diminishing, eliminating, or apply to the commodities that would be let alone swaps, institutional- preventing’’ ‘‘[e]xcessive speculation subject to federal limits under this interest in commodity indexes, and . . . causing sudden or unreasonable release. highly liquid energy markets. Congress fluctuations or unwarranted changes in After reconsidering the prior has tasked the Commission with: . . . price . . .’’ 8 The Commission also proposals, including reviewing the Establishing such limits as it finds are interprets these amendments as tasking comments responding thereto, the ‘‘necessary’’ for the purpose of the Commission with establishing Commission is withdrawing from preventing the burdens associated with position limits on any ‘‘economically further consideration the 2013 Proposal, excessive speculation causing sudden or equivalent’’ swaps.9 the 2016 Supplemental Proposal, and unreasonable fluctuations or The Commission previously issued the 2016 Reproposal.15 unwarranted changes in price; and proposed and final rules in 2011 to Instead, the Commission is now establishing limits on swaps that are implement the provisions of the Dodd- issuing a new proposal (‘‘2020 ‘‘economically equivalent’’ to certain Frank Act regarding position limits and Proposal’’). The 2020 Proposal is futures contracts. The Commission has the bona fide definition.10 A intended to (1) recognize differences preliminarily determined that an September 28, 2012 order of the U.S. across commodities and contracts, approach that is flexible enough to District Court for the District of including differences in commercial accommodate potential future, Columbia vacated the 2011 Final hedging and cash-market reporting unpredictable developments in Rulemaking, with the exception of the practices; (2) focus on derivatives commercial hedging practices would be rule’s amendments to 17 CFR 150.2.11 contracts that are critical to price well-suited for the current derivatives Subsequently, the Commission discovery and distribution of the markets by accommodating differences proposed position limits regulations in underlying commodity such that the in commodity types, contract 2013 (‘‘2013 Proposal’’), June of 2016 burden of excessive speculation in the specifications, hedging practices, cash- (‘‘2016 Supplemental Proposal’’), and derivatives contract may have a market trading practices, organizational again in December of 2016 (‘‘2016 particularly acute impact on interstate structures of hedging participants, and Reproposal’’).12 The 2016 Reproposal commerce for that commodity; and (3) liquidity profiles of individual markets. would have amended part 150 to, reduce duplication and inefficiency by The Commission proposes to build among other things: establish federal leveraging existing expertise and this flexibility into several parts of the position limits for 25 physical processes at DCMs. For these general proposed regulations, including: commodity futures contracts and for reasons, discussed in turn below, the Exchange-set limits and/or ‘‘economically equivalent’’ futures, accountability, rather than federal options on futures, and swaps; revise 13 Unless indicated otherwise, the use of the term limits, outside of the spot month for the existing exemptions from such ‘‘exchanges’’ throughout this proposal refers to referenced contracts based on DCMs and Swap Execution Facilities. commodities other than the nine legacy limits, including for bona fide hedges; 14 Aggregation of Positions, 81 FR 91454 (Dec. 16, agricultural commodities; the ability for and establish a framework for 2016) (‘‘Final Aggregation Rulemaking’’); see 17 CFR 150.4. Under the Final Aggregation exchanges to use more than one formula Rulemaking, unless an exemption applies, a when setting their own limit levels; an 7 7 U.S.C. 7(d)(5); 17 CFR 38.300. person’s positions must be aggregated with 8 7 U.S.C. 6a(a)(1); see infra Section III.F. updated formula for federal non-spot positions for which the person controls trading or month levels on the nine legacy (discussion of the necessity finding). for which the person holds a 10 percent or greater 9 7 U.S.C. 6a(a)(5). ownership interest. The Division of Market agricultural contracts that is calibrated 10 Position Limits for Derivatives, 76 FR 4752 Oversight has issued time-limited no-action relief to recently observed trading activity; a (Jan. 26, 2011); Position Limits for Futures and from some of the aggregation requirements bona fide hedging definition that is Swaps, 76 FR 71626 (Nov. 18, 2011) (‘‘2011 Final contained in that rulemaking. See CFTC Letter No. broad enough to accommodate common Rulemaking’’). 19–19 (July 31, 2019), available at https:// 11 Int’l Swaps & Derivatives Ass’n v. U.S. www.cftc.gov/csl/19-19/download. commercial hedging practices, Commodity Futures Trading Comm’n, 887 F. Supp. 15 Because the earlier proposals are withdrawn, including anticipatory hedging practices 2d 259 (D.D.C. 2012) (‘‘ISDA’’). comments on them will not be part of the such as anticipatory merchandising; a 12 Position Limits for Derivatives, 78 FR 75680 administrative record with respect to the current broader range of exchange-granted (Dec. 12, 2013) (2013 Proposal); Position Limits for proposal, except where expressly referenced herein. Derivatives: Certain Exemptions and Guidance, 81 Commenters should resubmit comments relevant to recognitions for purposes of federal and FR 38458 (June 13, 2016) (2016 Supplemental the subject proposal; commenters who wish to Proposal); and Position Limits for Derivatives, 81 reference prior comment letters should cite those 16 The specific proposed new regulations are FR 96704 (Dec. 30, 2016) (2016 Reproposal). prior comment letters as specifically as possible. discussed in detail later in this release.

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exchange-set limits that are in line with responsibilities, resources, deep Commission invites comments on all common commercial hedging practices; knowledge of their markets and trading aspects of this rulemaking. the elimination of a restriction for practices, close interactions with market B. Executive Summary purposes of federal limits on holding participants, existing programs for positions during the last trading days of addressing exemption requests, and This executive summary provides an the spot month; and broader discretion ability to generally act more quickly overview of the key components of this for market participants to measure risk than the Commission, the Commission proposal. The summary only highlights in the manner most suitable for their preliminarily believes that cooperation certain aspects of the proposed business. between the Commission and the regulations and generally uses Second, the proposal establishes exchanges on position limits should not shorthand to summarize complex limits on a limited set of commodities only be continued, but enhanced. For topics. The executive summary is for which the Commission preliminarily example, exchanges are particularly neither intended to be a comprehensive finds that speculative position limits are well-positioned to provide the 17 recitation of the proposal nor intended necessary. As described below, this Commission with estimates of to supplement, modify, or replace any necessity finding is based on a deliverable supply, to recommend limit interpretive or other language contained combination of factors including: The levels for the Commission’s herein. Section II of this release particular importance of these contracts consideration, and to help administer includes a more detailed and in the price discovery process for their the program for recognizing bona fide comprehensive discussion of all of the respective underlying commodities, the hedges. Further, given that the proposed regulations, and Section V fact that they require physical delivery Commission is proposing to require includes the actual regulations. of the underlying commodity, and, in exchanges to collect, and provide to the some cases, the commodities’ particular Commission upon request, cash-market 1. Contracts Subject to Federal importance to the national economy and information from market participants Speculative Position Limits especially acute economic burdens on requesting bona fide hedges, the interstate commerce that would arise Commission also proposes to eliminate Federal speculative position limits from excessive speculation causing Form 204, which market participants would apply to ‘‘referenced contracts,’’ sudden or unreasonable fluctuations or with bona fide hedging positions in which include: (a) 25 ‘‘core referenced unwarranted changes in the price of the excess of limits currently file each futures contracts;’’ (b) futures and commodities underlying these month with the Commission to options directly or indirectly linked to contracts.18 demonstrate cash-market positions a core referenced ; and Third, the Commission preliminarily justifying such overages. The (c) ‘‘economically equivalent swaps.’’ believes that there is an opportunity for Commission preliminarily believes that a. Core Referenced Futures Contracts greater collaboration between the enhanced collaboration will maintain Commission and the exchanges within the Commission’s access to information Federal speculative position limits the statutorily created parallel federal and result in a more efficient would apply to the following 25 and exchange-set position limit regimes. administrative process, in part by physically-settled core referenced Given the exchanges’ self-regulatory reducing duplication of efforts. The futures contracts:

Legacy agricultural Non-legacy agricultural Metals (federal limits during and outside the spot 19 month) (federal limits only during the spot month) (federal limits only during the spot month)

CBOT Corn (C) ...... CBOT Rough Rice (RR) ...... COMEX Gold (GC). CBOT Oats (O) ...... ICE Cocoa (CC) ...... COMEX Silver (SI) CBOT Soybeans (S) ...... ICE Coffee C (KC) ...... COMEX Copper (HG). CBOT Wheat (W) ...... ICE FCOJ–A (OJ) ...... NYMEX Platinum (PL). CBOT Soybean Oil (SO) ...... ICE U.S. Sugar No. 11 (SB) ...... NYMEX Palladium (PA).

CBOT Soybean Meal (SM) ...... ICE U.S. Sugar No. 16 (SF) ...... Energy (federal limits only during the spot month)

MGEX Hard Red Spring Wheat (MWE) ...... CME Live Cattle (LC) ...... NYMEX Henry Hub Natural Gas (NG). ICE Cotton No. 2 (CT) ...... NYMEX Light Sweet Crude Oil (CL). CBOT KC Hard Red Winter Wheat (KW) ...... NYMEX New York Harbor ULSD Heating Oil (HO). NYMEX New York Harbor RBOB Gasoline (RB).

b. Futures and Options on Futures the price of a core referenced futures not include location basis contracts, Linked to a Core Referenced Futures contract or to the same commodity commodity index contracts, swap Contract underlying the applicable core guarantees, and trade options that meet referenced futures contract for delivery certain requirements. Referenced contracts would also at the same location as specified in that include futures and options on futures core referenced futures contract. that are directly or indirectly linked to Referenced contracts, however, would

17 See infra Section III.F. agricultural core referenced futures contracts, position accountability levels in the non-spot 18 See infra Section III.F.1. exchanges would be required to establish, months for the non-legacy agricultural, metals, and 19 While the Commission is proposing federal consistent with Commission standards set forth in energy core referenced futures contracts. non-spot month limits only for the nine legacy this proposal, exchange-set position limits and/or

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c. Economically Equivalent Swaps a referenced contract, but differences in the core referenced futures contract, and Referenced contracts would also lot size specifications, notional verified by the Commission. The include economically equivalent swaps, amounts, or delivery dates diverging by proposed spot month limits would which would be defined as swaps with less than two calendar days, would still apply on a futures-equivalent basis ‘‘identical material’’ contractual be deemed economically equivalent based on the size of the unit of trading specifications, terms, and conditions to swaps. of the relevant core referenced futures a referenced contract. Swaps in 2. Federal Limit Levels During the Spot contract, and would apply ‘‘separately’’ commodities other than natural gas that Month to physically-settled and cash-settled have identical material specifications, referenced contracts. Therefore, a terms, and conditions to a referenced Federal spot month limits would market participant could net positions contract, but differences in lot size apply to referenced contracts on all 25 across physically-settled referenced specifications, notional amounts, or core referenced futures contracts. The contracts, and separately could net delivery dates diverging by less than following proposed spot month limit positions across cash-settled referenced one calendar day, would still be deemed levels, summarized in the table below, contracts, but would not be permitted to economically equivalent swaps. Natural are set at or below 25 percent of net cash-settled referenced contracts gas swaps that have identical material deliverable supply, as estimated using with physically-settled referenced specifications, terms, and conditions to recent data provided by the DCM listing contracts.

Existing Core referenced futures contract 2020 Proposed Existing federal exchange-set spot month limit spot month limit spot month limit

Legacy Agricultural Contracts

CBOT Corn (C) ...... 1,200 600 600 CBOT Oats (O) ...... 600 600 600 CBOT Soybeans (S) ...... 1,200 600 600 CBOT Soybean Meal (SM) ...... 1,500 720 720 CBOT Soybean Oil (SO) ...... 1,100 540 540 CBOT Wheat (W) ...... 1,200 600 600/500/400/300/220 CBOT KC Hard Red Winter Wheat (KW) ...... 1,200 600 600 MGEX Hard Red Spring Wheat (MWE) ...... 1,200 600 600 ICE Cotton No. 2 (CT) ...... 1,800 300 300

Other Agricultural Contracts

CME Live Cattle (LC) ...... 20 600/300/200 n/a 450/300/200 CBOT Rough Rice (RR) ...... 800 n/a 600/200/250 ICE Cocoa (CC) ...... 4,900 n/a 1,000 ICE Coffee C (KC) ...... 1,700 n/a 500 ICE FCOJ–A (OJ) ...... 2,200 n/a 300 ICE U.S. Sugar No. 11 (SB) ...... 25,800 n/a 5,000 ICE U.S. Sugar No. 16 (SF) ...... 6,400 n/a n/a

Metals Contracts

COMEX Gold (GC) ...... 6,000 n/a 3,000 COMEX Silver (SI) ...... 3,000 n/a 1,500 COMEX Copper (HG) ...... 1,000 n/a 1,500 NYMEX Platinum (PL) ...... 500 n/a 500 NYMEX Palladium (PA) ...... 50 n/a 50

Energy Contracts

NYMEX Henry Hub Natural Gas (NG) ...... 2,000 n/a 1,000 NYMEX Light Sweet Crude Oil (CL) ...... 21 6,000/5,000/4,000 n/a 3,000 NYMEX New York Harbor ULSD Heating Oil (HO) ...... 2,000 n/a 1,000 NYMEX New York Harbor RBOB Gasoline (RB) ...... 2,000 n/a 1,000

3. Federal Limit Levels Outside of the agricultural commodities subject to above, and otherwise would only be Spot Month existing federal limits. All other subject to exchange-set limits and/or referenced contracts subject to federal position accountability levels outside of Federal limits outside of the spot limits would be subject to federal limits the spot month. month would apply only to referenced only during the spot month, as specified contracts based on the nine legacy

20 The proposed federal spot month limit for Live the business day prior to the last five trading days trading three business days prior to the last trading Cattle would feature a step-down limit similar to of the contract month; and (3) 200 at the close of day of the contract; (2) 5,000 contracts as of the the CME’s existing Live Cattle step-down exchange trading on the business day prior to the last two close of trading two business days prior to the last set limit. The proposed federal spot month step- trading days of the contract month. trading day of the contract; and (3) 4,000 contracts down limit is: (1) 600 at the close of trading on the 21 The proposed federal spot month limit for Light as of the close of trading one business day prior to first business day following the first Friday of the Sweet Crude Oil would feature the following step- the last trading day of the contract. contract month; (2) 300 at the close of trading on down limit: (1) 6,000 contracts as of the close of

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The following proposed non-spot contracts, with an incremental increase unit of trading of the relevant core month limit levels, summarized in the of 2.5 percent of open interest thereafter, referenced futures contract: table below, are set at 10 percent of and would apply on a futures- open interest for the first 50,000 equivalent basis based on the size of the

Existing 2020 Proposed Existing federal exchange-set Core referenced futures contract single month single month single month and all-months and all-months- and all-months- combined limit combined limit combined limit

CBOT Corn (C) ...... 57,800 33,000 33,000 CBOT Oats (O) ...... 2,000 2,000 2,000 CBOT Soybean (S) ...... 27,300 15,000 15,000 CBOT Soybean Meal (SM) ...... 16,900 6,500 6,500 CBOT Soybean Oil (SO) ...... 17,400 8,000 8,000 CBOT Wheat (W) ...... 19,300 12,000 12,000 CBOT KC HRW Wheat (KW) ...... 12,000 12,000 12,000 MGEX HRS Wheat (MWE) ...... 12,000 12,000 12,000 ICE Cotton No. 2 (CT) ...... 11,900 5,000 5,000

4. Exchange-Set Limits and Exemptions Commission has determined would hedge is economically appropriate to Therefrom meet this standard, but an exchange the reduction of risks in the conduct a. Contracts Subject to Federal Limits would have the flexibility to develop and management of a commercial other approaches. enterprise (‘‘economically appropriate An exchange that lists a contract Exchanges would be provided test’’); and (3) the hedge arises from the subject to federal limits, as specified flexibility to grant a variety of potential change in value of actual or above, would be required to set its own exemption types, provided that the anticipated assets, liabilities, or services limits for such contracts at a level that exchange must take into account (‘‘change in value requirement’’). The is no higher than the federal level. whether the exemption would result in Commission proposes several changes Exchanges would be allowed to grant a position that would not be in accord to the existing bona fide hedging exemptions from their own limits, with ‘‘sound commercial practices’’ in definition, including those described provided the exemption does not the market for which the exchange is immediately below, and also proposes a subvert the federal limits framework.22 considering the application, and/or streamlined process for granting bona b. Physical Commodity Contracts Not would ‘‘exceed an amount that may be fide hedge recognitions, described Subject to Federal Limits established and liquidated in an orderly further below. fashion in that market.’’ First, for referenced contracts based For physical commodity contracts not on the 25 core referenced futures subject to federal limits, an exchange 5. Limits on ‘‘Pre-Existing Positions’’ contracts listed in § 150.2(d), the would generally be required to set spot Certain ‘‘Pre-Existing Positions’’ that Commission would expand the current month limits no greater than 25 percent were entered into prior to the effective list of enumerated bona fide hedges to of deliverable supply, but would have date of final position limits rules would cover additional hedging practices flexibility to submit other approaches not be subject to federal limits. Both included in the 2016 Reproposal, as for review by the Commission, provided ‘‘Pre-Enactment Swaps,’’ which are well as hedges of anticipated the approach results in spot month swaps entered into prior to the Dodd- merchandising.23 Persons who hold a levels that are ‘‘necessary and Frank Act whose terms have not bona fide hedging transaction or appropriate to reduce the potential expired, and ‘‘Transition Period position in accordance with § 150.1 in threat of or price Swaps,’’ which are swaps entered into referenced contracts based on one of the distortion of the contract’s or the between July 22, 2010 and 60 days after 25 core referenced futures contracts and underlying commodity’s price or index’’ the publication of final position limits whose hedging practice is included in and complies with all other applicable rules, would not be subject to federal the list of enumerated hedges in regulations. limits. All other ‘‘Pre-Existing Appendix A of part 150 would not be Outside of the spot month, such an Positions’’ that are acquired in good required to request prior approval from exchange would have additional faith prior to the effective date of final flexibility to set either position limits or position limits rules would be subject to 23 The existing definition of ‘‘bona fide hedging position accountability levels, provided federal limits during, but not outside, transactions and positions’’ enumerates the following hedging transactions: (1) Hedges of the levels are ‘‘necessary and the spot month. inventory and cash commodity fixed-price purchase appropriate to reduce the potential contracts under 1.3(z)(2)(i)(A); (2) hedges of unsold 6. Substantive Standards for Exemptions threat of market manipulation or price anticipated production under 1.3(z)(2)(i)(B); (3) From Federal Limits hedges of cash commodity fixed-price sales distortion of the contract’s or the contracts under 1.3(z)(2)(ii)(A); (4) certain cross- underlying commodity’s price or a. Bona Fide Hedge Recognition commodity hedges under 1.3(z)(2)(ii)(B); (5) hedges index.’’ Non-exclusive Acceptable Hedging transactions or positions may of unfilled anticipated requirements under Practices would provide several 1.3(z)(2)(ii)(C) and (6) hedges of offsetting unfixed continue to exceed federal limits if they price cash commodity sales and purchases under examples of formulas that the satisfy all three elements of the 1.3(z)(2)(iii). The following additional hedging ‘‘general’’ bona fide hedging definition: practices are not enumerated in the existing 22 In addition, as explained further below, (1) The hedge represents a substitute for regulation, but are included as enumerated hedges exchanges may choose to participate in the in the 2020 Proposal: (1) Hedges by agents; (2) Commission’s new proposed streamlined process transactions or positions made at a later hedges of anticipated royalties; (3) hedges of for reviewing bona fide hedge exemption time in a physical marketing channel services; (4) offsets of commodity trade options; and applications for purposes of federal limits. (‘‘temporary substitute test’’); (2) the (5) hedges of anticipated merchandising.

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the Commission to hold such bona fide purposes’’ 24 as a bona fide hedge, 7. Process for Requesting Bona Fide hedge position. That is, such unless the position qualifies as either (i) Hedge Recognitions and Spread exemptions would be self-effectuating an offset of a pass-through swap, where Exemptions for purposes of federal speculative the offset reduces price risk attendant to a. Self-Effectuating Enumerated Bona position limits, so a person would only a pass-through swap executed opposite Fide Hedges be required to request the bona fide a counterparty for whom the swap For referenced contracts based on any hedge exemption from the relevant qualifies as a bona fide hedge; or (ii) a core referenced futures contract listed in exchange for purposes of exchange-set ‘‘swap offset,’’ where the offset is used § 150.2(d), bona fide hedge recognitions limits. Transactions or positions that do by a counterparty to reduce price risk for positions that fall within one of the not fit within one of the enumerated attendant to a swap that qualifies as a proposed enumerated hedges, including hedges could still be recognized as a bona fide hedge and that was previously the proposed anticipatory enumerated bona fide hedge, provided the entered into by that counterparty. hedges, would be self-effectuating for Commission, or an exchange subject to b. Spread Exemption purposes of federal limits, provided the Commission oversight, recognizes the market participant separately applies to position as such using one of the Transactions or positions may also the relevant exchange for an exemption processes described below. The continue to exceed federal limits if they from exchange-set limits. Such market Commission would be open to adopting qualify as a ‘‘spread transaction,’’ which participants would no longer be additional enumerated hedges as it includes the following common types of required to file Form 204/304 with the becomes more comfortable with spreads: Calendar spreads, inter- Commission on a monthly basis to evolving hedging practices, particularly commodity spreads, quality differential demonstrate cash-market positions in the energy space, and provided the spreads, processing spreads (such as justifying position limit overages. practices comply with the general bona energy ‘‘crack’’ or soybean ‘‘crush’’ Instead, the Commission would have fide hedging definition. spreads), product or by-product access to cash-market information such Second, the Commission is clarifying differential spreads, or futures-option market participants submit as part of its position on whether and when spreads. Spread exemptions may be their application to an exchange for an exemption from exchanges-set limits, market participants may measure risk granted using the process described typically filed on an annual basis. on a gross basis rather than on a net below. basis in order to provide market b. Bona Fide Hedges That Are Not Self- participants with greater flexibility. c. Financial Distress Exemption Effectuating Instead of only being permitted to hedge This exemption would allow a market The Commission will consider adding on a ‘‘net basis’’ except in a narrow set participant to exceed federal limits if to the proposed list of enumerated of circumstances, market participants necessary to take on the positions and hedges at a later time once the would also now be able to hedge associated risk of another market Commission becomes more familiar positions on a ‘‘gross basis’’ in certain participant during a potential default or with common commercial hedging circumstances, provided that the bankruptcy situation. This exemption practices for referenced contracts participant has done so over time in a would be available on a case-by-case subject to federal position limits. Until consistent manner and is not doing so basis, depending on the facts and that time, all bona fide hedging to evade the federal limits. circumstances involved. recognitions that are not enumerated in Third, market participants would Appendix A of part 150 would be have additional leeway to hold bona d. Conditional Spot Month Limit granted pursuant to one of the proposed fide hedging positions in excess of Exemption in Natural Gas processes for requesting a non- enumerated bona fide hedge limits during the last five days of the The rules would allow market spot period (or during the time period recognition, as explained below. participants with cash-settled positions A market participant seeking to for the spot month if less than five in natural gas to exceed the proposed days). The proposal would not include exceed federal limits for a non- 2,000 contract spot month limit, enumerated bona fide hedging such a restriction for purposes of federal provided that the participant exits its limits, and would make clear that transaction or position would be able to spot month positions in the New York choose whether to apply directly to the exchanges continue to have the Mercantile Exchange (‘‘NYMEX’’) Henry discretion to adopt such restrictions for Commission or, alternatively, apply to Hub (NG) physically-settled natural gas the applicable exchange using a new purposes of exchange-set limits. The contracts, and provided further that the proposal would also include flexible proposed streamlined process. If participant’s position in cash-settled applying directly to the Commission, guidance on the circumstances under natural gas contracts does not exceed which exchanges may waive any such the market participant would also have 10,000 NYMEX Henry Hub Natural Gas to separately apply to the relevant limitation for purposes of their own (NG) equivalent-size natural gas limits. exchange for relief from exchange-set contracts per DCM that lists a natural position limits. If applying to an Finally, the proposal would modify gas referenced contract. Such market exchange using the new proposed the ‘‘temporary substitute test’’ to participants would be permitted to hold streamlined process, a market require that a bona fide hedging an additional 10,000 contracts in cash- participant would be able to file an transaction or position in a physical settled natural gas economically application with an exchange, generally commodity must always, and not just equivalent swaps. at least annually, which would be valid normally, be connected to the both for purposes of federal and production, sale, or use of a physical 24 The phrase ‘‘risk management’’ as used in this exchange-set limits. Under this cash-market commodity. Therefore, a instance refers to derivatives positions, typically streamlined process, if the exchange market participant would generally no held by a swap dealer, used to offset a swap determines to grant a non-enumerated longer be allowed to treat positions position, such as a commodity index swap, with another entity for which that swap is not a bona bona fide hedge recognition for entered into for ‘‘risk management fide hedge. purposes of its exchange-set limits, the

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exchange must notify the Commission federal limits, provided that the nine ‘‘legacy’’ agricultural contracts and the applicant simultaneously. Then, position: Falls within one of the currently subject to federal limits and 16 10 business days (or two business days categories set forth in the proposed additional non-legacy contracts, which in the case of sudden or unforeseen ‘‘spread transaction’’ definition,25 and would include: seven additional bona fide hedging needs) after the provided further that the market agricultural contracts, four energy exchange issues such a determination, participant separately applies to the contracts, and five metals contracts.27 the market participant could rely on the applicable exchange for an exemption Federal spot and non-spot month limits exchange’s determination for purposes from exchange-set limits. would apply to the nine ‘‘legacy’’ of federal limits unless the Commission Market participants with a spread agricultural contracts currently subject (and not staff) notifies the market position that does not fit within the to federal limits,28 and only federal spot participant otherwise. After the 10 ‘‘spread transaction’’ definition with month limits would apply to the business days expire, the bona fide respect to any of the commodities additional 16 non-legacy contracts. hedge exemption would be valid both subject to the proposed federal limits Outside of the spot month, these 16 for purposes of federal and exchange may apply directly to the Commission, non-legacy contracts would be subject to position limits and the market and must also separately apply to the exchange-set limits and/or participant would be able to take on a applicable exchange. accountability levels if listed on an position that exceeds federal position 8. Comment Period and Compliance exchange. • Amendments to § 150.1 would add limits. Under this streamlined process, Date during the 10 business day review or revise several definitions for use period, any rejection of an exchange The public may comment on these throughout part 150, including: new determination would require rules during a 90-day period that starts definitions of the terms ‘‘core referenced Commission action. Further, if, for after this proposal has been approved by futures contract’’ (pertaining to the 25 purposes of federal position limits, the the Commission. Market participants physically-settled futures contracts Commission determines to reject an and exchanges would be required to explicitly listed in the regulations) and application for exemption, the applicant comply with any position limit rules ‘‘referenced contract’’ (pertaining to would not be subject to any position finalized from herein no later than 365 contracts that have certain direct and/or limits violation during the period of the days after publication in the Federal indirect linkages to the core referenced Commission’s review nor once the Register. futures contracts, and to ‘‘economically Commission has issued its rejection, C. Summary of Proposed Amendments equivalent swaps’’) to be used as provided the person reduces the shorthand to refer to contracts subject to position within a commercially The Commission is proposing federal limits; a ‘‘spread transaction’’ reasonable amount of time, as revisions to §§ 150.1, 150.2, 150.3, definition; and a definition of ‘‘bona applicable. 150.5, and 150.6 and to parts 1, 15, 17, fide hedging transactions or positions’’ Under the proposal, positions that do 19, 40, and 140, as well as the addition that is broad enough to accommodate not fall within one of the enumerated of §§ 150.8, 150.9, and Appendices A– hedging practices in a variety of contract 26 hedges could thus still be recognized as F to part 150. Most noteworthy, the types, including hedging practices that bona fide hedges, provided the Commission proposes the following may develop over time. exchange deems the position to comply amendments to the foregoing rule • Amendments to § 150.2 would list with the general bona fide hedging sections, each of which, along with all the 25 core referenced futures contracts definition, and provided that the other proposed changes, is discussed in which, along with any associated Commission does not object to such a greater detail in Section II of this referenced contracts, would be subject hedge within the ten-day (or two-day, as release. The following summary is not appropriate) window. intended to provide a substantive 27 The seven additional agricultural contracts that Requests and approvals to exceed overview of this proposal, but rather is would be subject to federal spot month limits are limits would generally have to be intended to provide a guide to the rule CME Live Cattle (LC), CBOT Rough Rice (RR), ICE sections that address each topic. Please Cocoa (CC), ICE Coffee C (KC), ICE FCOJ–A (OJ), obtained in advance of taking on the ICE U.S. Sugar No. 11 (SB), and ICE U.S. Sugar No. position, but the proposed rule would see the executive summary above for an 16 (SF). The four energy contracts that would be allow market participants with sudden overview of this proposal organized by subject to federal spot month limits are: NYMEX or unforeseen hedging needs to file a topic, rather than by section number. Light Sweet Crude Oil (CL), NYMEX New York • The Commission preliminarily Harbor ULSD Heating Oil (HO), NYMEX New York request for a bona fide hedge exemption Harbor RBOB Gasoline (RB), and NYMEX Henry within five business days of exceeding finds that federal speculative position Hub Natural Gas (NG). The five metals contracts the limit. If the Commission rejects the limits are necessary for 25 core that would be subject to federal spot month limits application, the market participant referenced futures contracts and are: COMEX Gold (GC), COMEX Silver (SI), COMEX proposes federal limits on physically- Copper (HG), NYMEX Palladium (PA), and NYMEX would not be subject to a position limit Platinum (PL). As discussed below, any contracts violation, provided the participant settled and linked cash-settled futures, for which the Commission is proposing federal reduces its position within a options on futures, and ‘‘economically limits only during the spot month would be subject commercially reasonable amount of equivalent’’ swaps for such to exchange-set limits and/or accountability outside of the spot month. time. commodities. The 25 core referenced futures contracts would include the 28 The Commission currently sets and enforces Among other changes, market speculative position limits with respect to certain participants would also no longer be enumerated agricultural products. The required to file Form 204/304 with the 25 The categories are: Calendar spreads, inter- ‘‘enumerated’’ agricultural products refer to the list commodity spreads, quality differential spreads, of commodities contained in the definition of Commission on a monthly basis to processing spreads (such as energy ‘‘crack’’ or ‘‘commodity’’ in CEA section 1a; 7 U.S.C. 1a. These demonstrate cash-market positions soybean ‘‘crush’’ spreads), product or by-product agricultural products consist of the following nine justifying position limit overages. differential spreads, and futures-option spreads. currently traded contracts: CBOT Corn (and Mini- 26 This 2020 Proposal does not propose to amend Corn) (C), CBOT Oats (O), CBOT Soybeans (and c. Spread Exemptions current § 150.4 dealing with aggregation of Mini-Soybeans) (S), CBOT Wheat (and Mini-Wheat) positions for purposes of compliance with federal (W), CBOT Soybean Oil (SO), CBOT Soybean Meal For referenced contracts on any position limits. Section 150.4 was amended in 2016 (SM), MGEX HRS Wheat (MWE), CBOT KC HRW commodity, spread exemptions would in a prior rulemaking. See Final Aggregation Wheat (KW), and ICE Cotton No. 2 (CT). See 17 CFR be self-effectuating for purposes of Rulemaking, 81 FR at 91454. 150.2.

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to federal limits; and specify the Commission an opportunity to intervene ‘‘appropriate’’ levels for each.33 In ISDA, proposed federal spot and non-spot as-needed. This process would be used the U.S. District Court for the District of month limit levels. Federal spot month by market participants with non- Columbia disagreed and held that limit levels would be set at or below 25 enumerated positions. Under the section 4a(a)(2)(A) is ambiguous as to percent of deliverable supply, whereas proposed rule, market participants whether the ‘‘standards set forth in federal non-spot month limit levels could provide one application for a paragraph (1)’’ include the requirement would be set at 10 percent of open bona fide hedge to a designated contract of an antecedent finding that a position interest for the first 50,000 contracts of market or swap execution facility, as limit is necessary.34 The court vacated open interest, with an incremental applicable, and receive approval of such the 2011 Final Rulemaking and directed increase of 2.5 percent of open interest request for purposes of both exchange- the Commission to apply its experience thereafter. set limits and federal limits. and expertise to resolve that • Amendments to § 150.3 would • New Appendix A to part 150 would ambiguity.35 The Commission has done specify the types of positions for which contain enumerated hedges, some of so and preliminarily determines that exemptions from federal position limit which appear in the definition of bona section 4a(a)(2)(A) should be interpreted requirements may be granted, and fide hedging transactions and positions to require that before establishing would set forth and/or reference the in current § 1.3, which would be position limits, the Commission must processes for requesting such examples of positions that would determine that limits are necessary.36 A exemptions, including recognitions of comply with the proposed bona fide full legal analysis is set forth infra at bona fide hedges and exemptions for hedging definition. As the enumerated Section III.F. spread positions, financial distress hedges would be examples of bona fide The Commission preliminarily finds positions, certain natural gas positions hedging positions, positions that do not that position limits are necessary for the held during the spot month, and pre- fall within any of the enumerated 25 core referenced futures contracts, and enactment and transition period swaps. hedges could still potentially be any associated referenced contracts. For all contracts subject to federal recognized as bona fide hedging This preliminary finding is based on a limits, bona fide hedge exemptions positions, provided the position combination of factors including: The listed in Appendix A to part 150 as an otherwise complies with the proposed particular importance of these contracts enumerated bona fide hedge would be bona fide hedging definition and all in the price discovery process for their self-effectuating for purposes of federal other applicable requirements. respective underlying commodities, the limits. For non-enumerated hedges, • Amendments to part 19 and related fact that they require physical delivery market participants must request provisions would eliminate Form 204, of the underlying commodity, and, in approval in advance of taking a position enabling the Commission to leverage some cases, the commodities’ particular that exceeds the federal position limit, cash-market reporting submitted importance to the national economy and except in the case of sudden or directly to the exchanges under §§ 150.5 especially acute economic burdens that unforeseen hedging needs. and 150.9. would arise from excessive speculation • Amendments to § 150.5 would causing sudden or unreasonable D. The Commission Preliminarily refine the process, and establish non- fluctuations or unwarranted changes in exclusive methodologies, by which Construes CEA Section 4a(a) To Require the price of the commodities underlying exchanges may set exchange-level limits the Commission To Make a Necessity these contracts. and grant exemptions therefrom with Finding Before Establishing Position II. Proposed Rules respect to futures and options on Limits for Physical Commodities Other futures, including separate Than Excluded Commodities A. § 150.1—Definitions methodologies for contracts subject to The Commission is required by ISDA Definitions relevant to the existing federal limits and physical commodity to determine whether CEA section position limits regime currently appear derivatives not subject to federal 4a(a)(2)(A) requires the Commission to in both §§ 1.3 and 150.1 of the limits.29 While the Commission will find, before establishing a position limit, Commission’s regulations.37 The 30 oversee compliance with federal that such limit is ‘‘necessary.’’ The Commission proposes to update and position limits on swaps, amended provision states in relevant part that supplement the definitions in § 150.1, § 150.5 would not apply to exchanges ‘‘the Commission shall’’ establish including by moving a revised with respect to swaps until a later time position limits ‘‘as appropriate’’ for definition of ‘‘bona fide hedging once exchanges have access to sufficient contracts in physical commodities other transactions and positions’’ from § 1.3 data to monitor compliance with limits than excluded commodities ‘‘[i]n into § 150.1. The proposed changes are on swaps across exchanges. accordance with the standards set forth intended, among other things, to • 31 New § 150.9 would establish a in’’ the preexisting section 4a(a)(1). conform the definitions to the Dodd- streamlined process for addressing That preexisting provision requires the Frank Act amendments to the CEA.38 requests for bona fide hedging Commission to establish position limits recognitions for purposes of federal as it ‘‘finds are necessary to diminish, 33 2011 Final Rulemaking, 76 FR at 71626, 71627. limits, leveraging off exchange expertise eliminate, or prevent’’ certain 34 ISDA, 887 F.Supp.2d at 279–280. and resources while affording the enumerated burdens on interstate 35 Id. at 281. commerce.32 In the 2011 Final 36 See infra Section III.F. 29 Proposed § 150.5 addresses exchange-set Rulemaking, the Commission 37 17 CFR 1.3 and 150.1, respectively. position limits and exemptions therefrom, whereas interpreted this language as an 38 In addition to the amendments described proposed § 150.3 addresses exemptions from federal below, the Commission proposes to re-order the limits, and proposed § 150.9 addresses federal unambiguous mandate to establish defined terms so that they appear in alphabetical limits and acceptance of exchange-granted bona position limits without first finding that order, rather than in a lettered list, so that terms can fide hedging recognitions for purposes of federal such limits are necessary, but with be more quickly located. Moving forward, any new limits. Exchange rules typically refer to discretion to determine the defined terms would be inserted in alphabetical ‘‘exemptions’’ in connection with bona fide hedging order, as recommended by the Office of the Federal and spread positions, whereas the Commission uses Register. See Document Drafting Handbook, Office the nomenclature ‘‘recognition’’ with respect to 30 ISDA, 887 F.Supp.2d at 259, 281. of the Federal Register, National Archives and bona fide hedges, and ‘‘exemption’’ with respect to 31 7 U.S.C. 6a(a)(2)(A). Records Administration, 2–31 (Revision 5, Oct. 2, spreads. 32 7 U.S.C. 6a(a)(1). Continued

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Each proposed defined term is applied in determining whether a transactions that are included in the discussed in alphabetical order below. position is a bona fide hedge that may general bona fide hedging definition in exceed the proposed federal limits set paragraph (1). Market participants thus 1. ‘‘Bona Fide Hedging Transactions or forth in § 150.2. The Commission’s need not seek recognition from the Positions’’ current bona fide hedging definition is Commission of such positions as bona a. Background described immediately below, followed fide hedges prior to exceeding limits for Under CEA section 4a(c)(1), position by a discussion of the proposed new such positions; rather, market limits shall not apply to transactions or definition. This section of the release participants must simply report any positions that are ‘‘shown to be bona describes the substantive standards for such positions on the monthly Form fide hedging transactions or positions, bona fide hedges. The process for 204, as required by part 19 of the as such terms shall be defined by the granting bona fide hedge recognitions is Commission’s regulations.45 The four Commission . . . .’’ 39 The Dodd-Frank discussed later in this release in existing categories of enumerated Act directed the Commission, for connection with proposed §§ 150.3 and hedges are: (1) Hedges of ownership or purposes of implementing CEA section 150.9.43 fixed-price cash commodity purchases and hedges of unsold anticipated 4a(a)(2), to adopt a definition consistent b. The Commission’s Existing Bona Fide 40 production; (2) hedges of fixed-price with CEA section 4a(c)(2). The current Hedging Definition in § 1.3 definition of ‘‘bona fide hedging cash commodity sales and hedges of transactions and positions,’’ which first Paragraph (1) of the current bona fide unfilled anticipated requirements; (3) appeared in § 1.3 of the Commission’s hedging definition in § 1.3 contains hedges of offsetting unfixed-price cash regulations in the 1970s,41 is what is currently labeled the ‘‘general’’ commodity sales and purchases; and (4) inconsistent, in certain ways described bona fide hedging definition, which has cross-commodity hedges.46 below, with the revised statutory five key elements and requires that the Paragraph (3) of the current bona fide definition in CEA section 4a(c)(2). position must: (1) ‘‘normally’’ represent hedging definition states that the Accordingly, and for the reasons a substitute for transactions or positions Commission may recognize non- outlined below, the Commission made at a later time in a physical enumerated bona fide hedging proposes to remove the current bona marketing channel (‘‘temporary transactions and positions pursuant to a fide hedging definition from § 1.3 and substitute test’’); (2) be economically specific request by a market participant replace it with an updated bona fide appropriate to the reduction of risks in using the process described in § 1.47 of hedging definition that would appear the conduct and management of a the Commission’s regulations.47 alongside all of the other position limits commercial enterprise (‘‘economically appropriate test’’); (3) arise from the c. Proposed Replacement of the Bona related definitions in proposed Fide Hedging Definition in § 1.3 With a § 150.1.42 This definition would be potential change in value of actual or anticipated assets, liabilities, or services New Bona Fide Hedging Definition in § 150.1 2017) (stating, ‘‘[i]n sections or paragraphs (‘‘change in value requirement’’); (4) containing only definitions, we recommend that have a purpose to offset price risks i. Background you do not use paragraph designations if you list incidental to commercial cash or spot The list of enumerated hedges found the terms in alphabetical order. Begin the definition operations (‘‘incidental test’’); and (5) be paragraph with the term that you are defining.’’). in paragraph (2) of the current bona fide 39 7 U.S.C. 6a(c)(1). While portions of the CEA established and liquidated in an orderly hedging definition in § 1.3 was and proposed § 150.1 respectively refer, and would manner (‘‘orderly trading developed at a time when only refer, to the phrase ‘‘bona fide hedging transactions 44 requirement’’). agricultural commodities were subject or positions,’’ the Commission may use the phrases Additionally, paragraph (2) currently ‘‘bona fide hedging position,’’ ‘‘bona fide hedging to federal limits, has not been updated definition,’’ and ‘‘bona fide hedge’’ throughout this sets forth a non-exclusive list of four since 1987,48 and is likely too narrow to section of the release as shorthand to refer to the categories of ‘‘enumerated’’ hedging reflect common commercial hedging same. practices, including for metal and 40 7 U.S.C. 6a(c)(2). version currently in effect, the substance of which 41 See, e.g., Definition of Bona Fide Hedging and remains as it was amended in 1987, applies to all energy contracts. Numerous market and Related Reporting Requirements, 42 FR 42748 (Aug. commodities, not just to excluded commodities. See regulatory developments have taken 24, 1977). Previously, the Secretary of Agriculture, Revision of Federal Speculative Position Limits, 52 place since then, including, among pursuant to section 404 of the Commodity Futures FR 38914 (Oct. 20, 1987). While the 2011 Final other things, increased futures trading Trading Commission Act of 1974 (Pub. L. 93–463), Rulemaking amended the § 1.3 bona fide hedging promulgated a definition of bona fide hedging definition to apply only to excluded commodities, in the metals and energy markets, the transactions and positions. Hedging Definition, that rulemaking was vacated, as noted previously, development of the swaps markets, and Reports, and Conforming Amendments, 40 FR by a September 28, 2012 order of the U.S. District the shift in trading from pits to 11560 (Mar. 12, 1975). That definition, largely Court for the District of Columbia, with the electronic platforms. In addition, the reflecting the statutory definition previously in exception of the rule’s amendments to 17 CFR 49 effect, remained in effect until the newly- 150.2. Although the 2011 Final Rulemaking was CFMA and Dodd-Frank Act established Commission defined that term. Id. vacated, the 2011 version of the bona fide hedging introduced various regulatory reforms, 42 In a 2018 rulemaking, the Commission definition in § 1.3, which applied only to excluded including the enactment of position amended § 1.3 to replace the sub-paragraphs that commodities, has not yet been formally removed limits core principles.50 The had for years been identified with an alphabetic from the Code of Federal Regulations. The designation for each defined term with an currently-in-effect version of the Commission’s Commission is thus proposing to update alphabetized list. See Definitions, 83 FR 7979 (Feb. bona fide hedging definition thus does not currently its bona fide hedging definition to better 23, 2018). The bona fide hedging definition, appear in the Code of Federal Regulations. The conform to the current state of the law therefore, is now a paragraph, located in closest to a ‘‘current’’ version of the definition is the alphabetical order, in § 1.3, rather than in § 1.3(z). 2010 version of § 1.3, which, while substantively 45 17 CFR part 19. Accordingly, for purposes of clarity and ease of current, still includes the ‘‘(z)’’ denomination that 46 discussion, when discussing the Commission’s was removed in 2018. The Commission proposes to 17 CFR 1.3. current version of the bona fide hedging definition, address the need to formally remove the incorrect 47 Id. this release will refer to the bona fide hedging version of the bona fide hedging definition as part 48 See Revision of Federal Speculative Position definition in § 1.3. of this rulemaking. Limits, 52 FR 38914 (Oct. 20, 1987). Further, the version of § 1.3 that appears in the 43 See infra Section II.C.2. (discussion of 49 Commodity Futures Modernization Act of Code of Federal Regulations applies only to proposed § 150.3) and Section II.G.3. (discussion of 2000, Public Law 106–554, 114 Stat. 2763 (Dec. 21, excluded commodities and is not the version of the proposed § 150.9). 2000). bona fide hedging definition currently in effect. The 44 17 CFR 1.3. 50 See 7 U.S.C. 7(d)(5) and 7 U.S.C. 7b–3(f)(6).

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and to better reflect market fide hedging exemptions provided by Congressional direction that a bona fide developments over time. exchanges. hedging position in physical While one option for doing so could commodities must always (and not just ii. Proposed Bona Fide Hedging be to expand the list of enumerated ‘‘normally’’) be in connection with the Definition for Physical Commodities hedges to encompass a larger array of production, sale, or use of a physical hedging strategies, the Commission does The Commission proposes to cash-market commodity.56 not view this alone to be a practical maintain the general elements currently Accordingly, the Commission solution. It would be difficult to found in the bona fide hedging preliminarily interprets this change to maintain a list that captures all hedging definition in § 1.3 that conform to the signal that the Commission should cease activity across commodity types, and revised statutory bona fide hedging to recognize ‘‘risk management’’ any list would inherently fail to take definition in CEA section 4a(c)(2), and positions as bona fide hedges for into account future changes in industry proposes to eliminate the elements that physical commodities, unless the practices and other developments. The do not. In particular, the Commission position satisfies the pass-through Commission proposes to create a new proposes to include the updated swap/swap offset requirements in bona fide hedging definition in versions of the temporary substitute test, section 4a(c)(2)(B) of the CEA, discussed proposed § 150.1 that would work in economically appropriate test, and further below.57 In order to implement connection with limits on a variety of change in value requirements that are that statutory change, the Commission commodity types and accommodate described below, and eliminate the proposes a narrower bona fide hedging changing hedging practices over time. incidental test and orderly trading definition for physical commodities in The Commission proposes to couple requirement, which are not included in proposed § 150.1 that does not include this updated definition with an the revised statutory text. Each of these the word ‘‘normally’’ currently found in expanded list of enumerated hedges. proposed changes is described below.52 the temporary substitute language in While positions that fall within the (1) Temporary Substitute Test paragraph (1) of the existing § 1.3 bona proposed enumerated hedges, discussed fide hedging definition. below, would be examples of positions The language of the temporary The practical effect of conforming the that comply with the bona fide hedging substitute test that appears in the temporary substitute test in the definition, they would certainly not be Commission’s existing bona fide regulation to the amended statutory the only types of positions that could be hedging definition is inconsistent in provision would be to prevent market bona fide hedges. The proposed some ways with the language of the participants from treating positions enumerated hedges are intended to temporary substitute test that currently entered into for risk management ensure that the framework proposed appears in the statute. In particular, the purposes as bona fide hedges for herein does not reduce any clarity bona fide hedging definition in section contracts subject to federal limits, inherent in the existing framework; the 4a(c)(2)(A)(i) of the CEA currently unless the position qualifies under the proposed enumerated hedges are in no provides, among other things, that a pass-through swap provision in CEA way intended to limit the universe of bona fide hedging position ‘‘represents section 4a(c)(2)(B).58 As noted above, hedging practices that could otherwise a substitute for transactions made or to be recognized as bona fide. be made or positions taken or to be 56 Previously, the Commission stated that, among The Commission anticipates these taken at a later time in a physical other things, the inclusion of the word ‘‘normally’’ proposed modifications would provide marketing channel.’’ 53 The in connection with the pre-Dodd-Frank Act version a significant degree of flexibility to Commission’s definition currently of the temporary substitute language indicated that the bona fide hedging definition should not be market participants in terms of how provides that a bona fide hedging construed to apply only to firms using futures to they hedge, and to exchanges in terms position ‘‘normally represent[s] a reduce their exposures to risks in the cash market, of how they evaluate transactions and substitute for transactions to be made or and that to qualify as a bona fide hedge, a positions for purposes of their position positions to be taken at a later time in transaction in the futures market did not necessarily need to be a temporary substitute for a later limit programs, without sacrificing any a physical marketing channel’’ transaction in the cash market. See Clarification of of the clarity provided by the existing (emphasis added).54 The Dodd-Frank Certain Aspects of the Hedging Definition, 52 FR bona fide hedging definition. Further, as Act amended the temporary substitute 27195, 27196 (July 20, 1987). In other words, that described in detail in connection with language that previously appeared in 1987 interpretation took the view that a futures the discussion of proposed § 150.9 later position could still qualify as a bona fide hedging the statute by removing the word position even if it was not in connection with the in this release, the Commission ‘‘normally’’ from the phrase ‘‘normally production, sale, or use of a physical commodity. anticipates that allowing the exchanges represents a substitute for transactions 57 7 U.S.C. 6a(c)(2)(B). In connection with to process applications for bona fide made or to be made or positions taken physical commodities, the phrase ‘‘risk hedges for purposes of federal limits management exemption’’ has historically been used or to be taken at a later time in a by Commission staff to refer to non-enumerated would be significantly more efficient physical marketing channel....’’55 bona fide hedge recognitions granted under § 1.47 than the existing processes for The Commission preliminarily to allow swap dealers and others to hold exchanges and the Commission.51 The interprets this change as reflecting agricultural futures positions outside of the spot Commission discusses each element of month in excess of federal limits in order to offset commodity index swap or related exposure, the proposed bona fide hedging 52 Bona fide hedge recognition is determined typically opposite an institutional investor for definition below, followed by a based on the particular circumstances of a position which the swap was not a bona fide hedge. As discussion of the proposed enumerated or transaction and is not conferred on the basis of described below, due to differences in statutory hedges. The Commission’s intent with the involved market participant alone. Accordingly, language, the phrase ‘‘risk management exemption’’ while a particular position may qualify as a bona this proposal is to acknowledge to the often has a broader meaning in connection with fide hedge for a given market participant, another excluded commodities than with physical greatest extent possible, consistent with position held by that same participant may not. commodities. See infra Section II.A.1.c.v. the statutory language, existing bona Similarly, if a participant holds positions that are (discussion of proposed pass-through language). recognized as bona fide hedges, and holds other 58 7 U.S.C. 6a(c)(2)(B). See infra Section II.A.1.c.v. positions that are speculative, only the speculative 51 In this rulemaking, the Commission proposes to (discussion of proposed pass-through language). positions would be subject to position limits. allow qualifying exchanges to process requests for Excluded commodities, as described in further 53 non-enumerated bona fide hedge recognitions for 7 U.S.C. 6a(c)(2)(A)(i). detail below, are not subject to the statutory bona purposes of federal limits. See infra Section II.G.3. 54 17 CFR 1.3. fide hedging definition. Accordingly, the statutory (discussion of proposed § 150.9). 55 7 U.S.C. 6a(c)(2)(A)(i). Continued

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the Commission previously viewed currently subject to federal limits,62 may Commenters have previously positions in physical commodities, accommodate risk management activity requested flexibility for hedges of non- entered into for risk management that remains below the proposed levels price risk.67 However, re-interpreting purposes to offset the risk of swaps and in a manner that comports with the ‘‘risk’’ to mean something other than other financial instruments and not as CEA. Further, to the extent that such ‘‘price risk’’ would make determining substitutes for transactions or positions activity would be opposite a whether a particular position is to be taken in a physical marketing counterparty for whom the swap is a economically appropriate to the channel, as bona fide hedges. However, bona fide hedge, the Commission would reduction of risk too subjective to given the statutory change, positions encourage intermediaries to consider effectively evaluate. While the that reduce the risk of such swaps and whether they would qualify under the Commission or an exchange’s staff can financial instruments would no longer bona fide hedging position definition for objectively evaluate whether a meet the requirements for a bona fide the proposed pass-through swap particular derivatives position is an hedging position under CEA section treatment, which is explicitly economically appropriate hedge of a 4a(c)(2) and under proposed § 150.1. As authorized by the CEA and discussed in price risk arising from an underlying discussed below, any such previously- greater detail below.63 Moreover, while cash-market transaction, including by granted risk management exemptions positions entered into for risk assessing the correlations between the would generally no longer apply after management purposes may no longer risk and the derivatives position, it the effective date of the speculative qualify as bona fide hedges, some may would be more difficult, if not position limits proposed herein.59 satisfy the proposed requirements for impossible, to objectively determine Further, retaining such exemptions for spread exemptions. Finally, consistent whether an offset of non-price risk is swap intermediaries, without regard to with existing industry practice, economically appropriate for the the purpose of their counterparty’s exchanges may continue to recognize underlying risk. For example, for any swap, would be inconsistent with the risk management positions for contracts given non-price risk, such as political statutory restrictions on pass-through that are not subject to federal limits, risk, there could be multiple swap offsets, which require that the including for excluded commodities. commodities, directions, and contract months which a particular market swap position being offset qualify as a (2) Economically Appropriate Test bona fide hedging position.60 Aside participant may view as an from this change, the Commission is not The bona fide hedging definitions in economically appropriate offset for that proposing any other modifications to its section 4a(c)(2)(A)(ii) of the CEA and in risk, and multiple market participants existing temporary substitute test. existing § 1.3 of the Commission’s might take different views on which regulations both provide that a bona fide offset is the most effective. Re- While the Commission preliminarily hedging position must be ‘‘economically interpreting ‘‘risk’’ to mean something interprets the Dodd-Frank amendments appropriate to the reduction of risks in other than ‘‘price risk’’ would introduce to the CEA as constraining the the conduct and management of a an element of subjectivity that would Commission from recognizing as bona commercial enterprise.’’ 64 The make a federal position limit framework fide hedges risk management positions Commission proposes to replicate this difficult, if not impossible, to involving physical commodities, the standard in the new definition in administer. Commission has in part addressed the § 150.1, with one clarification: The Commission remains open to hedging needs of persons seeking to Consistent with the Commission’s receiving new product submissions, and offset the risk from swap books by longstanding practice regarding what should those submissions include proposing the pass-through swap and types of risk may be offset by bona fide contracts or strategies that are used to pass-through swap offset provisions hedging positions in excess of federal hedge something other than price risk, discussed below. limits,65 the Commission proposes to the Commission could at that point The Commission observes that while make explicit that the word ‘‘risks’’ evaluate whether to propose regulations ‘‘risk management’’ positions would not refers to, and is limited to, ‘‘price risk.’’ that would recognize hedges of risks qualify as bona fide hedges, some other This proposed clarification does not other than price risk as bona fide provisions in this proposal may provide reflect any change in policy, as the hedges. flexibility for existing and prospective Commission has, when defining bona risk management exemption holders in fide hedging, historically focused on (3) Change in Value Requirement a manner that comports with the statute. transactions that offset price risk.66 The Commission proposes to retain In particular, the Commission the substance of the change in value anticipates that the proposal to limit the 62 The proposed non-spot month levels for the requirement in existing § 1.3, with some applicability of federal non-spot month nine legacy agricultural contracts were calculated non-substantive technical using a methodology that, with the exception of limits to the nine legacy agricultural CBOT Oats (O), CBOT KC HRW Wheat (KW), and modifications, including modifications 61 contracts, coupled with the proposed MGEX HRS Wheat (MWE), would result in higher to correct a typographical error.68 Aside adjustment to non-spot limit levels levels than under existing rules and prior proposals. based on updated open interest numbers See infra Section II.B.2.d (discussion of proposed being hedged.’’ Bona Fide Hedging Transactions or for the nine legacy agricultural contracts non-spot month limit levels). Positions, 42 FR 14832, 14833 (Mar. 16, 1977). 63 See infra Section II.A.1.c.v. (discussion of ‘‘Value’’ is generally understood to mean price proposed pass-through language). times quantity. Dodd-Frank added CEA section restrictions on risk management exemptions that 64 7 U.S.C. 6a(c)(2)(A)(ii) and 17 CFR 1.3. 4a(c)(2), which copied the economically apply to physical commodities subject to federal 65 See, e.g., 2013 Proposal, 78 FR at 75709, 75710. appropriate test from the Commission’s definition limits do not apply to excluded commodities. 66 For example, in promulgating existing § 1.3, the in § 1.3. See also 2013 Proposal, 78 FR at 75702, 59 See infra Section II.C.2.g. (discussion of Commission explained that a bona fide hedging 75703 (stating that the ‘‘core of the Commission’s revoking existing risk management exemptions). position must, among other things, ‘‘be approach to defining bona fide hedging over the 60 See 7 U.S.C. 6a(c)(2)(B)(i). The pass-through economically appropriate to risk reduction, such years has focused on transactions that offset a swap offset language in the proposed bona fide risks must arise from operation of a commercial recognized physical price risk’’). hedging definition is discussed in greater detail enterprise, and the price fluctuations of the futures 67 See, e.g., 2016 Reproposal, 81 FR at 96847. below. contracts used in the transaction must be 68 The Commission proposes to replace the phrase 61 See infra Section II.B.2.d. (discussion of non- substantially related to fluctuations of the cash ‘‘liabilities which a person owns,’’ which appears spot month limit levels). market value of the assets, liabilities or services in the statute erroneously, with ‘‘liabilities which

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from the typographical error, the because the meaning of ‘‘orderly proposed Appendix A to part 150 of the proposed § 150.1 change in value trading’’ is unclear in the context of the Commission’s regulations. The requirement mirrors the Dodd-Frank over-the counter (‘‘OTC’’) swap market Commission preliminarily believes that Act’s change in value requirement in and in the context of permitted off- the list of enumerated hedges should CEA section 4a(c)(2)(A)(iii).69 exchange transactions, such as exchange appear in an appendix, rather than be for physicals. The proposed elimination (4) Incidental Test and Orderly Trading included in the definition, because each of the orderly trading requirement Requirement enumerated hedge represents just one would also have no bearing on an way, but not the only way, to satisfy the While the Commission proposes to exchange’s ability to impose its own proposed bona fide hedging definition maintain the substance of the three core orderly trading requirement. Further, in and § 150.3(a)(1).76 In some places, as elements of the existing bona fide proposing to eliminate the orderly described below, the Commission hedging definition described above, trading requirement from the definition proposes to modify and/or re-organize with some modifications, the in the regulations, the Commission is the language of the current enumerated Commission also proposes to eliminate not proposing any amendments or hedges; such proposed changes are two elements contained in the existing modified interpretations to any other intended only to provide clarifications, § 1.3 definition: The incidental test and related requirements, including to any and, unless indicated otherwise, are not orderly trading requirement that of the anti-disruptive trading intended to substantively modify the currently appear in paragraph (1)(iii) of prohibitions in CEA section 4c(a)(5),73 types of practices currently listed as the § 1.3 bona fide hedging definition.70 or to any other statutory or regulatory enumerated hedges. In other places, Notably, Congress eliminated the provisions. however, the Commission proposes incidental test from the statutory bona Taken together, the proposed substantive changes to the existing fide hedging definition in CEA section retention of the updated temporary enumerated hedges, including the 71 4a(c)(2). Further, the Commission substitute test, economically elimination of the five-day rule for views the incidental test as redundant appropriate test, and change in value purposes of federal limits, while because the Commission is proposing to requirement, coupled with the proposed allowing exchanges to impose a five-day maintain the change in value elimination of the incidental test and rule, or similar restrictions, for purposes requirement (value is generally orderly trading requirement, should of exchange-set limits. With the understood to mean price per unit times reduce uncertainty by eliminating exception of risk management positions quantity of units), and the economically provisions that do not appear in the previously recognized as bona fide appropriate test, which includes the statute, and by clarifying the language of hedges, and assuming all regulatory concept of the offset of price risks in the the remaining provisions. By reducing requirements continue to be satisfied, conduct and management of (i.e., uncertainty surrounding some parts of bona fide hedging recognitions that are incidental to) a commercial enterprise. the bona fide hedging definition for currently in effect under the The Commission does not view the physical commodities, the Commission Commission’s existing rules, either by proposed elimination of the incidental anticipates that, as described in greater virtue of § 1.47 or one of the enumerated test in the definition that appears in the detail elsewhere in this release, it would hedges currently listed in § 1.3, would regulations as a change in policy. The be easier going forward for the be grandfathered once the rules proposed elimination would not result Commission, exchanges, and market proposed herein are adopted. in any changes to the Commission’s participants to address whether novel When first proposed, the Commission trading practices or strategies may interpretation of the bona fide hedging viewed the enumerated bona fide qualify as bona fide hedges. definition for physical commodities. hedges as conforming to the general The Commission also preliminarily iii. Proposed Enumerated Bona Fide definition of bona fide hedging ‘‘without believes that the orderly trading Hedges for Physical Commodities further consideration as to the requirement should be deleted from the particulars of the case.’’ 77 Similarly, the definition in the Commission’s Federal position limits currently only proposed enumerated hedges would regulations because the statutory bona apply to referenced contracts based on reflect fact patterns for which the fide hedging definition does not include nine legacy agricultural commodities, Commission has preliminarily an orderly trading requirement,72 and and, as mentioned above, the bona fide hedging definition in existing § 1.3 determined, based on experience over a person owes,’’ which the Commission believes includes a list of four categories of time, that no case-by-case was the intended wording. The Commission enumerated hedges that may be exempt determination, or review of additional interprets the word ‘‘owns’’ to be a typographical from federal position limits.74 So as not details, by the Commission is needed to error. A person may owe on a liability, and may determine that the position or anticipate incurring a liability. If a person ‘‘owns’’ to reduce any of the clarity provided by a liability, such as a debt instrument issued by the current list of enumerated hedges, transaction is a bona fide hedge. This another, then such person owns an asset. The fact the Commission proposes to maintain proposal would in no way foreclose the that assets are included in CEA section the existing enumerated hedges, some recognition of other hedging practices as 4a(c)(2)(A)(iii)(I) further reinforces the bona fide hedges. Commission’s interpretation that the reference to with modification, and, for the reasons ‘‘owns’’ means ‘‘owes.’’ The Commission also described below, to expand this list. The Commission would be open, on proposes several other non-substantive Such enumerated bona fide hedges a case-by-case basis, to recognizing as modifications in sentence structure to improve would be self-effectuating for purposes bona fide hedges positions or clarity. of federal limits.75 The Commission also transactions that may fall outside the 69 7 U.S.C. 6a(c)(2)(A)(iii). bounds of these enumerated hedges, but 70 proposes to move the expanded list to 17 CFR 1.3. that nevertheless satisfy the proposed 71 7 U.S.C. 6a(c)(2). 72 The orderly trading requirement has been a part in 1974 removed the statutory definition from CEA of the regulatory definition of bona fide hedging section 4a(3). 76 As discussed below, proposed § 150.3(a)(1) since 1975; see Hedging Definition, Reports, and 73 7 U.S.C. 6c(a)(5). would allow a person to exceed position limits for Conforming Amendments, 40 FR 11560 (Mar. 12, 74 17 CFR 1.3. bona fide hedging transactions or positions, as 1975). Prior to 1974, the orderly trading 75 See infra Section II.C.2. (discussion of defined in proposed § 150.1. requirement was found in the statutory definition proposed § 150.3) and Section II.G.3. (discussion of 77 Bona Fide Hedging Transactions or Positions, of bona fide hedging position; changes to the CEA proposed § 150.9). 42 FR 14832 (Mar. 16, 1977).

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bona fide hedging definition and section (2) Hedges of Offsetting Unfixed Price the unfixed-price purchase or the 4a(c)(2) of the CEA.78 Cash Commodity Sales and Purchases unfixed-price sale (or absent both), it The Commission does not anticipate This hedge is currently enumerated in would be less clear how the transaction that moving the list of enumerated paragraph (2)(iii) of the bona fide could be classified as a bona fide hedge, hedges from the bona fide hedging hedging definition in § 1.3 and is subject that is, a transaction that reduces price 83 definition to an appendix per se would to the five-day rule. The Commission risk. have a substantial impact on market proposes to maintain it as an This is not to say that an unfixed- participants who seek clarity regarding enumerated hedge, with one proposed price cash commodity purchase alone, bona fide hedges. However, the modification described below. This or an unfixed-price cash commodity Commission is open to feedback on this enumerated hedge allows a market sale alone, could never be recognized as point. participant to use commodity a bona fide hedge. Rather, an additional Positions in referenced contracts derivatives in excess of limits to offset facts and circumstances analysis would subject to position limits that meet any an unfixed price cash commodity be warranted in such cases. Further, upon fixing the price of, or of the proposed enumerated hedges purchase coupled with an unfixed price taking delivery on, the purchase would, for purposes of federal limits, cash commodity sale. contract, the owner of the cash meet the bona fide hedging definition in Currently, under paragraph (2)(iii), commodity may hold the CEA section 4a(c)(2)(A), as well as the the cash commodity must be bought and leg of the spread as a hedge Commission’s proposed bona fide sold at unfixed prices at a basis to against a fixed-price purchase or hedging definition in § 150.1. Any such different delivery months, meaning the inventory. However, the long derivative recognitions would be self-effectuating offsetting derivatives transaction would leg of the spread would no longer for purposes of federal limits, provided be used to reduce the risk arising from qualify as a bona fide hedging position, the market participant separately a time differential in the unfixed-price 80 since the commercial entity has fixed requests an exemption from the purchase and sale contracts. The the price or taken delivery on the applicable exchange-set limit Commission proposes to expand this purchase contract. Similarly, if the established pursuant to proposed provision to also permit the cash commercial entity first fixed the price of § 150.5(a). The proposed enumerated commodity to be bought and sold at the sales contract, the long derivative hedges are each described below, unfixed prices at a basis to different leg of the spread may be held as a hedge followed by a discussion of the commodity derivative contracts in the against a fixed-price sale, but the short proposal’s treatment of the five-day rule. same commodity, even if the commodity derivative contracts are in derivative leg of the spread would no (1) Hedges of Unsold Anticipated the same calendar month. The longer qualify as a bona fide hedging Production Commission is proposing this change to position. Commercial entities in these circumstances thus may have to This hedge is currently enumerated in allow a commercial enterprise to enter consider reducing certain positions in paragraph (2)(i)(B) of the bona fide into the described derivatives order to comply with the regulations hedging definition in § 1.3, and is transactions to reduce the risk arising proposed herein. subject to the five-day rule. The from either (or both) a location 81 Commission proposes to maintain it as differential or a time differential in (3) Short Hedges of Anticipated Mineral an enumerated hedge, with the unfixed-price purchase and sale Royalties modification described below. This contracts in the same cash commodity. Both an unfixed-price cash The Commission is proposing a new enumerated hedge would allow a acceptable practice that is not currently market participant who anticipates commodity purchase and an offsetting unfixed-price cash commodity sale must enumerated in § 1.3 for short hedges of production, but who has not yet anticipated mineral royalties. The produced anything, to enter into a short be in hand in order to be eligible for this enumerated hedge, because having both Commission previously adopted a derivatives position in excess of limits similar provision as an enumerated to hedge the anticipated production. the unfixed-price sale and purchase in hand would allow for an objective hedge in part 151 in response to a While existing paragraph (2)(i)(B) 84 evaluation of the hedge.82 Absent either request from commenters. The limits this enumerated hedge to twelve- proposed provision would permit an months’ unsold anticipated production, 80 The Commission stated when it proposed this owner of rights to a future royalty to the Commission proposes to remove the enumerated hedge, ‘‘[i]n particular, a cotton lock in the price of anticipated mineral twelve-month limitation. The twelve- merchant may contract to purchase and sell cotton production by entering into a short month limitation may be unsuitable in in the cash market in relation to the futures price position in excess of limits in a in different delivery months for cotton, i.e., a basis connection with additional contracts purchase and a basis sale. Prior to the time when commodity derivative contract to offset based on agricultural and energy the price is fixed for each leg of such a cash the anticipated change in value of commodities covered by this release, position, the merchant is subject to a variation in mineral royalty rights that are owned by which may have longer growth and/or the two futures contracts utilized for price basing. that person and arise out of the This variation can be offset by purchasing the future production cycles than the nine legacy on which the sales were based [and] selling the production of a mineral commodity agricultural commodities. Commenters future on which [the] purchases were based.’’ have also previously recommended Revision of Federal Speculative Position Limits, 51 83 In 2013, the Commission provided an example removing the twelve-month limitation FR 31648, 31650 (Sept. 4, 1986). regarding this enumerated hedge: ‘‘The on agricultural production, stating that 81 In the case of reducing the risk of a location contemplated derivative positions will offset the differential, and where each of the underlying risk that the difference in the expected delivery it is unnecessarily short in comparison transactions in separate derivative contracts may be prices of the two unfixed-price cash contracts in the to the expected life of investment in in the same contract month, a position in a basis same commodity will change between the time the production facilities.79 The Commission contract would not be subject to position limits, as hedging transaction is entered and the time of fixing preliminarily agrees. discussed in connection with paragraph (3) of the of the prices on the purchase and sales cash proposed definition of ‘‘referenced contract.’’ contracts. Therefore, the contemplated derivative 82 For example, in the case of a calendar spread, positions are economically appropriate to the 78 See infra Section II.G.3. (discussion of having both the unfixed-price sale and purchase in reduction of risk.’’ 2013 Proposal, 78 FR at 75715. proposed § 150.9). hand would set the timeframe for the calendar 84 See 2011 Final Rulemaking, 76 FR at 71646. As 79 See, e.g., 2016 Reproposal, 81 FR at 96752. month spread being used as the hedge. noted above, part 151 was subsequently vacated.

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(e.g., oil and gas).85 The Commission bona fide hedging without further reasonable commercial relationship.92 preliminarily believes that this remains consideration as to the particulars of the For example, there is a reasonable a common hedging practice, and that case. commercial relationship between grain positions that satisfy the requirements sorghum, used as a food grain for (5) Cross-Commodity Hedges of this acceptable practice would humans or as animal feedstock, with conform to the general definition of Paragraph (2)(iv) of the existing § 1.3 corn underlying a derivative. There bona fide hedging without further bona fide hedge definition enumerates currently is not a futures contract for consideration as to the particulars of the the offset of cash purchases, sales, or grain sorghum grown in the United case. purchases and sales with a commodity States listed on a U.S. DCM, so corn The Commission proposes to limit derivative other than the commodity represents a substantially related this acceptable practice to mineral that comprised the cash position(s).88 commodity to grain sorghum in the royalties; the Commission preliminarily The Commission proposes to include United States.93 In contrast, there does believes that while royalties have been this hedge in the enumerated hedges not appear to be a reasonable paid for use of land in agricultural and expand its application such that commercial relationship between a production, the Commission has not cross-commodity hedges could be used physical commodity, say copper, and a received any evidence of a need for a to establish compliance with: Each of broad-based price index, such as bona fide hedge recognition from the proposed enumerated hedges listed the S&P 500 Index, because these owners of agricultural production in Appendix A to part 150; 89 and commodities are not reasonable royalties. The Commission requests hedges in the proposed pass-through substitutes for each other in that they comment on whether and why such an provisions under paragraph (2) of the have very different pricing drivers. That exemption might be needed for owners proposed bona fide hedging definition is, the price of a physical commodity is of agricultural production or other discussed further below; provided, in based on supply and demand, whereas royalties. each case, that the position satisfies the stock price index is based on various each element of the relevant acceptable individual stock prices for different (4) Hedges of Anticipated Services 90 practice. companies. The Commission is proposing a new This enumerated hedge is conditioned enumerated hedge that is not currently on the fluctuations in value of the (6) Hedges of Inventory and Cash enumerated in the § 1.3 bona fide position in the commodity derivative Commodity Fixed-Price Purchase hedging definition for hedges of contract or of the underlying cash Contracts anticipated services. The Commission commodity being ‘‘substantially Hedges of inventory and cash- previously adopted a similar provision related’’ 91 to the fluctuations in value of commodity fixed-price purchase as an enumerated hedge in part 151 in the actual or anticipated cash position contracts are included in paragraph response to a request from or pass-through swap. To be (2)(i)(A) of the existing § 1.3 bona fide 86 commenters. This enumerated hedge ‘‘substantially related,’’ the derivative hedge definition, and the Commission would recognize as a bona fide hedge a and cash market position, which may be proposes to include them as an long or short derivatives position used in different commodities, should have a enumerated hedge with minor to hedge the anticipated change in value modifications. This proposed of receipts or payments due or expected 88 For example, existing paragraph (2)(iv) of the enumerated hedge acknowledges that a to be due under an executed contract for bona fide hedging definition recognizes as an commercial enterprise is exposed to services arising out of the production, enumerated hedge the offset of a cash-market position in one commodity, such as soybeans, price risk (e.g., that the market price of manufacturing, processing, use, or through a derivatives position in a different the inventory could decrease) if it has transportation of the commodity commodity, such as soybean oil or soybean meal. obtained inventory in the normal course underlying the commodity derivative 89 Specifically, for: (i) Hedges of unsold of business or has entered into a fixed- contract.87 The Commission anticipated production, (ii) hedges of offsetting unfixed-price cash commodity sales and purchases, price spot or forward purchase contract preliminarily believes that this remains (iii) hedges of anticipated mineral royalties, (iv) calling for delivery in the physical a common hedging practice, and that hedges of anticipated services, (v) hedges of marketing channel of a cash-market positions that satisfy the requirements inventory and cash commodity fixed-price purchase commodity (or a combination of the of this acceptable practice would contracts, (vi) hedges of cash commodity fixed-price sales contracts, (vii) hedges by agents, and (viii) two), and has not offset that price risk. conform to the general definition of offsets of commodity trade options, a cross- Any such inventory, or a fixed-price commodity hedge could be used to offset risks purchase contract, must be on hand, as 85 A short position fixes the price of the arising from a commodity other than the cash opposed to a non-fixed purchase anticipated receipts, removing exposure to change commodity underlying the commodity derivatives in value of the person’s share of the production contract. contract or an anticipated purchase. To revenue. A person who has issued a royalty, in 90 For example, an airline that wishes to hedge satisfy the requirements of this contrast, has, by definition, agreed to make a the price of jet fuel may enter into a swap with a particular enumerated hedge, a bona payment in exchange for value received or to be swap dealer. In order to remain flat, the swap dealer fide hedge would be to establish a short received (e.g., the right to extract a mineral). Upon may offset that swap with a futures position, for extraction of a mineral and sale at the prevailing example, in ULSD. Subsequently, the airline may position in a commodity derivative cash market price, the issuer of a royalty remits part also offset the swap exposure using ULSD futures. contract to offset such price risk. An of the proceeds in satisfaction of the royalty In this example, under the pass-through swap exchange may require such short agreement. The issuer of a royalty, therefore, does language of proposed § 150.1, the airline would be position holders to demonstrate the not have price risk arising from that royalty acting as a bona fide hedging swap counterparty agreement. and the swap dealer would be acting as a pass- ability to deliver against the short 86 See 2011 Final Rulemaking, 76 FR at 71646. As through swap counterparty. In this example, noted above, part 151 was subsequently vacated. provided each element of the enumerated hedge in 92 Id. 87 As the Commission previously stated, paragraph (a)(5) of Appendix A, the pass-through 93 Grain sorghum was previously listed for trading regarding a proposed hedge for services, ‘‘crop swap provision in § 150.1, and all other regulatory on the Kansas City Board of Trade and Chicago insurance providers and other agents that provide requirements are satisfied, the airline and swap Mercantile Exchange, but because of liquidity services in the physical marketing channel could dealer could each exceed limits in ULSD futures to issues, grain buyers continued to use the more qualify for a bona fide hedge of their contracts for offset their respective swap exposures to jet fuel. liquid corn futures contract, which suggests that the services arising out of the production of the See infra Section II.A.1.c.v. (discussion of proposed basis risk between corn futures and cash sorghum commodity underlying a [commodity derivative pass-through language). could be successfully managed with the corn contract].’’ 2013 Proposal, 78 FR at 75716. 91 See proposed Appendix A to part 150. futures contract.

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position in order to demonstrate a such circumstances, the agent or the offset the expected price risks associated legitimate purpose for holding a commercial firm would not take with the anticipated future purchase of position deep into the spot month.94 ownership of the commodity it trades the cash-market commodity underlying on behalf of the farmer, producer, or the commodity derivative contract. (7) Hedges of Cash Commodity Fixed- government, but would be an agent Such unfilled anticipated requirements Price Sales Contracts eligible for an exemption to hedge the could include requirements for This hedge is enumerated in risks associated with such cash processing, manufacturing, use by that paragraphs (2)(ii)(A) and (B) of the positions. person, or resale by a utility to its existing § 1.3 bona fide hedge definition, customers.99 Consistent with the and the Commission proposes to (9) Offsets of Commodity Trade Options existing provision, for purposes of maintain it as an enumerated hedge. The Commission is proposing a new exchange-set limits, exchanges may This enumerated hedge acknowledges enumerated hedge to recognize certain wish to consider adopting rules that a commercial enterprise is exposed offsets of commodity trade options as a providing that during the lesser of the to price risk (i.e., that the market price bona fide hedge. Under this proposed last five days of trading (or such time of a commodity might be higher than enumerated hedge, a commodity trade period for the spot month), such the price of a fixed-price sales contract option meeting the requirements of positions must not exceed the person’s for that commodity) if it has entered § 32.3 96 of the Commission’s unfilled anticipated requirements of the into a spot or forward fixed-price sales regulations 97 may be deemed a cash underlying cash commodity for that contract calling for delivery in the commodity fixed-price purchase or cash month and for the next succeeding physical marketing channel of a cash- commodity fixed-price sales contract, as month.100 Any such quantity limitation market commodity, and has not offset the case may be, provided that such may help prevent the use of long futures that price risk. To satisfy the option is adjusted on a futures- to source large quantities of the requirements of this particular equivalent basis.98 Because the underlying cash commodity. The enumerated hedge, a bona fide hedge Commission proposes to include hedges Commission preliminarily believes that would be to establish a long position in of cash commodity fixed-price purchase the two-month limitation would allow a commodity derivative contract to contracts and hedges of cash commodity for an amount of activity that is in line offset such price risk. fixed-price sales contracts as with common commercial hedging enumerated hedges, the Commission practices, without jeopardizing any (8) Hedges by Agents also proposes to include hedges of statutory objectives. This proposed enumerated hedge is commodity trade options as an Although existing paragraph (2)(ii)(C) included in paragraph (3) of the existing enumerated hedge. limits this enumerated hedge to twelve- § 1.3 bona fide hedge definition as an months’ unfilled anticipated (10) Hedges of Unfilled Anticipated example of a potential non-enumerated requirements outside of the spot period, Requirements bona fide hedge. The Commission the Commission proposes to remove the proposes to include this example as an This proposed enumerated hedge twelve-month limitation because enumerated hedge, with non- appears in paragraph (2)(ii)(C) of the commenters have previously stated, and substantive modifications,95 because the existing § 1.3 bona fide hedge definition. the Commission preliminarily believes, Commission preliminarily believes that The Commission proposes to include it that there is a commercial need to hedge this is a common hedging practice, and as an enumerated hedge, with unfilled anticipated requirements for a that positions which satisfy the modification. To satisfy the time period longer than twelve requirements of this enumerated hedge requirements of this particular months.101 would conform to the general definition enumerated hedge, a bona fide hedge (11) Hedges of Anticipated of bona fide hedging without further would be to establish a long position in Merchandising consideration as to the particulars of the a commodity derivative contract to The Commission is proposing a new case. This proposed provision would 96 enumerated hedge to recognize certain allow an agent who has the 17 CFR 32.3. In order to qualify for the trade offsets of anticipated purchases or sales responsibility to trade cash commodities option exemption, § 32.3 requires, among other things, that: (1) The offeror is either (i) an eligible as a bona fide hedge. Under this on behalf of another entity for which contract participant, as defined in section 1a(18) of proposed enumerated hedge, a merchant such positions would qualify as bona the Act, or (ii) offering or entering into the may establish a long or short position in fide hedging positions to hedge those commodity trade option solely for purposes related cash positions on a long or short basis. to its business as a ‘‘producer, processor, or commercial user of, or a merchant handling the 99 The proposed inclusion of unfilled anticipated For example, an agent may trade on commodity that is the subject of the’’ trade option; requirements for resale by a utility to its customers behalf of a farmer or a producer, or a and (2) the offeree is offered or entering into the does not appear in the existing § 1.3 bona fide government may wish to contract with commodity trade option solely for purposes related hedging definition. This provision is analogous to to its business as ‘‘a producer, processor, or the unfilled anticipated requirements provision of a commercial firm to manage the commercial user of, or a merchant handling the existing paragraph (2)(ii)(C) of the existing bona fide government’s cash wheat inventory; in commodity that is the subject’’ of the commodity hedging definition, except the commodity is not for trade option. use by the same person (that is, the utility), but 94 For example, it would not appear to be 97 17 CFR 32.3. rather for anticipated use by the utility’s customers. economically appropriate to hold a short position 98 It may not be possible to compute a futures- This would recognize a bona fide hedging position in the spot month of a commodity derivative equivalent basis for a trade option that does not where a utility is required or encouraged by its contract against fixed-price purchase contracts that have a fixed strike price. Thus, under this public utility commission to hedge. provide for deferred delivery in comparison to the enumerated hedge, a market participant may not 100 This is essentially a less-restrictive version of delivery period for the spot month commodity use a trade option as a basis for a bona fide hedging the five-day rule, allowing a participant to hold a derivative contract. This is because the commodity position until a fixed strike price reasonably may position during the end of the spot period if under the cash contract would not be available for be determined. For example, a commodity trade economically appropriate, but only up to two delivery on the commodity derivative contract. option with a fixed strike price may be converted months’ worth of anticipated requirements. The 95 For example, the Commission proposes to to a futures-equivalent basis, and, on that futures- two-month quantity limitation has long-appeared in replace the phrase ‘‘offsetting cash commodity’’ equivalent basis, deemed a cash commodity sale existing § 1.3 as a measure to prevent the sourcing with ‘‘contract’s underlying cash commodity’’ to contract, in the case of a short call option or long of massive quantities of the underlying in a short use language that is consistent with the other put option, or a cash commodity purchase contract, time period. 17 CFR 1.3. proposed enumerated hedges. in the case of a long call option or short put option. 101 See, e.g., 2016 Reproposal, 81 FR at 96751.

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a commodity derivative contract to bona fide hedge recognition under the be thoughtful and deliberate in granting offset the anticipated change in value of proposed non-enumerated process, so exemptions, including anticipatory the underlying commodity that the long as the merchandiser can otherwise exemptions. merchant anticipates purchasing or show activities in the physical The Commission and the exchanges selling in the future. To safeguard marketing channel, including, for also have a variety of other tools against misuse, the enumerated hedge example, arrangements to take or make designed to help prevent misuse of self- would be subject to certain conditions. delivery of the underlying commodity. effectuating exemptions. For example, First, the commodity derivative position The Commission preliminarily market participants who submit an must not exceed in quantity twelve believes that anticipated merchandising application to an exchange as required months’ of purchase or sale is a hedging practice commonly used by under § 150.5 would be subject to the requirements of the same commodity some commodity market participants, Commission’s false statements authority that is anticipated to be merchandised. and that merchandisers play an that carries with it substantial penalties This requirement is intended to ensure important role in the physical supply under both the CEA and federal that merchants are hedging their chain. Positions which satisfy the criminal statutes.103 Similarly, the anticipated merchandising exposure to requirements of this acceptable practice Commission can use surveillance tools, the value change of the underlying would thus conform to the general special call authority, rule enforcement commodity, while calibrating the definition of bona fide hedging. reviews, and other formal and informal anticipated need within a reasonable While each of the proposed avenues for obtaining additional timeframe and the limitations in enumerated hedges described above information from exchanges and market physical commodity markets, such as would be self-effectuating for purposes participants in order to distinguish annual production or processing of federal limits, the Commission and between true hedging needs and capacity. Unlike in the enumerated the exchanges would continue to speculative trading masquerading as a hedge for unsold anticipated exercise close oversight over such bona fide hedge. production, where the Commission is positions to confirm that market In the 2013 Proposal, the Commission proposing to eliminate the twelve- participants’ claimed exemptions are previously addressed a petition for month limitation, the Commission has consistent with their cash-market exemptive relief for 10 transactions preliminarily determined that a twelve- activity. In particular, because all described as bona fide hedging month limitation for anticipatory contracts subject to federal limits would transactions by the Working Group of merchandising is suitable in connection also be subject to exchange-set limits, all Commercial Energy Firms (which has with contracts that are based on traders seeking to exceed federal since reconstituted itself as the anticipated activity on yet-to-be position limits would have to request an ‘‘Commercial Energy Working Group’’) exemption from the relevant exchange 104 established cash positions due to the (‘‘BFH Petition’’). In the 2013 for purposes of the exchange limit, Proposal, the Commission included uncertainty of forecasting such activity regardless of whether the position falls examples Nos. 1, 2, 6, 7 (scenario 1), and, all else being equal, the increased within one of the enumerated hedges. In and 8 as being permitted under the risk of excessive speculation on the other words, enumerated bona fide proposed definition of bona fide price of a commodity the longer the hedge recognitions that are self- hedging. time period before the actual need effectuating for purposes of federal With respect to the rules proposed arises. limits would not be self-effectuating for herein, the Commission has Second, the Commission is proposing purposes of exchange limits. preliminarily determined that example to limit this enumerated hedge to Exchanges have well-established #4 (binding, irrevocable bids or offers) merchants who are in the business of programs for granting exemptions, and #5 (timing of hedging physical purchasing and selling the underlying including, in some cases, experience transactions) from the BFH Petition commodity that is anticipated to be granting exemptions for anticipatory potentially fit within the proposed merchandised, and who can merchandising for certain traders in Appendix A paragraph (a)(11) demonstrate that it is their historical markets not currently subject to federal enumerated hedge of anticipatory practice to do so. Such demonstrated limits. As discussed in greater detail merchandising, so long as the history should include a history of below, proposed § 150.5 102 would transaction complies with each making and taking delivery of the ensure that such programs require, condition of that proposed enumerated underlying commodity, and a among other things, that: Exemption hedge. demonstration of an ability to store and applications filed with an exchange In addition, as discussed further move the underlying commodity. The include sufficient information to enable below, because the Commission is also Commission has a longstanding practice the exchange to determine, and the proposing to eliminate the five-day rule of providing exemptive relief to Commission to verify, whether the from the enumerated hedges to which commercial market participants to exchange may grant the exemption, the five-day rule currently applies, the enable physical commodity markets to including an indication of whether the Commission has preliminarily continue to be well-functioning markets. position qualifies as an enumerated determined that example #9 (holding a The proposed anticipatory hedge for purposes of federal limits and cross-commodity hedge using a physical merchandising hedge requires that the a description of the applicant’s activity delivery contract into the spot month) person be a merchant handling the in the underlying cash markets; and that and #10 (holding a cross-commodity underlying commodity that is subject to the exchange provides the Commission hedge using a physical delivery contract the anticipatory merchandising hedge with a monthly report showing the to meet unfilled anticipated and that such merchant is entering into disposition of all exemption the anticipatory merchandising hedge applications, including cash market 103 CEA section 6(c)(2), 7 U.S.C. 9(2); CEA section solely for purposes related to its information justifying the exemption. 9(a)(3), 7 U.S.C. 13(a)(3); CEA section 9(a)(4), 7 merchandising business. A U.S.C. 13(a)(4); 18 U.S.C. 1001. The Commission expects exchanges will 104 The Working Group BFH Petition is available merchandiser that lacks the requisite at http://www.cftc.gov/stellent/groups/public/@ history of anticipatory merchandising 102 See infra Section II.D.4. (discussion of rulesandproducts/documents/ifdocs/wgbfhpetition activity could still potentially receive proposed § 150.5). 012012.pdf.

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requirements) from the BFH Petition trading days could submit materials additional solutions other than a five- potentially fit within the proposed supporting a classification of the day rule that protect convergence while Appendix A paragraph (a)(5) position as a bona fide hedge, based on minimizing the impact on market enumerated hedge, so long as the the particular facts and participants. The proposed approach transaction otherwise complies with the circumstances.108 would allow exchanges to design and additional conditions of all applicable The Commission has viewed the five- tailor a variety of limitations to protect enumerated hedges and other day rule as an important way to help convergence during the spot period. For requirements. ensure that futures and cash-market example, in certain circumstances, a Regarding examples #3 (unpriced prices converge and to prevent smaller quantity restriction, rather than physical purchase or sale commitments) excessive speculation as a physical- a complete restriction on holding and #7 (scenario 2) (use of physical delivery contract nears expiration, positions in excess of limits during the delivery referenced contracts to hedge thereby protecting the integrity of the spot period, may be effective at physical transactions using calendar delivery process and the price discovery protecting convergence. Similarly, month average pricing), while the function of the market, and deterring or exchanges currently utilize other tools Commission has preliminarily preventing types of market to achieve similar policy goals, such as determined that the positions described manipulations such as corners and by requiring market participants to within those examples do not fit within squeezes. The enumerated hedges ‘‘step down’’ the levels of their any of the proposed enumerated hedges, currently subject to the five-day rule are exemptions as they approach the spot market participants seeking bona fide either: (i) Anticipatory in nature; or (ii) period, or by establishing exchange-set hedge recognition for such positions involve a situation where there is no speculative position limits that include may apply for a non-enumerated need to make or take delivery. The a similar step down feature. As recognition under proposed §§ 150.3 or Commission has historically questioned proposed § 150.5(a) would require that 150.9, and a facts and circumstances the need for such positions in excess of any exchange-set limits for contracts decision would be made.105 As included limits to be held into the spot period if subject to federal limits must be less in the request for comment on this the participant has no immediate plans than or equal to the federal limit, any section, the Commission requests and/or need to make or take delivery in exchange application of the five day additional information on the scenarios the few remaining days of the spot rule, or a similar restriction, would have listed above, particularly for the period.109 the same effect as if administered by the positions that the Commission While the Commission continues to Commission for purposes of federal preliminarily views as falling outside believe that the justifications described speculative position limits. the proposed list of enumerated hedges. above for the existing five-day rule The Commission expects that exchanges would closely scrutinize any iv. Elimination of a Federal Five Day remain valid, the Commission has participant who requests a recognition Rule preliminarily determined that for contracts subject to federal limits, the during the last five days of the spot Under the existing bona fide hedging exchanges, subject to Commission period or in the time period for the spot definition in § 1.3, to help protect oversight, are better positioned to month. orderly trading and the integrity of the decide whether to apply the five-day To assist exchanges that wish to physical-delivery process, certain rule in connection with their own establish a five-day rule, or a similar enumerated hedging positions in exchange-set limits, or whether to apply provision, the Commission proposes physical-delivery contracts are not other tools that may be equally effective. guidance in paragraph (b) of Appendix recognized as bona fide hedges that may Accordingly, consistent with this B that would set forth circumstances exceed limits when the position is held proposal’s focus on leveraging existing when a position held during the spot during the last five days of trading period may still qualify as a bona fide during the spot month. The goal of the exchange practices and expertise when appropriate, the Commission proposes hedge. The guidance would provide that five-day rule is to help ensure that only a position held during the spot period those participants who actually intend to eliminate the five-day rule from the enumerated hedges to which the five- may still qualify as a bona fide hedging to make or take delivery maintain position, provided that, among other positions toward the end of the spot day rule currently applies, and instead to afford exchanges with the discretion things: (1) The position complies with period.106 When the Commission the bona fide hedging definition; and (2) adopted the five-day rule, it believed to apply, and when appropriate, waive the five-day rule (or similar restrictions) there is an economically appropriate that, as a general matter, there is little need to maintain such position in commercial need to maintain such for purposes of their own limits. Allowing for such discretion will excess of federal speculative position positions in the last five days.107 limits during the spot period, and that However, persons wishing to exceed afford exchanges flexibility to quickly impose, modify, or waive any such need relates to the purchase or sale of position limits during the five last 111 limitation as circumstances dictate. a cash commodity. While a strict five day rule may be In addition, the guidance would 105 Similarly, other examples of anticipatory provide that the person wishing to merchandising that have been described to the inappropriate in certain circumstances, Commission in response to request for comment on including when applied to energy exceed federal position limits during the proposed rulemakings on position limits (i.e., the contracts that typically have a shorter spot period: (1) Intends to make or take storage hedge and hedges of assets owned or spot period than agricultural delivery during that period; (2) provides anticipated to be owned) would be the type of materials to the exchange supporting the transactions that market participants may seek contracts,110 the flexible approach through one of the proposed processes for allowed for herein may allow for the waiver of the five-day rule; (3) requesting a non-enumerated bona fide hedge development and implementation of recognition. 111 For example, an economically appropriate 106 Paragraphs (2)(i)(B), (ii)(C), (iii), and (iv) of the need for soybeans would mean obtaining soybeans existing § 1.3 bona fide hedging definition are 108 Id. from a reasonable source (considering the subject to some form of the five-day rule. 109 See, e.g., 42 FR at 42749. marketplace) that is the least expensive, at or near 107 Definition of Bona Fide Hedging and Related 110 Energy contracts typically have a three-day the location required for the purchaser, and that Reporting Requirements, 42 FR 42748, 42750 (Aug. spot period, whereas the spot period for agricultural such sourcing does not cause market disruptions or 24, 1977). contracts is typically two weeks. prices to spike.

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demonstrates supporting cash-market basis as bona fide; 116 however, as the bona fide. Like the analysis of whether exposure in-hand that is verified by the Commission has also previously a particular position satisfies the exchange; (4) demonstrates that, for allowed, the proposed guidance also proposed bona fide hedge definition, the short positions, the delivery is feasible, may in certain circumstances allow for analysis of whether gross hedging may meaning that the person has the ability the recognition of gross hedging as bona be utilized would involve a case-by-case to deliver against the short position; 112 fide, provided that: (1) The manner in determination made by the Commission and (5) demonstrates that, for long which the person measures risk is and/or by an exchange using its positions, the delivery is feasible, consistent over time and follows a expertise and knowledge of its meaning that the person has the ability person’s regular, historical practice 117 participants as it considers applications to take delivery at levels that are (meaning the person is not switching under § 150.9, subject to Commission economically appropriate.113 This between net hedging and gross hedging review and oversight. proposed guidance is intended to on a selective basis simply to justify an The Commission believes that include a non-exclusive list of increase in the size of his/her permitting market participants with considerations for determining whether derivatives positions); (2) the person is bona fide hedges to use either or both to waive a five-day rule established at not measuring risk on a gross basis to gross or net hedging will help ensure the discretion of an exchange. evade the limits set forth in proposed that market participants are able to § 150.2 and/or the aggregation rules v. Guidance on Measuring Risk hedge efficiently. Large, complex currently set forth in § 150.4; (3) the entities may have hedging needs that In prior proposals involving position person is able to demonstrate (1) and (2) cannot be efficiently and effectively met limits, the Commission discussed the to the Commission and/or an exchange with either gross or net hedging. For issue of whether the Commission may upon request; and (4) an exchange that instance, some firms may hedge on a recognize as bona fide both ‘‘gross recognizes a particular gross hedging global basis while others may hedge by hedging’’ and ‘‘net hedging.’’ 114 Such position as a bona fide hedge pursuant trading desk or business line. Some attempts reflected the Commission’s to proposed § 150.9 documents the risks that appear offsetting may in fact longstanding preference for net hedging, justifications for doing so and maintains need to be treated separately where a which, although not stated explicitly in records of such justifications in difference in delivery location or date prior releases, has been underpinned by accordance with proposed § 150.9(d). makes net hedging of those positions The Commission continues to believe a concern that unfettered recognition of inappropriate. that a gross hedge may be a bona fide gross hedging could potentially allow hedge in circumstances where net cash To prevent ‘‘cherry-picking’’ when for the cherry picking of positions in a positions do not necessarily measure determining whether to gross or net manner that subverts the position limits total risk exposure due to differences in hedge certain risks, hedging entities rules.115 the timing of cash commitments, the should have policies and procedures In an effort to clarify its current view location of , and differences in setting out when gross and net hedging on this issue, the Commission proposes grades or types of the cash is appropriate. Consistent usage of guidance in paragraph (a) to Appendix commodity.118 However, the appropriate gross and/or net hedging in B. The Commission is of the preliminary Commission clarifies that these may not line with such policies and procedures view that there are myriad ways in be the only circumstances in which can demonstrate compliance with the which organizations are structured and gross hedging may be recognized as Commission’s regulations. On the other engage in commercial hedging practices, hand, usage of gross or net hedging that including the use of multi-line business 116 See 2016 Reproposal, 81 FR at 96747 (stating is inconsistent with an entity’s policies strategies in certain industries that that gross hedging was economically appropriate in or a change from gross to net hedging (or would be subject to federal limits for the circumstances where ‘‘net cash positions do not vice versa) could be an indication that necessarily measure total risk exposure due to an entity is seeking to evade position first time under this proposal. differences in the timing of cash commitments, the Accordingly, the Commission does not location of stocks, and differences in grades or the limits regulations. propose a one-size-fits-all approach to types of cash commodity.’’) See also Bona Fide Hedging Transactions or Positions, 42 FR at 14832, vi. Pass-Through Provisions the manner in which risk is measured 14834 (Mar. 16, 1977) and Definition of Bona Fide across an organization. Hedging and Related Reporting Requirements, 42 As the Commission has noted above, 119 The proposed guidance reflects the FR 42748, 42750 (Aug. 24, 1977). CEA section 4a(c)(2)(B) further 117 Commission’s historical practice of This proposed guidance on measuring risk is contemplates bona fide hedges that by consistent in many ways with the manner in which themselves do not meet the criteria of recognizing positions hedged on a net the exchanges require their participants to measure and report risk, which is consistent with the CEA section 4a(c)(2)(A), but that are Commission’s requirements with respect to the executed by a pass-through swap 112 That is, the person has inventory on-hand in reporting of risk. For example, under § 17.00(d), a deliverable location and in a condition in which counterparty opposite a bona fide futures commission merchants (‘‘FCMs’’), clearing the commodity can be used upon delivery. hedging swap counterparty, or used by members, and foreign brokers are required to report 113 That is, the delivery comports with the certain reportable net positions, while under a bona fide hedging swap counterparty person’s demonstrated need for the commodity, and § 17.00(e), such entities may report gross positions to offset its swap exposure that does the contract is the cheapest source for that in certain circumstances, including if the positions satisfy CEA section 4a(c)(2)(A).120 The commodity. are reported to an exchange or the clearinghouse on 114 Id. at 96747. a gross basis. 17 CFR 17.00. The Commission’s 115 For example, using gross hedging, a market understanding is that certain exchanges generally 119 7 U.S.C. 6a(c)(2)(B). participant could potentially point to a large long prefer, but do not require, their participants to 120 CEA section 4a(c)(2)(B)(i) recognizes as a bona cash position as justification for a bona fide hedge, report positions on a net basis. For those fide hedging position a position that reduces risk even though the participant, or an entity with participants that elect to report positions on a gross attendant to a position resulting from a swap that which the participant is required to aggregate, has basis, such exchanges require such participants to was executed opposite a counterparty for which the an equally large short cash position that would continue reporting that way, particularly through transaction would qualify as a bona fide hedging result in the participant having no net price risk to the spot period. The Commission preliminarily transaction pursuant to 4a(c)(2)(A). 7 U.S.C. hedge as the participant had no price risk exposure believes that such consistency is a strong indicator 6a(c)(2)(B)(i). CEA section 4a(c)(2)(B)(ii) further to the commodity prior to establishing such that the participant is not measuring risk on a gross recognizes as bona fide positions that reduce risks derivative position. Instead, the participant created basis simply to evade regulatory requirements. attendant to a position resulting from a swap that price risk exposure to the commodity by 118 See, e.g., Bona Fide Hedging Transactions or meets the requirements of 4a(c)(2)(A). 7 U.S.C. establishing the derivative position. Positions, 42 FR at 14834. 6a(c)(2)(B)(ii).

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Commission preliminarily believes that, swap counterparty entering into a hedging swap counterparty’s offset of its in affording bona fide hedging futures, option on a futures, or swap bona fide hedging swap. Any further recognition to positions used to offset position in the same physical offsets would not be eligible for a pass- exposure opposite a bona fide hedging commodity as the pass-through swap to through exemption under (2) unless the swap counterparty, Congress in CEA offset and reduce the price risk offsets themselves meet the bona fide section 4a(c)(2)(B) intended: (1) To attendant to the pass-through swap. hedging definition. For instance, if encourage the provision of liquidity to If the two conditions above are Producer A enters into an OTC swap commercial entities that are hedging satisfied, then the bona fides of the bona with Swap Dealer B, and the OTC swap physical commodity price risk in a fide hedging swap counterparty ‘‘pass qualifies as a bona fide hedge for manner consistent with the bona fide through’’ to the pass-through swap Producer A, then Swap Dealer B could hedging definition; but also (2) to counterparty for purposes of recognizing be eligible for a pass-through exemption prohibit risk management positions that as a bona fide hedge any futures, to offset that swap in the futures market. are not opposite a bona fide hedging options on futures, or swap position However, if Swap Dealer B offsets its swap counterparty from being entered into by the pass-through swap swap opposite Producer A using an OTC recognized as bona fide hedges.121 counterparty to offset the pass-through swap with Swap Dealer C, Swap Dealer The Commission proposes to swap (i.e. to offset the swap opposite the C would not be eligible for a pass- implement this pass-through swap bona fide hedging swap counterparty). through exemption. language in paragraph (2) of the bona The pass-through swap counterparty As discussed more fully above, the fide hedging definition for physical could thus exceed federal limits for the pass-through swap provision may help commodities in proposed § 150.1. Each bona fide hedge swap opposite the bona mitigate some of the potential impact component of the proposed pass- fide hedging swap counterparty and for resulting from the removal of the ‘‘risk through swap provision is described in any offsetting futures, options on management’’ exemptions that are turn below. futures, or swap position in the same currently in effect.124 Proposed paragraph (2)(i) of the bona physical commodity, even though any 2. ‘‘Commodity Derivative Contract’’ fide hedging definition would address a such position on its own would not situation where a particular swap qualify as a bona fide hedge for the pass- The Commission proposes to create qualifies as a bona fide hedge by through swap counterparty under the defined term ‘‘commodity derivative satisfying the temporary substitute test, proposed paragraph (1). contract’’ for use throughout part 150 of economically appropriate test, and Proposed paragraph (2)(ii) of the bona the Commission’s regulations as change in value requirement under fide hedging definition would address a shorthand for any futures contract, proposed paragraph (1) for one of the situation where a participant who option on a futures contract, or swap in counterparties (the ‘‘bona fide hedging qualifies as a bona fide hedging swap a commodity (other than a security swap counterparty’’), but not for the counterparty (i.e., a counterparty with a futures product as defined in CEA other counterparty, and where those position in a previously-entered into section 1a(45)). bona fides ‘‘pass through’’ from the bona swap that qualified, at the time the swap 3. ‘‘Core Referenced Futures Contract’’ fide hedging swap counterparty to the was entered into, as a bona fide hedge The Commission proposes to provide other counterparty (the ‘‘pass-through under paragraph (1)) seeks, at some later a list of 25 futures contracts in proposed swap counterparty’’). The pass-through time, to offset that bona fide hedge swap § 150.2(d) to which proposed position swap counterparty could be an entity position using futures, options on limit rules would apply. The such as a swap dealer, for example, that futures, or swaps in excess of limits. Commission proposes the term ‘‘core provides liquidity to the bona fide Such step might be taken, for example, referenced futures contract’’ as a short- hedging swap counterparty. to respond to a change in the bona fide hand phrase to denote such contracts.125 Under the proposed rule, the pass- hedging swap counterparty’s risk As per the ‘‘referenced contract’’ through of the bona fides from the bona exposure in the underlying definition described below, position fide hedging swap counterparty to the commodity.123 Proposed paragraph limits would also apply to any contract pass-through swap counterparty would (2)(ii) would allow such a bona fide that is directly/indirectly linked to, or be contingent on: (1) The pass-through hedging swap counterparty to use that has certain pricing relationships swap counterparty’s ability to futures, options on futures, or swaps in with, a core referenced futures contract. demonstrate that the pass-through swap excess of federal limits to offset the is a bona fide hedge upon request from price risk of the previously-entered into 4. ‘‘Economically Equivalent Swap’’ the Commission and/or from an swap, even though the offsetting CEA section 4a(a)(5) requires that exchange; 122 and (2) the pass-through position itself does not qualify for that when the Commission imposes limits participant as a bona fide hedge under on futures and options on futures 121 As described above, the Commission has paragraph (1). preliminarily interpreted the revised statutory pursuant to CEA section 4a(a)(2), the temporary substitute test as limiting its authority to The proposed pass-through Commission also establish limits recognize risk management positions as bona fide exemption under paragraph (2) would simultaneously for ‘‘economically hedges unless the position is used to offset only apply to the pass-through swap equivalent’’ swaps ‘‘as appropriate.’’ 126 exposure opposite a bona fide hedging swap counterparty’s offset of the bona fide counterparty. 122 While proposed paragraph (2)(i) of the bona hedging swap, and/or to the bona fide 124 See supra Section II.A.1.c.ii.(1) (discussion of fide hedging definition in § 150.1 would require the the temporary substitute test). pass-through swap counterparty to be able to swap, or at some later point. For the bona fides to 125 The selection of the proposed core referenced demonstrate the bona fides of the pass-through pass-through as described above, the swap position futures contracts is explained below in the swap upon request, the proposed rule would not need only qualify as a bona fide hedging position discussion of proposed § 150.2. prescribe the manner by which the pass-through at the time the swap was entered into. 126 CEA section 4a(a)(5); 7 U.S.C. 6a(a)(5). In swap counterparty obtains the information needed 123 Examples of a change in the bona fide hedging addition, CEA section 4a(a)(4) separately to support such a demonstration. The pass-through swap counterparty’s cash market price risk could authorizes, but does not require, the Commission to swap counterparty could base such a demonstration include a change in the amount of the commodity impose federal limits on swaps that meet certain on a representation made by the bona fide hedging that the hedger will be able to deliver due to statutory criteria qualifying them as ‘‘significant swap counterparty, and such determination may be drought, or conversely, higher than expected price discovery function’’ swaps. 7 U.S.C. 6a(a)(4). made at the time when the parties enter into the due to growing conditions. The Commission reiterates, for the avoidance of

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As the statute does not define the term 4a(a)(2)(C) requires the Commission to definition is based on a number of ‘‘economically equivalent,’’ the strive to ensure that any limits imposed considerations. Commission must apply its expertise in by the Commission will not cause price First, the proposed definition would construing such term, and, as discussed discovery in a commodity subject to support the statutory objectives in CEA further below, must do so consistent federal limits to shift to trading on a section 4a(a)(3)(i) and (ii) by helping to with the policy goals articulated by foreign exchange. prevent excessive speculation and Congress, including in CEA sections market manipulation, including corners Accordingly, any definition of and squeezes, by: (1) Focusing on swaps 4a(a)(2)(C) and 4a(a)(3). ‘‘economically equivalent swap’’ must Under the Commission’s proposed that are the most economically consider these statutory objectives. The definition of an ‘‘economically equivalent in every significant way to Commission also recognizes that equivalent swap,’’ a swap on any futures or options on futures for which physical commodity swaps are largely referenced contract (including core the Commission deems position limits bilaterally negotiated, traded off- 130 referenced futures contracts), except for to be necessary; and (2) exchange (i.e., OTC), and potentially natural gas referenced contracts, would simultaneously limiting the ability of include customized (i.e., ‘‘bespoke’’) qualify as ‘‘economically equivalent’’ speculators to obtain excessive positions with respect to that referenced contract terms, while futures contracts are through netting. Any swap that meets so long as the swap shares identical exchange traded with standardized the proposed definition would offer ‘‘material’’ contractual specifications, terms. As explained further below, due identical risk sensitivity to its associated terms, and conditions with the to these differences between swaps and referenced futures or options on futures referenced contract, disregarding any exchange-traded futures and options, contract with respect to the underlying differences with respect to: (i) Lot size the Commission has preliminarily commodity, and thus could be used to or notional amount, (ii) delivery dates determined that Congress’s underlying effect a manipulation, benefit from a diverging by less than one calendar day policy goals in CEA section 4a(a)(2)(C) manipulation, or otherwise potentially (if the swap and referenced contract are and (3) are best achieved by proposing distort prices in the same or similar physically-settled), or (iii) post-trade a narrow definition of ‘‘economically manner as the associated futures or risk management arrangements.127 For equivalent swaps,’’ compared to the options on futures contract. reasons described further below, natural broader definition of ‘‘referenced Because OTC swaps are bilaterally gas swaps would qualify as contract’’ the Commission is proposing negotiated and customizable, the economically equivalent with respect to to apply to look-alike futures and Commission has preliminarily 128 a particular referenced contract under related options. determined not to propose a more inclusive ‘‘economically equivalent the same circumstances, except that The Commission’s proposed swap’’ definition that would encompass physically-settled swaps with delivery ‘‘referenced contract’’ definition in additional swaps because such dates diverging by less than two § 150.1 would include ‘‘economically definition could make it easier for calendar days, rather than one calendar equivalent swaps,’’ meaning any market participants to inappropriately day, could qualify as economically economically equivalent swap would be net down against their core referenced equivalent. subject to federal limits, and thus would futures contracts by allowing market In promulgating the position limits be required to be added to, and could participants to structure swaps that do framework, Congress instructed the be netted against, as applicable, other not necessarily offer identical risk or Commission to consider several factors: referenced contracts in the same economic exposure or sensitivity. In First, CEA section 4a(a)(3) requires the commodity for the purpose of contrast, the Commission preliminarily Commission when establishing federal determining one’s aggregate positions believes that this is less of a concern 129 limits, to the maximum extent for federal position limit levels. Any with exchange-traded futures and practicable, in its discretion, to (i) swap that is not deemed economically related options since these instruments diminish, eliminate, or prevent equivalent would not be a referenced have standardized terms and are subject excessive speculation; (ii) deter and contract, and thus could not be netted to exchange rules and oversight. As a prevent market manipulation, squeezes, with referenced contracts nor would be result, the proposal would generally and corners; (iii) ensure sufficient required to be aggregated with any allow market participants to net certain market liquidity for bona fide hedgers; referenced contract for federal position positions in referenced contracts in the and (iv) ensure that the price discovery limits purposes. The proposed same commodity across economically function of the underlying market is not equivalent swaps, futures, and options disrupted. Second, CEA section 128 The proposed definition of ‘‘referenced on futures, but the proposed contract’’ would incorporate cash-settled look-alike economically equivalent swap doubt, that the definitions of ‘‘economically futures contracts and related options that are either equivalent’’ in CEA section 4a(a)(5) and ‘‘significant (i) directly or indirectly linked, including being definition would focus on swaps with price discovery function’’ in CEA section 4a(a)(4) partially or fully settled on, or priced at a fixed identical material terms and conditions are separate concepts and that contracts can be differential to, the price of that particular core in order to reduce the ability of market economically equivalent without serving a referenced futures contract; or (ii) directly or participants to accumulate large, significant price discovery function. See 2016 indirectly linked, including being partially or fully Reproposal, 81 FR at 96736 (the Commission noting settled on, or priced at a fixed differential to, the speculative positions in excess of that certain commenters may have been confusing price of the same commodity underlying that federal limits by using tangentially- the two definitions). particular core referenced futures contract for related (i.e., non-identical) swaps to net 127 The proposed ‘‘economically equivalent’’ delivery at the same location or locations as down such positions. language is distinct from the terms ‘‘futures specified in that particular core referenced futures Second, the proposed definition equivalent,’’ ‘‘economically appropriate,’’ and other contract. See infra Section II.A.16. (definition of similar terms used in the Commission’s regulations. ‘‘referenced contract’’). The proposed definition of would address statutory objectives by For the avoidance of doubt, the Commission’s ‘‘economically equivalent swap’’ would be included focusing federal limits on those swaps proposed definition of ‘‘economically equivalent as a type of ‘‘referenced contract,’’ but, as discussed that pose the greatest threat for swap’’ for the purposes of CEA section 4a(a)(5) does herein, would include a relatively narrower class of facilitating corners and squeezes—that not impact the application of any such other terms swaps compared to look-alike futures and options as they appear in part 20 of the Commission’s contracts, for the reasons discussed below. is, those swaps with similar delivery regulations, in the Commission’s proposed bona 129 See infra Section II.B.2.k. (discussion of fide hedge definition, or elsewhere. netting). 130 See infra Section III.F. (necessity finding).

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dates and identical material economic proposed definition of economically dates; settlement type (e.g., cash- versus terms to futures and options on futures equivalent swaps thus furthers statutory physically-settled); and, as applicable subject to federal limits—while also goals, including those set forth in CEA for physically-delivered swaps, delivery minimizing market impact and liquidity section 4a(a)(2)(C), which requires the specifications, including commodity for bona fide hedgers by not Commission to strive to ensure that any quality standards or delivery unnecessarily subjecting other swaps to federal position limits are ‘‘comparable’’ locations.133 Because settlement type the new federal framework. For to foreign exchanges and will not cause would be considered to be a material example, if the Commission were to ‘‘price discovery . . . to shift to trading’’ ‘‘contractual specification, term, or adopt an alternative definition of on foreign exchanges.132 Further, market condition,’’ a cash-settled swap could economically equivalent swap that participants trading in both U.S. and EU only be deemed economically encompassed a broader range of swaps markets should find the proposed equivalent to a cash-settled referenced by including delivery dates that diverge definition to be familiar, which may contract, and a physically-settled swap by one or more calendar days—perhaps help reduce compliance costs for those could only be deemed economically by several days or weeks—a speculator market participants that already have equivalent to a physically-settled with a large portfolio of swaps may be systems and personnel in place to referenced contract; however, a cash- more likely to be constrained by the identify and monitor such swaps. settled swap that initially did not applicable position limits and therefore Each element of the proposed qualify as ‘‘economically equivalent’’ may have an incentive either to definition, as well as the proposed due to no corresponding cash-settled minimize its swaps activity, or move its exclusions from the definition, is referenced contract (i.e., no cash-settled swaps activity to foreign jurisdictions. If described below. look-alike futures contract), could there were many similarly situated a. Scope of Identical Material Terms subsequently become an ‘‘economically speculators, the market for such swaps equivalent swap’’ if a cash-settled could become less liquid, which in turn Only ‘‘material’’ contractual futures contract market were to develop. could harm liquidity for bona fide specifications, terms, and conditions In addition, a swap that either hedgers. As a result, the Commission would be relevant to the analysis of references another referenced contract, has preliminarily determined that the whether a particular swap would or incorporates its terms by reference, proposed definition’s relatively narrow qualify as an economically equivalent would be deemed to share identical scope of swaps reasonably balances the swap. The proposed definition would terms with the referenced contract and factors in CEA section 4a(a)(3)(B)(ii) and thus not require that a swap be identical therefore would qualify as an in all respects to a referenced contract (iii) by decreasing the possibility of economically equivalent swap.134 Any in order to be deemed ‘‘economically illiquid markets for bona fide hedgers change in the material terms of such a equivalent.’’ ‘‘Material’’ specifications, on the one hand while, on the other swap, however, would render the swap terms, and conditions would be limited hand, focusing on the prevention of no longer economically equivalent for to those provisions that drive the market manipulation during the most position limits purposes.135 sensitive period of the spot month as economic value of a swap, including In contrast, the Commission generally discussed above. with respect to pricing and risk. would consider those swap contractual Third, the proposed definition would Examples of ‘‘material’’ provisions terms, provisions, or terminology (e.g., help prevent regulatory arbitrage and would include, for example: The ISDA terms and definitions) that are would strengthen international comity. underlying commodity, including unique to swaps (whether standardized If the Commission proposed a definition commodity reference price and grade that captured a broader range of swaps, differentials; maturity or termination 133 When developing its definition of an U.S.-based swaps activity could ‘‘economically equivalent swap,’’ the Commission, potentially migrate to other jurisdictions Application of Position Limits for Commodity based on its experience, preliminarily has with a narrower definition, such as the Derivatives Traded on Trading Venues and determined that for a swap to be ‘‘economically Economically Equivalent OTC Contracts, ESMA/ equivalent’’ to a futures contract, the material European Union (‘‘EU’’). In this regard, 2016/668 at 10 (May 2, 2016), available at https:// contractual specifications, terms, and conditions the proposed definition is similar in www.esma.europa.eu/sites/default/files/library/ would need to be identical. In making this certain ways to the EU definition for 2016–668_opinion_on_draft_rts_21.pdf (‘‘[D]rafting determination, the Commission took into account, OTC contracts that are ‘‘economically the [economically equivalent OTC swap] definition in regards to the economics of swaps, how a swap in too wide a fashion carries an even higher risk of and a corresponding futures contract or option on equivalent’’ to commodity derivatives enabling circumvention of position limits by a futures contract react to certain market factors and 131 traded on an EU trading venue. The creating an ability to net off positions taken in on- movements, the pricing variables used in venue contracts against only roughly similar OTC calculating each instrument, the sensitivities of 131 See EU Commission Delegated Regulation positions.’’). those variables, the ability of a market participant (EU) 2017/591, 2017 O.J. (L 87). The applicable The applicable EU regulator, the European to gain the same type of exposures, and how the European regulations define an OTC derivative to Securities and Markets Authority (‘‘ESMA’’), exposures move to changes in market conditions. be ‘‘economically equivalent’’ when it has recently released a ‘‘consultation paper’’ discussing 134 For example, a cash-settled swap that either ‘‘identical contractual specifications, terms and the status of the existing EU position limits regime settles to the pricing of a corresponding cash-settled conditions, excluding different lot size and specific comments received from market referenced contract, or incorporates by reference the specifications, delivery dates diverging by less than participants. According to ESMA, no commenter, terms of such referenced contract, could be deemed one calendar day and different post trade risk with one exception, supported changing the to be economically equivalent to the referenced management arrangements.’’ While the definition of an economically equivalent swap contract. Commission’s proposed definition is similar, the (referred to as an ‘‘economically equivalent OTC 135 The Commission preliminarily recognizes that Commission’s proposed definition requires contract’’ or ‘‘EEOTC’’). ESMA further noted that for the material swap terms noted above are essential ‘‘identical material’’ terms rather than ‘‘identical’’ some respondents, ‘‘the mere fact that very few to determining the pricing and risk profile for terms. Further, the Commission’s proposed EEOTC contracts have been identified is no swaps. However, there may be other contractual definition excludes different ‘‘lot size specifications evidence that the regime is overly restrictive.’’ See terms that also may be important for the or notional amounts’’ rather than referencing only European Securities and Markets Authority, counterparties but not necessarily ‘‘material’’ for ‘‘lot size’’ since swaps terminology usually refers to Consultation Paper MiFID Review Report on purposes of position limits. For example, as ‘‘notional amounts’’ rather than to ‘‘lot sizes.’’ Position Limits and Position Management Draft discussed below, certain other terms, such as Both the Commission’s definition and the Technical Advice on Weekly Position Reports, clearing arrangements or governing law, may not be applicable EU regulation are intended to prevent ESMA70–156–1484 at 46, Question 15 (Nov. 5, material for the purpose of determining economic harmful netting. See European Securities and 2019), available at https://www.esma.europa.eu/ equivalence for federal position limits, but may Markets Authority, Draft Regulatory Technical document/consultation-paper-position-limits. nonetheless affect pricing and risk or otherwise be Standards on Methodology for Calculation and the 132 7 U.S.C. 6a(a)(2)(C). important to the counterparties.

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or bespoke) not to be material for reasonable, good faith effort in reaching or more would not be deemed to be purposes of determining whether a their determination, and that the economically equivalent under the swap is economically equivalent to a Commission would not bring any Commission proposal, and such swaps particular referenced contract. For enforcement action for violating the would not be required to be added to, example, swap provisions or terms Commission’s speculative position nor permitted to be netted against, any designating business day or holiday limits against such market participants referenced contract when calculating conventions, day count (e.g., 360 or as long as the market participant one’s compliance with federal position actual), calculation agent, dispute performed the necessary due diligence limit levels.140 The Commission resolution mechanisms, choice of law, and is able to provide sufficient recognizes that while a penultimate or representations and warranties are evidence, if requested, to support its contract may be significantly correlated generally unique to swaps and/or reasonable, good faith effort.137 Because to its corresponding spot-month otherwise not material, and therefore market participants would be provided contract, it does not necessarily offer would not be dispositive for with discretion in making any identical economic or risk exposure to determining whether a swap is ‘‘economically equivalent’’ swap the spot-month contract, and depending economically equivalent.136 determination, the Commission on the underlying commodity and The Commission is unable to publish preliminarily anticipates that this market conditions, a market participant a list of swaps it would deem to be flexibility should provide a greater level may open itself up to material basis risk economically equivalent swaps because of certainty to market participants in by moving from the spot-month contract any such determination would involve contrast to the alternative in which to a penultimate contract. Accordingly, a facts and circumstances analysis, and market participants would be required the Commission has preliminarily because most commodity swaps are to first submit swaps to the Commission determined that it would not be created bilaterally between staff and wait for feedback.138 appropriate to permit market counterparties and traded OTC. Absent participants to net such penultimate b. Exclusions From the Definition of a requirement that market participants positions against their core referenced ‘‘Economically Equivalent Swap’’ identify their economically equivalent futures contract positions since such swaps to the Commission on a regular As noted above, the Commission’s positions do not necessarily reflect basis, the Commission preliminarily proposed definition would expressly equivalent economic or risk exposure. believes that market participants are provide that differences in lot size or best positioned to determine whether notional amount, delivery dates ii. Post-Trade Risk Management particular swaps share identical diverging by less than one calendar day The Commission is specifically material terms with referenced contracts (or less than two calendar days for excluding differences in post-trade risk and would therefore qualify as natural gas), or post-trade risk management arrangements, such as ‘‘economically equivalent’’ for purposes management arrangements would not clearing or , in determining of federal position limits. However, the disqualify a swap from being deemed to whether a swap is economically Commission understands that for be ‘‘economically equivalent’’ to a equivalent. As noted above, many certain bespoke swaps it may be unclear particular referenced contract. commodity swaps are traded OTC and may be uncleared or cleared at a whether the facts and circumstances i. Delivery Dates Diverging by Less Than different clearing house than the would demonstrate whether the swap One Calendar Day qualifies as ‘‘economically equivalent’’ corresponding referenced contract.141 with respect to a referenced contract. The proposed definition as it applies Moreover, since the core referenced The Commission emphasizes that to commodities other than natural gas futures contracts, along with futures under this proposal, market participants would encompass swaps with delivery contracts and options on futures in would have the discretion to make such dates that diverge by less than one general, are traded on DCMs with determination as long as they make a calendar day from that of a referenced vertically integrated clearing houses, as contract.139 As a result, a swap with a a practical matter, it is impossible for 136 Commodity swaps, which generally are traded delivery date that differs from that of a OTC commodity swaps, which OTC, are less standardized compared to exchange- referenced contract by one calendar day historically have been uncleared, to traded futures and therefore must include these share identical post-trade clearing house provisions in an ISDA master agreement between 137 counterparties. While certain provisions, for As noted below, the Commission reserves the or other post-trade risk management example choice of law, dispute resolution authority under this proposal to determine that a particular swap or class of swaps either is or is not arrangements with their associated core mechanisms, or the general representations made in referenced futures contracts. an ISDA master agreement, may be important ‘‘economically equivalent’’ regardless of a market considerations for the counterparties, the participant’s determination. See infra Section Therefore, if differences in post-trade Commission would not deem such provisions II.A.4.d. (discussion of commission determination risk management arrangements were material for purposes of determining economic of economic equivalence). As long as the market sufficient to exclude a swap from participant made its determination, prior to such equivalence under the federal position limits economic equivalence to a core framework for the same reason the Commission Commission determination, using reasonable, good would not deem a core referenced futures contract faith efforts, the Commission would not take any and a look-alike referenced contract to be enforcement action for violating the Commission’s 140 A swap as so described that is not economically different, even though the look-alike position limits regulations if the Commission’s ‘‘economically equivalent’’ would not be subject to contract may be traded on a different exchange with determination differs from the market participant’s. a federal speculative position limit under this different contractual representations, governing 138 As discussed under Section II.A.16. (definition proposal. law, holidays, dispute resolution processes, or other of ‘‘referenced contract’’), the Commission proposes 141 Similar to the Commission’s understanding of provisions unique to the exchanges. Similarly, with to include a list of futures and related options that ‘‘material’’ terms, the Commission construes ‘‘post- respect to day counts, a swap could designate a day qualify as referenced contracts because such trade risk management arrangements’’ to include count that is different than the day count used in contracts are standardized and published by various provisions included in standard swap a referenced contract but adjust relevant swap exchanges. In contrast, since swaps are largely agreements, including, for example: Margin or economic terms (e.g., relevant rates or payments, bilaterally negotiated and OTC traded, a swap could collateral requirements, including with respect to fees, basis, etc.) to achieve the same economic have multiple permutations and any published list initial or variation margin; whether a swap is exposure as the referenced contract. In such a case, of economically equivalent swaps would be cleared, uncleared, or cleared at a different clearing the Commission may not find such differences to unhelpful or incomplete. house than the applicable referenced contract; be material for purposes of determining the swap 139 This aspect of the proposed definition would close-out, netting, and related provisions; and to be economically equivalent for federal position be irrelevant for cash-settled swaps since ‘‘delivery different default or termination events and limits purposes. date’’ applies only to physically-settled swaps. conditions.

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referenced futures contract, then such terminates.143 In order to recognize the position limits framework. Similarly, an exclusion could otherwise render existing natural gas markets, which where market participants hold ineffective the Commission’s statutory include active and vibrant markets in divergent views as to whether certain directive under CEA section 4a(a)(5) to penultimate natural gas contracts, the swaps qualify as ‘‘economically include economically equivalent swaps Commission thus proposes a slightly equivalent,’’ the Commission can ensure within the federal position limits broader economically equivalent swap that all market participants treat OTC framework. Accordingly, the definition for natural gas so that swaps swaps with identical material terms Commission has preliminarily with delivery dates that diverge by less similarly, and also would be able to determined that differences in post- than two calendar days from an serve as a backstop in case market trade risk management arrangements associated referenced contract could participants fail to properly treat should not prevent a swap from still be deemed economically equivalent economically equivalent swaps as such. qualifying as economically equivalent and would be subject to federal limits. As noted above, the Commission would with an otherwise materially identical The Commission intends for this change not take any enforcement action with referenced contract. to prevent and disincentivize respect to violating the Commission’s manipulation and regulatory arbitrage position limits regulations if the iii. Lot Size or Notional Amount and to prevent volume from shifting Commission disagrees with a market The last exclusion would clarify that away from NG to penultimate natural participant’s determination as long as differences in lot size or notional gas contract futures and/or penultimate the market participant is able to provide swap markets in order to avoid federal sufficient support to show that it made amount would not prevent a swap from 144 being deemed to be economically position limits. a reasonable, good faith effort in applying its discretion.145 equivalent to its corresponding d. Commission Determination of referenced contract. The Commission’s Economic Equivalence 5. ‘‘Eligible Affiliate’’ use of ‘‘lot size’’ and ‘‘notional amount’’ While the Commission would The Commission proposes to create refer to the same general concept— primarily rely on market participants to the new defined term ‘‘eligible affiliate,’’ while futures terminology usually determine whether their swaps meet the which would be used in proposed employs ‘‘lot size,’’ swap terminology proposed ‘‘economically equivalent § 150.2(k), discussed in connection with usually employs ‘‘notional amount.’’ swap’’ definition, the Commission is proposed § 150.2 below. As discussed Accordingly, the Commission proposes proposing paragraph (3) to the further in that section of the release, an to use both terms to convey the same definition to clarify that the entity that qualifies as an ‘‘eligible general meaning, and in this context Commission may determine on its own affiliate’’ would be permitted to does not mean to suggest a substantive initiative that any swap or class of voluntarily aggregate its positions, even difference between the two terms. swaps satisfies, or does not satisfy, the though it is eligible for an exemption c. Economically Equivalent Natural Gas economically equivalent definition with from aggregation under § 150.4(b). respect to any referenced contract or Swaps 6. ‘‘Eligible Entity’’ class of referenced contracts. The Market dynamics in natural gas are Commission believes that this provision The Commission adopted a revised unique in several respects including, may provide the ability to offer clarity ‘‘eligible entity’’ definition in the 2016 among other things, that ICE and to the marketplace in cases where Final Aggregation Rulemaking.146 The NYMEX both list high volume contracts, uncertainty exists as to whether certain Commission is not proposing any whereas liquidity in other commodities swaps would qualify (or would not further amendments to this definition, tends to pool at a single DCM. As qualify) as ‘‘economically equivalent,’’ but is including that revised definition expiration approaches for natural gas and therefore would be (or would not in this document so that all defined contracts, volume tends to shift from the be) subject to the proposed federal terms are included. As noted above, the NYMEX core referenced futures contract Commission is also proposing a non- (‘‘NG’’), which is physically settled, to 143 Such penultimate contracts include: ICE’s substantive change to remove the an ICE contract, which is cash settled. Henry Financial Penultimate Fixed Price Futures lettering from this and other definitions (PHH) and options on Henry Penultimate Fixed that appear lettered in existing § 150.1, This trend reflects certain market Price (PHE), and NYMEX’s Henry Hub Natural Gas participants’ desire for exposure to Penultimate Financial Futures (NPG). and to list the definitions in natural gas prices without having to 144 As noted above, the Commission is proposing alphabetical order. make or take delivery.142 a relatively narrow ‘‘economically equivalent swap’’ NYMEX and definition in order to prevent market participants 7. ‘‘Entity’’ ICE also list several ‘‘penultimate’’ cash- from inappropriately netting positions in core The Commission proposes defining settled referenced contracts that use the referenced futures contracts against swap positions ‘‘entity’’ to mean ‘‘a ‘person’ as defined price of the physically-settled NYMEX further out on the curve. The Commission preliminarily acknowledges that liquidity could in section 1a of the Act.’’ 147 The term, contract as a reference price for cash shift to penultimate swaps as a result but believes settlement on the day before trading in not defined in existing § 150.1, is used that, with the exception of natural gas, this concern throughout proposed part 150 of the the physically-settled NYMEX contract is mitigated since certain constraints exist that militate against this occurring. First, there may be Commission’s regulations. basis risk between the penultimate swap and the 142 In part to address historical concerns over the core referenced futures contract. Second, compared 8. ‘‘Excluded Commodity’’ potential for manipulation of physically-settled to most other contracts, the Commission believes The phrase ‘‘excluded commodity’’ is natural gas contracts during the spot month in order that natural gas has a relatively liquid penultimate to benefit positions in cash-settled natural gas futures market that enables a market participant to defined in CEA section 1a(19), but is not contracts, the Commission proposes later in this hedge or set-off its penultimate swap position. defined or used in existing part 150 of release to allow for a higher ‘‘conditional’’ spot Since the constraints described above do not the Commission’s regulations. The month limit in cash-settled natural gas referenced necessarily apply to the natural gas futures markets, contracts under the condition that market the Commission preliminarily believes that 145 participants seeking to utilize such conditional liquidity may be incentivized to shift from NG to See supra II.A.4.a. (discussing market limit exit any positions in physically-settled natural penultimate natural gas swaps in order to avoid participants’ discretion in determining whether a gas referenced contracts. See infra Section II.C.2.e. federal position limits in the absence of the swap is economically equivalent). (proposed conditional spot month limit exemption Commission’s proposed exception for natural gas in 146 See 17 CFR 150.1(d). for natural gas). the ‘‘economically equivalent swap’’ definition. 147 7 U.S.C. 1a(38).

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Commission proposes including a clarify that such positions would be on 16. ‘‘Referenced Contract’’ definition of ‘‘excluded commodity’’ in a futures-equivalent basis. This The nine contracts currently subject part 150 that references that term as provision would thus be applicable to to federal limits, which are all 148 defined in CEA section 1a(19). options on futures and swaps such that physically-settled futures, are all listed a long position would also include a 152 9. ‘‘Futures-Equivalent’’ in existing § 150.2. As the long futures-equivalent option on Commission is proposing to expand the This phrase is currently defined in futures and a long futures-equivalent position limits framework to cover existing § 150.1(f) and is used swap. certain cash-settled futures and options throughout existing part 150 of the on futures contracts and certain Commission’s regulations to describe 12. ‘‘Physical Commodity’’ economically equivalent swaps, the the method for converting a position in The Commission proposes to define Commission proposes a new defined an option on a futures contract to an the term ‘‘physical commodity’’ for term, ‘‘referenced contract,’’ for use economically equivalent amount in a position limits purposes. Congress used throughout proposed part 150 to refer to futures contract. The Dodd-Frank Act the term ‘‘physical commodity’’ in CEA contracts that would be subject to amendments to CEA section 4a,149 in sections 4a(a)(2)(A) and 4a(a)(2)(B) to federal limits. part, direct the Commission to apply mean commodities ‘‘other than The referenced contract definition aggregate federal position limits to excluded commodities as defined by the would thus include: (1) Any core physical commodity futures contracts Commission.’’ 151 The proposed referenced futures contract listed in and to swap contracts that are definition of ‘‘physical commodity’’ proposed § 150.2(d); (2) any other economically equivalent to such thus would include both exempt and contract (futures or option on futures), physical commodity futures on which agricultural commodities, but not on a futures-equivalent basis with the Commission has established limits. excluded commodities. respect to a particular core referenced In order to aggregate positions in futures contract, that is directly or 13. ‘‘Position Accountability’’ futures, options on futures, and swaps, indirectly linked to the price of a core it is necessary to adjust the position Existing § 150.5 permits position referenced futures contract, or that is sizes, since such contracts may have accountability in lieu of position limits directly or indirectly linked to the price varying units of trading (e.g., the in certain cases, but does not define the of the same commodity underlying a amount of a commodity underlying a term ‘‘position accountability.’’ The core referenced futures contract (for particular swap contract could be larger proposed amendments to § 150.5 would delivery at the same location(s)); and (3) than the amount of a commodity allow exchanges, in some cases, to any economically equivalent swap, on a underlying a core referenced futures adopt position accountability levels in futures-equivalent basis. contract). The Commission thus lieu of, or in addition to, position limits. The proposed referenced contract proposes to adjust position sizes to an The Commission proposes a definition definition would include look-alike equivalent position based on the size of of ‘‘position accountability’’ for use futures and options on futures contracts the unit of trading of the core referenced throughout proposed § 150.5 as (as well as options or economically futures contract. The phrase ‘‘futures- discussed in greater detail in connection equivalent swaps with respect to such equivalent’’ is used for that purpose with proposed § 150.5 below. look-alike contracts) and contracts of the throughout the proposed rules, same commodity but different sizes including in connection with the 14. ‘‘Pre-Enactment Swap’’ (e.g., mini contracts). Positions in ‘‘referenced contract’’ definition in The Commission proposes to create referenced contracts may in certain proposed § 150.1. The Commission also the defined term ‘‘pre-enactment swap’’ circumstances be netted with positions proposes broadening this definition to to mean any swap entered into prior to in other referenced contracts. However, include references to the proposed term enactment of the Dodd-Frank Act of to avoid evasion and undermining of the ‘‘core referenced futures contracts.’’ 2010 (July 21, 2010), the terms of which position limits framework, non- 10. ‘‘Independent Account Controller’’ have not expired as of the date of referenced contracts on the same commodity could not be used to net The Commission adopted a revised enactment of that Act. As discussed in connection with proposed § 150.3 later down positions in referenced ‘‘independent account controller’’ contracts.153 definition in the 2016 Final Aggregation in this release, if acquired in good faith, Rule.150 The Commission is not such swaps would be exempt from a. Cash-Settled Referenced Contracts proposing any further amendments to federal speculative position limits, Under these proposed provisions, this definition, but is including that although such swaps could not be federal limits would apply to all cash- revised definition in this document so netted with post-effective date swaps for settled futures and options on futures that all defined terms appear together. purposes of complying with spot month contracts on physical commodities that speculative position limits. 11. ‘‘Long Position’’ are linked in some manner, whether 15. ‘‘Pre-Existing Position’’ directly or indirectly, to physically- The phrase ‘‘long position’’ is settled contracts subject to federal currently defined in § 150.1(g) to mean The Commission proposes to create limits, and to any cash settled swaps ‘‘a long call option, a short put option the defined term ‘‘pre-existing position’’ that are deemed ‘‘economically or a long underlying futures contract.’’ to reference any position in a equivalent swaps’’ with respect to a The Commission proposes to update commodity derivative contract acquired particular cash-settled referenced this definition to apply to swaps and to in good faith prior to the effective date contract.154 While the Commission of a final federal position limit 148 7 U.S.C. 1a(19). rulemaking. Proposed § 150.2(g) would 152 17 CFR 150.2. 149 Under CEA sections 4a(a)(2) and 4a(a)(5), set forth the circumstances under which 153 A more detailed discussion of when netting is speculative position limits apply to agricultural and position limits would apply to such permitted appears below. See infra Section II.B.2.k. exempt commodity swaps that are ‘‘economically positions. (discussion of netting). equivalent’’ to DCM futures and options on futures 154 For example, ICE’s Henry Penultimate Fixed contracts. 7 U.S.C. 6a(a)(2) and (5). Price Future, which cash-settles directly to 150 See 17 CFR 150.1(e). 151 7 U.S.C. 6a(a)(2)(A) and (B). Continued

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acknowledges previous comments to the not be directly or indirectly linked to contract definition may allow effect that cash-settled contracts are less the core referenced futures contract. commercial end-users to more susceptible to manipulation and thus Similarly, a physical-delivery derivative efficiently hedge the cost of should not be subject to federal limits, contract whose settlement price was commodities at their preferred location. the Commission is of the view that based on the same underlying Similarly, the proposed exclusion of generally speaking, linked cash-settled commodity at a different delivery commodity index contracts from the and physically-settled contracts form location (e.g., a hypothetical physical- referenced contract definition would one market, and thus should be subject delivery futures contract on ultra-low help ensure that market participants to federal limits. This view is informed sulfur diesel delivered at L.A. Harbor could not use a position in a commodity by the Commission’s experience instead of the NYMEX ultra-low sulfur index contract to net down an outright overseeing derivatives markets, where it diesel futures contract delivered in New position that was a component of the has observed that it is common for the York Harbor core referenced futures commodity index contract. If the same market participant to arbitrage contract) would not be linked, directly Commission did not exclude linked cash- and physically-settled or indirectly, to the core referenced commodity index contracts, then contracts, and where it has also futures contract because the price of the speculators would be allowed to take on observed instances where linked cash- physically-delivered L.A. Harbor massive outright positions in referenced settled and physically-settled contracts contract would reflect the L.A. Harbor contracts, which could lead to excessive have been used together as part of a market price for ultra-low sulfur diesel. speculation. manipulation.155 In the Commission’s b. Exclusions From the Referenced As noted above, it is common for view, cash-settled contracts are Contract Definition swap dealers to enter into commodity generally economically equivalent to While the proposed referenced index contracts with participants for physical-delivery contracts in the same which the contract would not qualify as commodity. In the absence of position contract definition would include linked contracts, it would also explicitly a bona fide hedging position (e.g., with limits, a trader with positions in both a pension fund). Failing to exclude the physically-delivered and cash- exclude certain other types of contracts. Paragraph (3) of the proposed referenced commodity index contracts from the settled contracts may have increased referenced contract definition could ability and incentive to manipulate one contract definition would explicitly enable a swap dealer to use positions in contract to benefit positions in the exclude from that definition a location commodity index contracts to net down other. basis contract, a commodity index The proposal to include futures contract, a swap guarantee, or a trade offsetting outright futures positions in contracts and options on futures that are option that meets the requirements of the components of the index. This ‘‘indirectly linked’’ to the core § 32.3 of this chapter. would have the effect of subverting the referenced futures contract under the First, failing to exclude location basis statutory pass-through swap language in definition of ‘‘referenced contract’’ is contracts from the referenced contract CEA section 4a(c)(2)(B), which is intended to prevent the evasion of definition could enable speculators to intended to foreclose the recognition of position limits through the creation of net portions of the location basis positions entered into for risk an economically equivalent futures contract with outright positions in one management purposes as bona fide contract or option on a future, as of the locations comprising the basis hedges unless the swap dealer is applicable, that does not directly contract, which would permit entering into positions opposite a reference the price of the core extraordinarily large speculative counterparty for which the swap 159 referenced futures contract. Such positions in the outright contract.157 For position is a bona fide hedge. contracts that settle to the price of a example, under the proposed rules, a In order to clarify the types of referenced contract but not to the price large outright position in Henry Hub contracts that would qualify as location of a core referenced futures contract, for Natural Gas futures could not be netted basis contracts and commodity index example, would be indirectly linked to down against a location basis contract contracts, and thus would be excluded the core referenced futures contract.156 that cash-settles to the difference in from the referenced contract definition, On the other hand, an outright price between Gulf Coast Natural Gas the Commission proposes guidance in derivative contract whose settlement and Henry Hub Natural Gas. Absent the Appendix C to part 150 of the price is based on an index published by proposed exclusion, a market Commission’s regulations. The a price reporting agency that surveys participant could otherwise increase its proposed guidance would include cash market transaction prices (even if exposure in the outright contract by information which would help define the cash market practice is to price at a using the location basis contract to net the parameters of the terms ‘‘location differential to a futures contract) would down, and then increase further, an basis contract’’ and ‘‘commodity index outright contract position that would contract.’’ To the extent a particular NYMEX’s Henry Hub Natural Gas core referenced otherwise be restricted by position contract fits within the proposed futures contract, would be considered a referenced limits.158 Further, excluding location guidance, such contract would not be a contract under the rules proposed herein. referenced contract, would not be 155 The Commission has previously found that basis contracts from the referenced traders with positions in look-alike cash-settled subject to federal limits, and could not contracts may have an incentive to manipulate and 157 See infra Section II.B.2.k. (discussion of undermine price discovery in the physical-delivery netting). 159 7 U.S.C. 6a(c)(2)(B). While excluding contracts to which the cash-settled contract is 158 While excluding location basis contracts from commodity index contracts from the referenced linked. The practice known as ‘‘banging the close’’ the referenced contract definition would prevent contract definition would prevent the potentially or ‘‘marking the close’’ is one such manipulative the circumstance described above, it would also risky netting circumstance described above, it practice that the Commission prosecutes and that mean that location basis contracts would not be would also mean that commodity index contracts this proposal seeks to prevent. subject to federal limits. The Commission would be would not be subject to federal limits. The 156 As discussed above, the Commission is comfortable with this outcome because location Commission would be comfortable with this proposing a definition of ‘‘economically equivalent basis contracts generally demonstrate minimal outcome because the commodities comprising the swap’’ that is narrower than the class of futures and and are typically significantly less liquid index would themselves be subject to limits, and options on futures that would be included as than the core referenced futures contracts, meaning because commodity index contracts generally tend referenced contracts. See supra Section II.A.4. they would be more costly to try to use in a to exhibit low volatility since they are diversified (discussion of economically equivalent swaps). manipulation. across many different commodities.

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be used to net down positions in c. List of Referenced Contracts and SEF contracts subject to federal referenced contracts.160 limits. Second, swap guarantees are In an effort to provide clarity to explicitly excluded from the proposed market participants regarding which 17. ‘‘Short Position’’ referenced contract definition. In exchange-traded contracts are subject to The Commission proposes to expand connection with further defining the federal limits, the Commission the existing definition of ‘‘short term ‘‘swap’’ jointly with the Securities anticipates publishing, and regularly position,’’ currently defined in and Exchange Commission in updating, a list of such contracts on its § 150.1(h), to include swaps and to connection with the ‘‘Product Definition website.165 The Commission thus clarify that any such positions would be Adopting Release,’’ 161 the Commission proposes to publish a CFTC Staff measured on a futures-equivalent basis. interpreted the term ‘‘swap’’ (that is not Workbook of Commodity Derivative a ‘‘security-based swap’’ or ‘‘mixed Contracts under the Regulations 18. ‘‘Speculative Position Limit’’ swap’’) to include a guarantee of such Regarding Position Limits for The Commission proposes to define swap, to the extent that a counterparty Derivatives along with this release, the term ‘‘speculative position limit’’ for to a swap position would have recourse which would provide a non-exhaustive use throughout part 150 of the to the guarantor in connection with the list of referenced contracts and may be Commission’s regulations to refer to position.162 Excluding guarantees of helpful to market participants in federal or exchange-set limits, net long swaps from the definition of referenced determining categories of contracts that or net short, including single month, contract should help avoid any potential would fit within the referenced contract spot month, and all-months-combined confusion regarding the application of definition. As always, market limits. This proposed definition is not position limits to guarantees of swaps. participants may request clarification intended to limit the authority of The Commission understands that swap from the Commission. exchanges to adopt other types of limits guarantees generally serve as insurance, In order to ensure that the list remains that do not meet the ‘‘speculative and in many cases swap guarantors up-to-date and accurate, the position limit definition,’’ such as a guarantee the performance of an affiliate Commission is proposing changes to limit on gross long or gross short in order to entice a counterparty to enter certain provisions of part 40 of its positions, or a limit on holding or into a swap with such guarantor’s regulations which pertain to the controlling delivery instruments. affiliate. As a result, the Commission collection of position limits information 19. ‘‘Spot Month,’’ ‘‘Single Month,’’ and preliminarily believes that swap through the filing of product terms and guarantees neither contribute to ‘‘All-Months’’ conditions submissions. In particular, excessive speculation, market under existing rules, including §§ 40.2, The Commission proposes to expand manipulation, squeezes, or corners nor 40.3, and 40.4, DCMs and SEFs are the existing definition of ‘‘spot month’’ were contemplated by Congress when required to comply with certain to account for the fact that the proposed Congress articulated its policy goals in submission requirements related to the limits would apply to both physically- CEA sections 4a(a)(1)–(3).163 Third, trade options that meet the listing of certain products. Many of the settled and certain cash-settled requirements of § 32.3 would also be required submissions must include the contracts, to clarify that the spot month excluded from the proposed referenced product’s ‘‘terms and conditions,’’ for referenced contracts would be the contract definition. The Commission which is defined in § 40.1(j) and which same period as that of the relevant core has traditionally exempted trade options includes, under § 40.1(j)(1)(vii), referenced futures contract, and to from a number of Commission ‘‘Position limits, position accountability account for variations in spot month requirements because they are typically standards, and position reporting conventions that differ by commodity. used by end-users to hedge physical risk requirements.’’ The Commission In particular, for the ICE U.S. Sugar No. and thus do not contribute to excessive proposes to expand § 40.1(j)(1)(vii), 11 (SB) core referenced futures contract, speculation. Trade options are not which addresses futures and options on the spot month would mean the period subject to position limits under current futures, to also include an indication as of time beginning at the opening of regulations, and the proposed exclusion to whether the contract meets the trading on the second business day of trade options from the referenced definition of a referenced contract as following the expiration of the regular contract definition would simply codify defined in § 150.1, and, if so, the name option contract traded on the expiring existing practice.164 of the core referenced futures contract futures contract until the contract on which the referenced contract is expires. For the ICE U.S. Sugar No. 16 160 See infra Section II.B.2.k. (discussion of based. The Commission proposes to also (SF) core referenced futures contract, netting). expand § 40.1(j)(2)(vii), which addresses the spot month would mean the period 161 See generally Further Definition of ‘‘Swap,’’ swaps, to include an indication as to of time beginning on the third-to-last ‘‘Security-Based Swap,’’ and ‘‘Security-Based Swap whether the contract meets the trading day of the contract month until Agreement’’; Mixed Swaps; Security-Based Swap Agreement Recordkeeping, 77 FR 48207 (Aug. 13, definition of economically equivalent the contract expires. For the CME Live 2012) (‘‘Product Definitions Adopting Release’’). swap as defined in § 150.1 of this Cattle (LC) core referenced futures 162 See id. at 48226. chapter, and, if so, the name of the contract, the spot month would mean 163 To the extent that swap guarantees may lower referenced contract to which the swap is the period of time beginning at the close costs for uncleared OTC swaps in particular by incentivizing counterparties to agree to the swap, economically equivalent. This of trading on the fifth business day of excluding swap guarantees arguably may improve information would enable the the contract month until the contract market liquidity, which is consistent with the Commission to maintain on its website, expires. CEA’s statutory goals in CEA section 4a(a)(3)(B) to www.cftc.gov, an up-to-date list of DCM ensure sufficient liquidity for bona fide hedgers The Commission also proposes to when establishing its position limit framework. eliminate the existing definitions of 164 In the trade options final rule, the Commission 165 As discussed above, the Commission will ‘‘single month’’ and ‘‘all-months’’ stated its belief that federal limits should not apply provide market participants with reasonable, good- because the definitions for those terms to trade options, and expressed an intention to faith discretion to determine whether a swap would would be built into the proposed address trade options in the context of any final qualify as economically equivalent for federal rulemaking on position limits. See Trade Options, position limit purposes. See supra Section II.A.4. definition of ‘‘speculative position 81 FR at 14966, 14971 (Mar. 21, 2016). (discussion of economically equivalent swaps). limits’’ described above.

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20. ‘‘Spread Transaction’’ Register, the terms of which have not exchange limits in 9 legacy The Commission proposes to expired as of that date. As discussed in commodities. incorporate a definition for transactions connection with proposed § 150.3 later (5) To what extent do the enumerated normally known to the trade as in this release, if acquired in good faith, hedges proposed in this release ‘‘spreads,’’ which would list the types of such swaps would be exempt from encompass the types of positions transactions that could qualify for federal speculative position limits, discussed in the BFH Petition? Should spread exemptions for purposes of although such swaps could not be additional types of positions identified federal position limits. The proposed netted with post-effective date swaps for in the BFH Petition, including examples list would cover common types of inter- purposes of complying with spot month nos. 3 (unpriced physical purchase and commodity and intra-commodity speculative position limits. sale commitments) and 7 (scenario 2) spreads such as: Calendar spreads; Finally, the Commission proposes to (use of physical delivery referenced quality differential spreads; processing eliminate existing § 150.1(i), which contracts to hedge physical transactions spreads (such as energy ‘‘crack’’ or includes a chart specifying the ‘‘first using calendar month averaging soybean ‘‘crush’’ spreads); product or delivery month of the crop year’’ for pricing), be enumerated as bona fide by-product differential spreads; and certain commodities. The crop year hedges, after notice and comment? (6) The Commission requests futures-options spreads.166 Separately, definition had been pertinent for comment as to whether price risk is under proposed § 150.3(a)(2)(ii), the purposes of the spread exemption to the attributable to a variety of factors, Commission could determine to exempt individual month limit in current including political and weather risk, any other spread transaction that is not § 150.3(a)(3), which limits spreads to and could therefore allow hedging included in the spread transaction those between individual months in the political, weather, or other risks, or definition, but that the Commission has same crop year and to a level no more whether price risk is something determined is consistent with CEA than that of the all-months limit. This narrower in the application of bona fide section 4a(a)(3)(B),167 and exempted, provision was pertinent at a time when hedging. pursuant to proposed § 150.3(b). the single month and all months combined limits were different. Now (7) While an ‘‘economically 21. ‘‘Swap’’ and ‘‘Swap Dealer’’ that the current and proposed single equivalent swap’’ qualifies as a The Commission proposes to month and all months combined limits referenced contract under paragraph (2) incorporate the definitions of ‘‘swap’’ are the same, and now that the of the ‘‘referenced contract’’ definition, and ‘‘swap dealer’’ as they are defined Commission is proposing a new process paragraph (1) of the ‘‘referenced in section 1a of the Act and § 1.3 of this for granting spread exemptions in contract’’ definition applies a broader chapter.168 § 150.3, this provision is no longer test to determine whether futures needed. contracts or options on a futures 22. ‘‘Transition Period Swap’’ contract would qualify as a referenced 23. Request for Comment The Commission proposes to create contract. Instead of a separate definition the defined term ‘‘transition period The Commission requests comment for ‘‘economically equivalent swaps,’’ swap’’ to mean any swap entered into on all aspects of the proposed should the same test (e.g., paragraph (1) during the period commencing July 22, amendments and additions to the of the ‘‘referenced contract’’ definition) 2010 and ending 60 days after the definitions in § 150.1. The Commission that applies to futures and options on publication of a final federal position also invites comments on the following: futures for determining status as limits rulemaking in the Federal (1) Should the Commission include ‘‘referenced contracts’’ also apply to the enumerated hedges in regulations, determine whether a swap is an 166 For example, trading activity in many rather than in an appendix of acceptable ‘‘economically equivalent swap,’’ and commodity derivative markets is concentrated in practices? Why or why not? therefore a ‘‘referenced contract’’? Why the nearby contract month, but a hedger may need (2) Should the Commission list any or why not? to offset risk in deferred months where derivative additional common commercial hedging (8) The Commission is proposing to trading activity may be less active. A calendar spread trader could provide liquidity without practices as enumerated hedges? define ‘‘economically equivalent swap’’ exposing himself or herself to the price risk (3) The Commission proposes to in a manner that is generally consistent inherent in an outright position in a deferred eliminate the five day rule on federal with the EU’s definition, with the month. Processing spreads can serve a similar position limits, instead allowing exception that a swap must have function. For example, a soybean processor may seek to hedge his or her processing costs by entering exchanges discretion on whether to ‘‘identical material’’ terms, disregarding into a ‘‘crush’’ spread, i.e., going long soybeans and apply or waive any five day rule or differences in lot size or notional short soybean meal and oil. A speculator could equivalent on their exchange position amount, delivery dates diverging by less facilitate the hedger’s ability to do such a limits. The Commission believes that than one calendar day (or for natural transaction by entering into a ‘‘reverse crush’’ spread (i.e., going short soybeans and long soybean the five day rule can be an important gas, by less than two calendar days), or meal and oil). Quality differential spreads, and way to help ensure that futures and cash post-trade risk management product or by-product differential spreads, may market prices converge. As such, should arrangements. Is this approach either serve similar liquidity-enhancing functions when the Commission require that exchanges too narrow or too broad? Why or why spreading a position in an actively traded commodity derivatives market such as CBOT Wheat apply the five day rule to some or all not? (W) against a position in another actively traded bona fide hedging positions and/or (9) The Commission requests market, such as MGEX Wheat. spread exemptions? If so, to which bona comment how a market participant 167 As noted above, CEA section 4a(a)(3)(B) fide hedging positions? Should the subject to both the CFTC’s and EU’s provides that the Commission shall set limits ‘‘to exchanges retain the ability to waive position limits regimes expects to the maximum extent practicable, in its discretion— (i) to diminish, eliminate, or prevent excessive such five day rule? comply with both regimes for contracts speculation as described under this section; (ii) to (4) The Commission requests subject to both regimes. deter and prevent market manipulation, squeezes, comment on the nature of anticipated (10) With respect to economically and corners; (iii) to ensure sufficient market merchandising exemptions that have equivalent swaps, the Commission liquidity for bona fide hedgers; and (iv) to ensure that the price discovery function of the underlying been granted by DCMs in connection proposes an exception that would market is not disrupted.’’ with the 16 non-legacy commodities or capture penultimate swaps only for 168 7 U.S.C. 1a(47) and 1a(49); 17 CFR 1.3. in connection with exemptions from natural gas contracts, including

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penultimate swaps on the NYMEX NG proposing to explicitly exclude swap comply with the proposed bona fide core referenced futures contract. Is this guarantees from the referenced contract hedging definition. 169 exception for such penultimate natural definition. Should the Commission (18) The Commission proposes to gas swaps appropriate, or should again propose to exclude swap define spread transactions to include: economically equivalent natural gas guarantees from the referenced contract Either a calendar spread, swaps be treated the same as other definition? Why or why not? If the intercommodity spread, quality economically equivalent swaps? Why or Commission does exclude swap differential spread, processing spread why not? guarantees, should such exclusion be (such as energy ‘‘crack’’ or soybean (11) Should the Commission broaden limited to guarantees for affiliated ‘‘crush’’ spreads), product or by-product the definition of ‘‘economically entities only? Why or why not? differential spread, or futures-option equivalent swap’’ to include (15) Please indicate if any updates or spread. Are there other types of penultimate referenced contracts for all other modifications are needed to: (1) transactions commonly known to the (or at least a subset of) commodities The proposed list of referenced trade as ‘‘spreads’’ that the Commission subject to federal position limits? Why contracts that would appear in the CFTC should include in its spread transaction or why not? Staff Workbook of Commodity (12) The Commission is proposing Derivative Contracts Under the definition? Please provide any examples that a physically-settled swap may Regulations Regarding Position Limits or descriptions that will help the qualify as economically equivalent even for Derivatives posted on the Commission determine whether such if its delivery date diverges by less than Commission’s website; 170 or (2) the transactions would be consistent with one calendar day from its corresponding proposed Appendix D to part 150 list of CEA section 4a(a)(3)(B) and should be physically-settled referenced contract. commodities deemed ‘‘substantially the included in the definition of spread Should the Commission include a same’’ for purposes of the term transaction. similar provision for cash-settled swaps ‘‘location basis contract’’ as used in the (19) Should the Commission require where cash-settled swaps could qualify proposed ‘‘referenced contract’’ market participants that trade as economically equivalent if their cash definition. economically equivalent swaps OTC, settlement price determination diverged from their corresponding cash-settled (16) Should the Commission require rather than on a SEF or DCM, to self- referenced contract by less than one exchanges to maintain a list of identify and report to the Commission calendar day? referenced contracts and location basis that in their view, such swaps meet the (13) Under the proposed definition of contracts listed on their platforms? Commission’s proposed economically ‘‘economically equivalent swaps,’’ a (17) The Commission has previously equivalent swap definition? requested, and commenters have cash-settled swap that otherwise shares B. § 150.2—Federal Limit Levels identical material terms with a previously provided, a list of risks other physically-settled referenced contract than price risk for which commercial 1. Existing § 150.2 (and vice-versa) would not be deemed to enterprises commonly need to hedge.171 be economically equivalent due to the Please explain which hedges of non- Federal spot month, single month, difference in settlement type. Should price risks could be objectively and and all-months-combined position the Commission consider treating swaps systematically verified as bona fide limits currently apply to nine that share identical material terms, other hedges by the Commission, and how the physically-settled futures contracts on than settlement type (i.e., cash-settled Commission would verify that such agricultural commodities listed in versus physically-settled swaps), to be positions are bona fide hedges, existing § 150.2, and, on a futures- economically equivalent? Why or why including how the Commission would equivalent basis, to options contracts not? consistently and definitively quantify thereon. Existing federal limit levels set (14) Consistent with the 2016 and assess whether any such hedges of forth in § 150.2 172 apply net long or net Reproposal, the Commission is non-price risks are bona fide hedges that short and are as follows:

EXISTING LEGACY AGRICULTURAL CONTRACT FEDERAL SPOT MONTH, SINGLE MONTH, AND ALL-MONTHS-COMBINED LIMIT LEVELS

Single month Contract Spot month limit and all-months- combined limit

Chicago Board of Trade (‘‘CBOT’’) Corn (C) ...... 600 33,000 CBOT Oats (O) ...... 600 2,000 CBOT Soybeans (S) ...... 600 15,000 CBOT Soybean Meal (SM) ...... 720 6,500 CBOT Soybean Oil (SO) ...... 540 8,000 CBOT Kansas City Hard Red Winter Wheat (KW) ...... 600 12,000 CBOT Wheat (W) ...... 600 12,000 ICE Futures U.S. (‘‘ICE’’) Cotton No. 2 (CT) ...... 300 5,000 Minneapolis Grain Exchange (‘‘MGEX’’) Hard Red Spring Wheat (MWE) ...... 600 12,000

169 See 2016 Reproposal, 81 FR at 96966. DoddFrankAct/Rulemakings/PositionLimitsfor 2016 Reproposal (listing operational risk, liquidity 170 Position Limits for Derivatives, U.S. Derivatives/index.htm. risk, credit risk, locational risk, and seasonal risk). Commodity Futures Trading Commission website, 171 See, e.g., National Gas Supply Association 172 17 CFR 150.2. available at https://www.cftc.gov/LawRegulation/ Comment Letter at 4 (Feb. 28, 2017) in response to

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While not explicit in § 150.2, the necessity finding and the characteristics and only during the spot month for the Commission’s practice has been to set of the 25 core referenced futures 16 other commodity contracts. spot month limit levels at or below 25 contracts is in Section III.F. Proposed § 150.2(e) would provide percent of deliverable supply based on In order to comply with CEA section that the levels set forth below for the 25 DCM estimates of deliverable supply 4a(a)(5), the Commission also proposes contracts are listed in Appendix E to verified by the Commission, and to set to establish limits on swaps that are part 150 of the Commission’s limit levels outside of the spot month at ‘‘economically equivalent’’ to the regulations and would set the 10 percent of open interest for the first above.176 As discussed above, under the compliance date for such levels at 365 25,000 contracts of open interest, with Commission’s proposed definition of days after publication of final position a marginal increase of 2.5 percent of ‘‘economically equivalent swap’’ set limits regulations in the Federal open interest thereafter. forth in § 150.1, a swap would generally Register. qualify as economically equivalent with 2. Proposed § 150.2 173 respect to a particular referenced b. Proposed Federal Spot Month Limit Levels a. Contracts Subject to Federal Limits contract so long as the swap shares identical material contract Under the rules proposed herein, The Commission proposes to establish specifications, terms, and conditions federal spot month limit levels would federal limits on the 25 core referenced with the referenced contract, apply to all 25 core referenced futures futures contracts listed in proposed disregarding any differences with contracts, and any associated referenced § 150.2(d),174 and on their associated respect to lot size or notional amount, contracts.178 Federal spot month limits referenced contracts, which would delivery dates diverging by less than for referenced contracts on all 25 include swaps that qualify as one calendar day, (or for natural gas, by commodities are essential for deterring ‘‘economically equivalent swaps.’’ 175 less than two calendar days) or post- and preventing excessive speculation, The Commission proposes to establish trade risk-management arrangements.177 manipulation, corners and squeezes.179 position limits on futures and options As described in greater detail below, Proposed § 150.2(e) provides that on these 25 commodities on the basis the proposed federal limits would apply federal spot month levels are set forth in that position limits on such contracts during all contract months for the nine proposed Appendix E to part 150 and are ‘‘necessary.’’ A discussion of the legacy agricultural commodity contracts are as follows:

2020 Proposed spot Existing federal spot Existing exchange-set Core referenced futures contract month limit month limit spot month limit

Legacy Agricultural Contracts

CBOT Corn (C) ...... 1,200 600 600 CBOT Oats (O) ...... 600 600 600 CBOT Soybeans (S) ...... 1,200 600 600 CBOT Soybean Meal (SM) ...... 1,500 720 720 CBOT Soybean Oil (SO) ...... 1,100 540 540 CBOT Wheat (W) ...... 1,200 600 180 600/500/400/300/220 CBOT KC HRW Wheat (KW) ...... 1,200 600 600

173 This portion of the release is organized by 176 CEA section 4a(a)(5); 7 U.S.C. 6a(a)(5). first Friday of the contract month; (2) 300 at the subject matter, rather than by lettered provision, 177 See infra Section II.A.4. (definition of close of trading on the business day prior to the last and will proceed in the following order: (1) ‘‘economically equivalent swap’’). five trading days of the contract month; and (3) 200 Contracts subject to federal limits; (2) proposed spot 178 As described below, federal non-spot month at the close of trading on the business day prior to month limit levels; (3) proposed methodology for limit levels would only apply to the nine legacy the last two trading days of the contract month. setting spot month limit levels; (4) proposed non- agricultural commodities. The 16 non-legacy 182 CME’s existing exchange-set limit for Live spot month limit levels; (5) proposed methodology commodities would be subject to federal limits Cattle (LC) has a step-down spot month limit: (1) for setting non-spot month limit levels; (6) during the spot month, and exchange-set limits 450 at the close of trading on the first business day subsequent levels; (7) relevant contract month for and/or accountability outside of the spot month. following the first Friday of the contract month; (2) purposes of referenced contracts; (8) limits on pre- See infra Section II.B.2.d. (discussion of proposed 300 at the close of trading on the business day prior existing positions; (9) limits for positions on foreign non-spot month limit levels). to the last five trading days of the contract month; boards of trade; (10) anti-evasion provision; (11) 179 See infra Section III. (Legal Matters). and (3) 200 at the close of trading on the business netting of positions; (12) eligible affiliates and day prior to the last two trading days of the contract aggregation; and (13) request for comment. 180 CBOT’s existing exchange-set limit for Wheat month. 174 Proposed § 150.2(d) provides that each core (W) is 600 contracts. However, for its May contract 183 CBOT’s existing exchange-set spot month limit referenced futures contract includes any month, CBOT has a variable spot limit that is for Rough Rice (RR) is 600 contracts for all contract ‘‘successor’’ contracts. An example of a successor dependent upon the deliverable supply that it months. However, for July and September, there is contract would be the RBOB Gasoline contract that publishes from the CBOT’s Stocks and Grain report a step-down limit from 600 contracts. In the last was listed due to a change in gasoline specifications on the Friday preceding the first notice day for the five trading days of the expiring futures month, the and that ultimately replaced the Unleaded Gasoline May contract month. In the last five trading days contract. For some time, both contracts were listed of the expiring futures month in May, the speculative position limit for the July futures month for trading to allow open interest to migrate to the speculative position limit is: (1) 600 contracts if steps down to 200 contracts from 600 contracts and new RBOB contract; once trading migrated, the deliverable supplies are at or above 2,400 contracts; the speculative position limit for the September Unleaded Gasoline contract was delisted. (2) 500 contracts if deliverable supplies are between futures month steps down to 250 contracts from 600 contracts. 175 As described above, the proposed term 2,000 and 2,399 contracts; (3) 400 contracts if 184 ‘‘referenced contract’’ includes: (1) Futures and deliverable supplies are between 1,600 and 1,999 NYMEX recommends implementing a step- options on futures contracts that, with respect to a contracts; (4) 300 contracts if deliverable supplies down federal spot position limit for its Light Sweet particular core referenced futures contract, are are between 1,200 and 1,599 contracts; and (5) 220 Crude Oil (CL) futures contract: (1) 6,000 contracts directly or indirectly linked to the price of that core contracts if deliverable supplies are below 1,200 as of the close of trading three business days prior referenced futures contract, or directly or indirectly contracts. to the last trading day of the contract; (2) 5,000 linked to the price of the same commodity 181 The proposed federal spot month limit for contracts as of the close of trading two business underlying the core referenced futures contract for CME Live Cattle (LC) would feature a step-down days prior to the last trading day of the contract; delivery at the same location; and (2) ‘‘economically limit similar to the CME’s existing Live Cattle (LC) and (3) 4,000 contracts as of the close of trading one equivalent swaps.’’ See proposed ‘‘referenced step-down exchange set limit. The proposed federal business day prior to the last trading day of the contract’’ and ‘‘economically equivalent swap’’ spot month step down limit is: (1) 600 at the close contract. definitions in 150.1. of trading on the first business day following the

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2020 Proposed spot Existing federal spot Existing exchange-set Core referenced futures contract month limit month limit spot month limit

MGEX HRS Wheat (MWE) ...... 1,200 600 600 ICE Cotton No. 2 (CT) ...... 1,800 300 300

Other Agricultural Contracts

CME Live Cattle (LC) ...... 181 600/300/200 n/a 182 450/300/200 CBOT Rough Rice (RR) ...... 800 n/a 183 600/200/250 ICE Cocoa (CC) ...... 4,900 n/a 1,000 ICE Coffee C (KC) ...... 1,700 n/a 500 ICE FCOJ–A (OJ) ...... 2,200 n/a 300 ICE U.S. Sugar No. 11 (SB) ...... 25,800 n/a 5,000 ICE U.S. Sugar No. 16 (SF) ...... 6,400 n/a n/a

Metals Contracts

COMEX Gold (GC) ...... 6,000 n/a 3,000 COMEX Silver (SI) ...... 3,000 n/a 1,500 COMEX Copper (HG) ...... 1,000 n/a 1,500 NYMEX Platinum (PL) ...... 500 n/a 500 NYMEX Palladium (PA) ...... 50 n/a 50

Energy Contracts

NYMEX Light Sweet Crude Oil (CL) ...... 184 6,000/5,000/4,000 n/a 3,000 NYMEX NYH ULSD Heating Oil (HO) ...... 2,000 n/a 1,000 NYMEX NYH RBOB Gasoline (RB) ...... 2,000 n/a 1,000 NYMEX Henry Hub Natural Gas (NG) ...... 2,000 n/a 1,000

Limits for any contract with a information and by independently none of the recommended levels proposed limit above 100 contracts assessing the recommended levels using considered in preparing this release would be rounded up to the nearest 100 its own experience, observations, and appear improperly calibrated such that contracts from the exchange- knowledge. The Commission proposes they might hinder liquidity for bona fide recommended level and/or from 25 to adopt each of the exchange- hedgers, or invite excessive speculation, percent of deliverable supply. recommended levels as federal spot manipulation, corners, or squeezes, month limit levels. including activity that could impact c. Process for Calculating Federal Spot In setting federal limits, the price discovery. For these reasons, Month Limit Levels Commission considers the four policy discussed in turn below, the The existing federal spot month limit objectives in CEA section 4a(a)(3)(B). Commission preliminarily believes that levels on the nine legacy agricultural That is, to set limits, to the maximum the DCMs’ recommended spot month contracts have remained constant for extent practicable, in its discretion, to: limit levels all further the statutory decades, yet the markets have changed (1) Diminish, eliminate, or prevent objectives set forth in CEA section significantly during that time period, excessive speculation; (2) deter and 4a(a)(3)(B).187 including the advent of electronic prevent market manipulation, squeezes, i. The Proposed Spot Month Limit trading and the implementation of and corners; (3) ensure sufficient market Levels Are Low Enough To Prevent extended trading hours. Further, open liquidity for bona fide hedgers; and (4) Excessive Speculation and Protect Price interest and trading volume have since ensure that the price discovery function Discovery reached record levels, and some of the of the underlying market is not deliverable supply estimates on which disrupted.186 In setting federal position All 25 of the exchange-recommended the existing federal spot month limits limit levels, the Commission endeavors levels are at or below 25 percent of were originally based are now decades to maximize these objectives by setting deliverable supply.188 The Commission out of date. In light of these and other limits that are low enough to prevent has long used deliverable supply as the factors, CME Group, ICE, and MGEX excessive speculation, manipulation, basis for spot month position limits due recommended federal spot month limit squeezes, and corners that could disrupt to concerns regarding corners, squeezes, levels for each of their respective core price discovery, but high enough so as and other settlement-period referenced futures contracts, including not to restrict liquidity for bona fide manipulative activity.189 It would be contracts that would be subject to hedgers. difficult, in the absence of other factors, federal limits for the first time under Based on the Commission’s for a participant to corner or squeeze a this proposal.185 Commission staff experience overseeing federal position market if the participant holds less than reviewed these recommendations and limits for decades, and overseeing or equal to 25 percent of deliverable conducted its own analysis of them, exchange-set position limits submitted supply because, among other things, any including by requesting additional to the Commission pursuant to part 40 of its regulations, the Commission has 187 7 U.S.C. 6a(a)(3)(B). 185 See ICE Comment Letter at 8 (May 14, 2019); analyzed and evaluated the information 188 The recommended levels range from MGEX Comment Letter at 2, 4–8 (Aug. 31, 2018); provided by CME Group, ICE, and approximately 7 percent of deliverable supply to 25 and Summary DSE Proposed Limits, CME Group MGEX, and preliminarily finds that percent of deliverable supply. Comment Letter (Nov. 26, 2019), available at 189 See, e.g., Revision of Federal Speculative https://comments.cftc.gov (comment file for RIN Position Limits and Associated Rules, 64 FR 24038 3038–AD99). 186 7 U.S.C. 6a(a)(3)(B). (May 5, 1999).

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potential economic gains resulting from Commission has closely assessed the markets overseen by the Commission.195 the manipulation may be insufficient to estimates, which CME Group, ICE, and Market developments that have taken justify the potential costs, including the MGEX updated with recent data using place since federal spot month limits costs of acquiring, and ultimately the methodologies they used during the were last amended decades ago, such as offloading, the positions used to 2016 Reproposal.192 The Commission electronic trading and expanded trading effectuate the manipulation. hereby verifies that the estimates hours, have likely only contributed to By restricting positions to a submitted by the exchanges are these already liquid markets.196 Market proportion of the deliverable supply of reasonable. participants have more opportunities the commodity, the spot month position In verifying the DCMs’ estimates of than ever to enter, trade, or exit a limits require that no one speculator can deliverable supply, the Commission is position. By proposing to generally hold a position larger than 25 percent of not endorsing any particular increase the existing federal spot month deliverable supply, reducing the methodology for estimating deliverable limit levels, and by proposing federal possibility that a market participant can supply beyond what is already set forth spot month limit levels that are use derivatives, including referenced in Appendix C to part 38 of the generally equal to or higher than contracts, to affect the price of the cash Commission’s regulations.193 As existing exchange-set levels,197 yet in all commodity (and vice versa). Limiting a circumstances change over time, such cases still low enough to prevent speculative position based on a DCMs may need to adjust the excessive speculation, manipulation, percentage of deliverable supply also methodology, assumptions, and corners and squeezes, the Commission restricts a speculative trader’s ability to allowances that they use to estimate does not expect the proposed limits to establish a leveraged position in cash- deliverable supply to reflect then result in a reduction in liquidity for settled derivative contracts, reducing current market conditions and other bona fide hedgers. that trader’s incentive to manipulate the relevant factors. iii. The Proposed Spot Month Limit cash settlement price.190 Further, by ii. The Proposed Spot Month Limit Levels Fall Within a Range of proposing levels that are sufficiently Acceptable Levels low to prevent market manipulation, Levels are High Enough To Ensure including corners and squeezes, the Sufficient Market Liquidity for Bona ICE and MGEX recommended federal proposed levels also help ensure that Fide Hedgers spot month limit levels at 25 percent of deliverable supply, while CME Group the price discovery function of the Section 4a(a)(1) of the CEA addresses underlying market is not disrupted generally recommended levels below 25 ‘‘excessive speculation. . .causing percent of deliverable supply.198 These because markets that are free from sudden or unreasonable fluctuations or corners, squeezes, and other 194 unwarranted [price] changes . . .’’ 195 See infra Section III.F. manipulative activity reflect Speculative activity that is not 196 With the exception of CBOT Oats (O), open fundamentals of supply and demand ‘‘excessive’’ in this manner is not a interest for the legacy agricultural commodities has rather than artificial pressures. focus of section 4a(a)(1). Rather, increased dramatically over the past several Each of the exchange-recommended speculative activity may generate decades, some by a factor of four. levels is based on a percentage of 197 While the proposed spot month limit levels liquidity by enabling market are generally higher than the existing federal or deliverable supply estimated by the participants with bona fide hedging exchange-set levels, the proposed federal level for relevant exchange and submitted to the positions to trade more efficiently. COMEX Copper (HG) is below the existing Commission for review.191 The exchange-set level, the proposed federal level for Setting position limits too low could CBOT Oats (O) is the same as the existing federal result in reduced liquidity, including for and exchange-set level, and the proposed federal 190 Id. bona fide hedgers. The Commission has levels for NYMEX Platinum (PL) and NYMEX 191 See ICE Comment Letter at 8 (May 14, 2019); Palladium (PA) are the same as the existing MGEX Comment Letter at 2, 4–8 (Aug. 31, 2018); not observed, or received any complaints about, a lack of liquidity for exchange-set levels. and Summary DSE Proposed Limits, CME Group 198 For the following core referenced futures Comment Letter (Nov. 26, 2019), available at bona fide hedgers in the markets for the contracts, CME Group recommended spot month https://comments.cftc.gov (comment file for RIN 25 core referenced futures contracts. In levels below 25 percent of deliverable supply: 3038–AD99).CME Group submitted updated fact, as described later in this release, CBOT Corn (C) (9.22% of deliverable supply), estimates of deliverable supply and recommended CBOT Oats (O) (19.29%), CBOT Soybeans (S) federal spot month limit levels for CBOT Corn (C), the 25 core referenced futures contracts (15.86%), CBOT Soybean Meal (SM) (16.77%), CBOT Oats (O), CBOT Rough Rice (RR), CBOT represent some of the most liquid Soybean Oil (SO) (8.31%), CBOT Wheat (W) Soybeans (S), CBOT Soybean Meal (SM), CBOT (9.24%), CBOT KC HRW Wheat (KW) (9.24%), CME Soybean Oil (SO), CBOT Wheat (W), and CBOT KC Live Cattle (LC) (step-down limits 15.86%–7.93%– HRW Wheat (KW); COMEX Gold (GC), COMEX the assumptions made by the exchanges in the submissions were acceptable, or whether alternative 5.29%), CBOT Rough Rice (RR) (8.94%), COMEX Silver (SI), NYMEX Platinum (PL), NYMEX Gold (GC) (12.72%), COMEX Silver (SI) (12.62%), assumptions would lead to similar results. In some Palladium (PA), and COMEX Copper (HG); and COMEX Copper (HG) (9.66%), NYMEX Platinum cases, Commission staff conducted trade source NYMEX Henry Hub Natural Gas (NG), NYMEX (PL) (13.60%), NYMEX Palladium (PA) (17.18%), interviews. Commission staff replicated the Light Sweet Crude Oil (CL), NYMEX NY Harbor NYMEX Light Sweet Crude Oil (CL) (step-down calculations included in the submissions. ULSD Heating Oil (HO), and NYMEX NY Harbor limits 11.16%–9.30%–7.44%), NYMEX NYH ULSD 192 RBOB Gasoline (RB). ICE submitted updated See CME Group Comment Letter (Apr. 15, Heating Oil (HO) (10.85%), and NYMEX NYH estimates of deliverable supply and recommended 2016); CME Group Comment Letter (addressing RBOB Gasoline (RB) (7.41%). CME Group federal spot month limit levels for ICE Cocoa (CC), natural gas) (Sept. 15, 2016); CME Group Comment recommended spot month levels at 25 percent of ICE Coffee C (KC), ICE Cotton No. 2 (CT), ICE FCOJ– Letter (addressing ULSD) (Sept. 15, 2016); ICE estimated deliverable supply for NYMEX Henry A (OJ), ICE U.S. Sugar No. 11 (SB), and ICE U.S. Comment Letter (Apr. 20, 2016); and MGEX Hub Natural Gas (NG). ICE and MGEX Sugar No. 16 (SF). MGEX submitted an updated Comment Letter (Jul. 13, 2016), available at https:// recommended limit levels at 25 percent of deliverable supply estimate and indicated that if the comments.cftc.gov/PublicComments/ estimated deliverable supply for each of their core _ _ Commission adopted a specific spot month position CommentList.aspx?id=1772&ctl00 ctl00 referenced futures contracts: Cocoa (CC), Coffee C _ _ limit, MGEX believes the federal spot month limit cphContentMain MainContent (KC), FCOJ–A (OJ), Cotton No. 2 (CT), U.S. Sugar _ level for MGEX Hard Red Spring Wheat (MWE) gvCommentListChangePage=8 50. At that time, the No. 11 (SB), and U.S. Sugar No. 16 (SF) on ICE, and should be no less than 1,000 contracts. Commission Commission reviewed the methodologies that the Hard Red Spring Wheat (MWE) on MGEX. See ICE staff reviewed the exchange submissions and DCMs used to prepare the estimates, among other Comment Letter at 1–7 (May 14, 2019); MGEX conducted its own research. Commission staff things, and verified the deliverable supply Comment Letter at 2, 4–8 (Aug. 31, 2018); and reviewed the data submitted, confirmed that the estimates as reasonable. See 2016 Reproposal, 81 FR Summary DSE Proposed Limits, CME Group data submitted accurately reflected the source data, at 96754. Comment Letter (Nov. 26, 2019), available at and considered whether the data sources were 193 17 CFR part 38, Appendix C. https://comments.cftc.gov (comment file for RIN authoritative. Commission staff considered whether 194 CEA section 4a(a)(1); 7 U.S.C. 6a(a)(1). 3038–AD99).

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distinctions reflect philosophical and For the agricultural commodities, the for other commodity types. Further, other differences among the exchanges Commission considered a variety of metals tend not to spoil and are cheap and differences between the core factors in evaluating the exchange- to store on a per dollar basis compared referenced futures contracts and their recommended spot month levels, to other commodities. As metals are underlying commodities, including a including concentration and generally easier to obtain, store, and sell preference on the part of CME Group composition of market participants, the than other commodity types, it is also not to increase existing limit levels historical price volatility of the potentially cheaper to accomplish a applicable to its core referenced futures commodity, convergence between the corner or squeeze in metals than in contracts too drastically.199 The futures and cash market prices at the other commodity types. The Commission has previously stated that expiration of the contract, and the Commission has previously observed ‘‘there is a range of acceptable limit Commission’s experience observing manipulative activity in metals as levels,’’ 200 and continues to believe this how the supplies of agricultural evidenced by the Hunt Brother silver is true, both for spot and non-spot commodities are affected by weather and Sumitomo copper events. The month limits. There is no single (drought, flooding, or optimal growing Commission kept this history in mind in ‘‘correct’’ spot month limit level for a conditions), storage costs, and delivery accepting CME Group’s given contract, and it is likely that a mechanisms. In the Commission’s view, recommendation to take a fairly number of limit levels within a certain the exchanges’ recommended spot cautious approach with respect to the range could effectively address the month levels for each of the agricultural recommended levels for each metal 4a(a)(3) factors. While the CME Group, contracts would allow for speculators to contract, which are each well below 25 ICE, and MGEX recommended levels all be present in the market while percent of deliverable supply.202 fall at different ends of the deliverable preventing speculative positions from Commission staff has, however, supply range, the levels all fall at or being so large as to harm convergence reviewed each of the metals contracts below 25 percent of deliverable supply, and otherwise hinder statutory previously and confirms that these which is critical for protecting the spot objectives. contracts satisfy all regulatory month from excessive speculation, The Commission also considered the requirements, including the DCM Core manipulation, corners and squeezes. delivery mechanisms for the agricultural Principle 3 requirement that the commodities in assessing the exchange- contracts are not readily susceptible to iv. The Proposed Spot Month Limit recommended spot month levels. For manipulation. Levels Account for Differences Between example, for the CME Live Cattle (LC) Additionally, the Commission Markets contract, the Commission considered considered the volatility in the In addition to being high enough to the physical limitation that exists on estimated deliverable supply for metals. ensure sufficient liquidity, and low how many cattle can be processed For the COMEX Copper (HG) contract, enough to prevent excessive speculation (inspected, graded, and weighed) at the the estimated deliverable supply for and manipulation, the proposed spot delivery facilities. CME Group currently copper (measured by copper stocks in month limit levels are also calibrated to has an exchange-set step-down spot COMEX-approved warehouses) has further address CEA section 4a(a)(3) by month limit, and recommended a experienced considerable volatility accounting for differences between federal step-down limit for CME Live during the past decade, resulting in markets for the core referenced futures Cattle (LC) of 600/300/200 contracts in COMEX amending its exchange-set spot contracts and for their underlying order to avoid congestion and to foster month position limit multiple times, commodities.201 convergence by gradually reducing the decreasing or increasing the limit level limit levels in a manner that meets the to reflect the amount of copper in its 199 CME Group has indicated that for its own processing capacity of the delivery approved warehouses.203 Similarly, exchange-set limits, it historically has not typically facilities. The Commission proposes to volatility in deliverable supplies has set the limit at the full 25 percent of deliverable adopt this step-down limit due to the supply when launching a new product, regardless been observed for the NYMEX of asset class or commodity. CME Group’s unique attributes of the CME Live Cattle Palladium (PA) contract, where recommended spot month limit levels are based on (LC) contract. production of palladium from major observations regarding the orderliness of For the metals contracts, which are all producers has been declining while liquidations and monitoring for appropriate price listed on NYMEX, the Commission took demand for palladium by the auto convergence. CME Group indicated that the delivery mechanisms, among other recommended levels reflect a measured approach calibrated to avoid the risk of disruption to its factors, into account in assessing the 202 As noted above, CME Group’s recommended markets, and stated that upon analyzing a recommended spot month limit levels. federal level of 1,000 for COMEX Copper (HG) is reasonable body of data relating to the expirations Upon expiration, the long for each below the existing exchange-set level of 1,500, and with the recommended spot month limit levels, metals contract receives the ownership CME Group’s recommended federal levels for CME Group would consider in the future making NYMEX Platinum (PL) and NYMEX Palladium (PA) any recommendations for increases in limits if any certificate (warrant) for the metal are equal to the existing exchange-set levels of 500 additional increases were appropriate. Summary already in the warehouse/depository and 50, respectively. CME Group recommended DSE Proposed Limits, CME Group Comment Letter and can continue to store the metal federal levels of 6,000 for COMEX Gold (GC) and (Nov. 26, 2019), available at https:// where it is, load-out the metal, or short 3,000 for COMEX Silver (SI), which would comments.cftc.gov (comment file for RIN 3038– a futures contract to sell the ownership represent an increase over the existing exchange-set AD99). levels of 3,000 and 1,500, respectively. While CME 200 See, e.g., Revision of Federal Speculative certificate. This delivery mechanism, Group’s recommended federal COMEX Gold (GC) Position Limits, 57 FR at 12766, 12770 (Apr. 13, which allows for the resale of the and COMEX Silver (SI) levels are higher than the 1992). warrant while the metal remains in the existing exchange-set levels, the recommended 201 Commenters, including those responding to warehouse, provides for relatively levels still represent only approximately 13 percent the 2016 Reproposal, have previously requested of deliverable supply each. Summary DSE Proposed that limit levels should be set on a commodity-by- inexpensive and simple delivery when Limits, CME Group Comment Letter (Nov. 26, 2019), commodity basis to recognize differences among compared to the delivery mechanisms available at https://comments.cftc.gov (comment commodities, including differences in liquidity, file for RIN 3038–AD99). seasonality, and other economic factors. See, e.g., Securities Industry and Financial Markets 203 The volatility was based on factors such as the AQR Capital Management Comment Letter at 12 Association, and the Alternative Investment bust in the housing market in 2008, the severe (Feb. 28, 2017); Copperwood Asset Management Management Association Comment Letter at 9–12 recession in the United States in 2009, and high Comment Letter at 3 (Feb. 28, 2017); Managed (Feb. 28, 2017); and National Grain and Feed demand for copper exports to China, which has Funds Association, Asset Management Group of the Association Comment Letter at 2 (Feb. 28, 2017). grown continually over the past 20 years.

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industry for catalytic converters has Sweet Crude Oil (CL) and NYMEX NYH a step down mechanism in its increased. This trend in palladium RBOB Gasoline (RB) contracts. exemptions that it had granted to force stocks in exchange-approved The Commission also considered market participants to lower their depositories has been observed since factors such as the large amounts of positions to the current 3,000 contract 2014. In a series of amendments, liquidity in the cash-settled natural gas spot month limit. Given the NYMEX reduced its exchange-set spot referenced contracts relative to the recommended increase to a final step- month limit from 650 contracts to below physically settled NYMEX Henry Hub down limit of 4,000 contracts, the 200 contracts over time.204 Natural Gas (NG) core referenced futures exchange, through feedback from market The Commission has not observed contract. For that contract, CME Group participants, recommended a step-down similar volatility in the deliverable recommended setting the spot month spot month limit that would in effect supply estimates for agricultural or limit at 25 percent of estimated provide the same diminishing effect on energy commodities. Given this history deliverable supply (2,000 contract spot positions. of volatility in deliverable supply month limit) with a conditional limit d. Proposed Federal Single Month and estimates for metals, if the Commission exemption of 10,000 contracts net long All-Months Combined (‘‘Non-Spot were to set limit levels at, rather than or net short conditioned on the Month’’) Limit Levels below, 25 percent of deliverable supply, participant not holding or controlling and if deliverable supply were to any positions during the spot month in Under the rules proposed herein, subsequently change drastically, the the physically-settled NYMEX Henry federal non-spot month limits would spot month limit level could end up Hub Natural Gas (NG) core referenced only apply to the nine agricultural being well above (or below) 25 percent futures contract. Speculators who desire commodities currently subject to federal of deliverable supply, and thus price exposure to natural gas will likely limits. The 16 additional contracts potentially too high (or too low) to trade in the cash-settled contracts covered by this proposal would be further statutory objectives. because, generally, they do not have the subject to federal limits only during the For the energy complex, the ability to make or take delivery; trading spot month, and exchange-set limits Commission considered factors such as in the cash-settled contract removes the and/or accountability requirements the underlying infrastructure and chance that they may be unable to exit outside of the spot month.206 connectivity. For example, as of 2017, the physically-settled NYMEX Henry The Commission proposes to generally, out of commodities Hub Natural Gas (NG) contract and be maintain federal non-spot month limits underlying the core referenced futures selected to make or take delivery of for the nine legacy agricultural contracts in energy, natural gas had the natural gas. Thus, speculators are likely contracts, with the modifications set most robust infrastructure for moving to remain out of the NYMEX Henry Hub forth below, because the Commission the commodity, with over 1,600,000 Natural Gas (NG) contract during the has observed no reason to eliminate miles of pipeline (including distribution spot month. Since corners and squeezes them. These non-spot month limits have mains, transmission pipelines, and cannot be effected using cash settled been in place for decades, and while the gathering lines) in the United States, contracts, the Commission proposes a Commission is proposing to modify the compared to only 215,000 miles of spot month limit set at 25 percent of limit levels,207 removing the levels pipeline for oil (including crude and deliverable supply for the NYMEX entirely could potentially result in product lines).205 The robust Henry Hub Natural Gas (NG) core market disruption. In fact, commercial infrastructure for moving natural gas referenced futures contract. market participants trading the nine supports CME Group’s recommended Further, for certain energy legacy agricultural contracts have spot month limit level at 25 percent of commodities, CME Group requested that the Commission maintain estimated deliverable supply for the recommended step-down limits, federal limits outside the spot month in NYMEX Henry Hub Natural Gas (NG) including for commodities where order to promote market integrity. For contract, while comparatively smaller delivery constraints could hinder the following reasons, however, the crude oil and crude product pipeline convergence or where market Commission is not proposing limits infrastructure support CME Group’s participants otherwise provided outside the spot month for the other 16 recommended spot month limit levels feedback that such limits would help contracts. below 25 percent of estimated maintain orderly markets. In the case of deliverable supply for the NYMEX Light NYMEX Light Sweet Crude Oil (CL), 206 Market Resources, ICE Futures website, CME Group currently has a single spot- available at https://www.theice.com/futures-us/ market-resources (ICE exchange-set position limits); 204 See, e.g., NYMEX Submissions Nos. 14–463 month limit of 3,000 contracts, but is Position Limits, CME Group website, available at (Oct. 31, 2014), 15–145 (Apr. 14, 2015), and 15–377 recommending a step down limit that https://www.cmegroup.com/market-regulation/ (Aug. 27, 2015). would end at 4,000 contracts (step- position-limits.html; Rules and Regulations of the 205 See U.S. Oil and Gas Pipeline Mileage, Bureau down limits of 6,000/5,000/4,000). Minneapolis Grain Exchange, Inc., MGEX, available of Transportation Statistics website, available at _ www.bts.gov/content/us-oil-and-gas-pipeline- Historically, as liquidity decreases in at http://www.mgex.com/documents/Rulebook mileage. the contract, the exchange would have 051.pdf (MGEX exchange-set position limits). 207 See infra Section II.B.2.e.

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First, corners and squeezes cannot for the position, and will evaluate contracts based on all 25 core referenced occur outside the spot month when existing market conditions. If the futures contracts, and outside of the there is no threat of delivery, and there position does not raise any concerns, spot month only to referenced contracts are tools other than federal position the exchange will allow the trader to based on the nine legacy agricultural limits for deterring and preventing exceed the accountability level. If the commodities, furthers statutory goals manipulation outside of the spot position raises concerns, the exchange while minimizing the impact on 208 month. Surveillance at both the has the authority to instruct the trader existing industry practice and exchange and federal level, coupled not to increase the position further, or leveraging existing exchange-set limits with exchange-set limits and/or to reduce the position. Accountability is and accountability levels that appear to accountability, would continue to offer a particularly flexible and effective tool have functioned well. The Commission strong deterrence and protection against because it provides the exchanges with thus endeavors to minimize market manipulation outside of the spot month. an opportunity to intervene once a In particular, under this proposal, for position hits a relatively low level, disruption that could result from the 16 contracts that would be subject while still affording market participants eliminating existing federal non-spot to federal limits only during the spot with the flexibility to establish a large month limits on certain agricultural month, exchanges would be required to position when warranted by the nature commodities and from adding new non- establish either position limit levels or of the position and the condition of the spot limits on certain metals and energy position accountability levels outside of market. commodities that have never been the spot month.209 Any such The Commission has decades of subject to federal limits. Layering accountability and limit levels would be experience overseeing accountability federal non-spot month limits for the 16 subject to standards established by the levels implemented by exchanges,212 additional contracts on top of existing Commission including, among other including for all 16 contracts that would exchange-set limit/accountability levels things, that any such levels be not be subject to federal limits outside may only provide minimal benefits, if ‘‘necessary and appropriate to reduce of the spot month under this proposal. any, and would forego the benefits the potential threat of market Such accountability levels apply to all associated with flexible accountability manipulation or price distortion of the participants on the exchange, whether levels, which provide many of the same contract’s or the underlying commercial or non-commercial, and protections as hard limits but with commodity’s price or index.’’ 210 regardless of whether the participant significantly more flexibility for market Exchanges would also be required to would qualify for an exemption. In the participants to exceed the accountability submit any rules adopting or modifying Commission’s experience, these levels level in cases where the position would have functioned as-intended, and the such position limit and/or not harm the market. accountability levels to the Commission Commission views exchange pursuant to part 40 of the Commission’s accountability outside of the spot month As set forth in proposed § 150.2(e), regulations.211 as an equally robust, yet more flexible, proposed federal non-spot month levels Exchange position accountability alternative to federal non-spot month applicable to referenced contracts based establishes a level at which an exchange speculative position limits. on the nine legacy agricultural contracts will ask traders additional questions, Second, applying federal limits are listed in proposed Appendix E and including regarding the trader’s purpose during the spot month to referenced are as follows:

2020 Pro- posed single month and Existing Existing all-months federal exchange-set Core referenced futures contract combined limit single month single month based on new and and 10/2.5 formula all-months- all-months- for first 50,000 combined limit combined limit OI

CBOT Corn (C) ...... 57,800 33,000 33,000 CBOT Oats (O) ...... 2,000 2,000 2,000 CBOT Soybeans (S) ...... 27,300 15,000 15,000 CBOT Soybean Meal (SM) ...... 16,900 6,500 6,500 CBOT Soybean Oil (SO) ...... 17,400 8,000 8,000 CBOT Wheat (W) ...... 19,300 12,000 12,000 KC HRW Wheat (KW) ...... 12,000 12,000 12,000 MGEX HRS Wheat (MWE) ...... 12,000 12,000 12,000 ICE Cotton No. 2 (CT) ...... 11,900 5,000 5,000

208 In the case of certain commodities where open However, if a large position accumulated over time and (2) halt increasing further its position or reduce interest in the deferred month contracts may be in a particular deferred month is held into the spot its position in an orderly manner, in each case as much larger, it may become difficult to exert market month, it is possible that such positions could form requested by the DCM. power via concentrated futures positions. For the groundwork for an attempted corner or squeeze 212 See, e.g., 56 FR 51687 (Oct. 15, 1991) example, a participant with a large cash-market in the spot month. (permitting CME to establish position position and a large deferred futures position may 209 See infra Section II.D.4. (discussion of accountability for certain financial contracts traded attempt to move cash markets in order to benefit proposed § 150.5). on CME), Speculative Position Limits—Exemptions that deferred futures position. Any attempt to do so 210 Id. from Commission Rule 1.61, 57 FR 29064 (June 30, could become muted due to general futures market 211 Under the proposed ‘‘position accountability’’ 1992) (permitting the use of accountability for resistance from multiple vested interests present in definition in § 150.1, DCM accountability rules trading in energy commodity contracts), and 17 CFR that deferred futures month (i.e., the overall size of would have to require a trader whose position 150.5(e) (2009) (formally recognizing the practice of the deferred contracts may be too large for one exceeds the accountability level to consent to: (1) accountability for contracts that met specified individual to influence via cash market activity). Provide information about its position to the DCM; standards).

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e. Methodology for Setting Proposed proposed levels would remain at the limit formula from 25,000 to 50,000 Non-Spot Month Limit Levels existing levels. contracts would provide a modest The Commission continues to believe increase in the non-spot month limit of The Commission’s practice has been that a formula based on a percentage of 1,875 contracts (over what the limit to set non-spot month limit levels for open interest is an appropriate tool for would be if the 10, 2.5 percent formula the nine legacy agricultural contracts at establishing limits outside the spot were applied at 25,000 contracts), 10 percent of the open interest for the month. As the Commission stated when assuming the underlying commodity first 25,000 contracts and 2.5 percent of it initially proposed to use an open futures market has open interest of at the open interest thereafter (the ‘‘10, 2.5 interest formula, taking open interest least 50,000 contracts. The Commission percent formula’’).213 The existing non- into account ‘‘will permit speculative believes that the amended non-spot spot month limit levels have not been position limits to reflect better the month formula would provide a updated to reflect changes in open changing needs and composition of the conservative increase in the non-spot 216 interest data in over a decade, and the futures markets . . .’’ Open interest month limits for most contracts to better 10, 2.5 percent formula has been used is a measure of market activity that reflect the general increase observed in since the 1990s, and was based on the reflects the number of contracts that are open interest across futures markets Commission’s experience up until that ‘‘open’’ or live, where each contract of since the late 1990s, as discussed below. time.214 The Commission’s adoption of open interest represents both a long and the 10, 2.5 percent formula was based a short position. Relative to contracts i. Increases in Open Interest on two primary factors: growth in open with smaller open interest, contracts The table below provides data that interest and the size of large traders’ with larger open interest may be better describes the market environment positions.215 able to mitigate the disruptive impact of excessive speculation because there may during the period prior to, and The Commission proposes to be more activity to oppose, diffuse, or subsequent to, the adoption of the 10, maintain the 10, 2.5 percent formula for otherwise counter a potential pricing 2.5 percent formula by the Commission non-spot limits, with the limited change disruption. Limiting positions to a in 1999. The data includes futures that the 2.5 percent calculation will be percentage of open interest: (1) Helps contracts and the delta-adjusted options applied to open interest above 50,000 ensure that positions are not so large on futures open interest.217 The first contracts rather than to the current level relative to observed market activity that column of the table provides the of 25,000 contracts. The Commission they risk disrupting the market; (2) maximum open interest in the nine believes that this change is warranted allows speculators to hold sufficient legacy agricultural contracts over the due to the significant overall increase in contracts to provide a healthy level of five year period ending in 1999. The open interest in these markets, which liquidity for hedgers; and (3) allows for CBOT Corn (C) contract had maximum has roughly doubled since federal limits increases in position limits and position open interest of approximately 463,000 were set on these markets. The sizes as markets expand and become contracts, and the CBOT Soybeans (S) Commission would apply the modified more active. contract had maximum open interest of formula to recent open interest data for While the Commission continues to approximately 227,000 contracts. The the periods from July 2017–June 2018 prefer a formula based on a percentage other seven contracts had maximum and July 2018–June 2019 of the of open interest, market and potential open interest figures that ranged from applicable futures and delta adjusted regulatory changes counsel in favor of less than 20,000 contracts for CBOT futures options. The resulting proposed proposing a slight modification to the Oats (O) to approximately 172,000 for limit levels, set forth in the second existing formula. In particular, as CBOT Soybean Oil (SO). Hence, when column in the table above, would discussed in detail below, open interest adopting the 10, 2.5 percent formula in generally be higher than existing limit has grown, and market composition has 1999, the Commission’s experience in levels, with the exception of CBOT Oats changed, significantly since the 1990s. these markets was of aggregate futures (O), CBOT KC HRW Wheat (KW), and The proposed increase in the open and options on futures open interest MGEX HRS Wheat (MWE), where interest portion of the non-spot month well below 500,000 contracts.

TABLE—MAXIMUM FUTURES AND OPTIONS ON FUTURES OPEN INTEREST, 1994–2018

1994–1999 2000–2004 2005–2009 2010–2014 2015–2018

CBOT Corn (C) ...... 463,386 828,176 1,897,484 2,052,678 2,201,990 ICE Cotton No. 2 (CT) ...... 122,989 140,240 388,336 296,596 344,302

213 For example, assume a commodity contract 1999, the Commission had given little weight to the positions in a market do not continue to grow in has an aggregate open interest of 200,000 contracts size of open interest in the contract in determining proportion with increases in the overall open over the past 12 month period. Applying the 10, 2.5 the position limit level—instead, the Commission’s interest of the market.’’ Id. percent formula to an aggregate open interest of traditional standard was to set limit levels based on 217 Delta is a ratio comparing the change in the 200,000 contracts would yield a non-spot month the distribution of speculative traders in the market. price of an asset (a futures contract) to the limit of 6,875 contracts. That is, 10 percent of the See, e.g., 64 FR at 24039; Revision of Federal corresponding change in the price of its derivative first 25,000 contracts would equal 2,500 contracts Speculative Position Limits and Associated Rules, (an option on that futures contract) and has a value (25,000 contracts × 0.10 = 2,500 contracts). Then 63 FR at 38525, 38527 (July 17, 1998). that ranges between zero and one. In-the-money call add 2.5 percent of the remaining 175,000 of 215 See 64 FR at 24038. See also 63 FR at 38525, aggregate open interest or 4,375 contracts (175,000 38527 (The 1998 proposed revisions to non-spot options get closer to 1 as their expiration contracts × 0.025 = 4,375 contracts) for a total non- month levels, which were eventually adopted in approaches. At-the-money call options typically spot month limit of 6,875 contracts (2,500 contracts 1999, were based upon two criteria: ‘‘(1) the have a delta of 0.5, and the delta of out-of-the- + 4,375 contracts = 6,875 contracts). distribution of speculative traders in the markets; money call options approaches 0 as expiration 214 See, e.g., Revision of Federal Speculative and (2) the size of open interest.’’). nears. The deeper in-the-money the call option, the Position Limits and Associated Rules, 64 FR at 216 Revision of Federal Speculative Position closer the delta will be to 1, and the more the option 24038 (May 5, 1999) (increasing deferred-month Limits, 57 FR 12766, 12770 (Apr. 13, 1992). The will behave like the underlying asset. Thus, delta- limit levels based on 10 percent of open interest up Commission also stated that providing for a adjusted options on futures will represent the total to an open interest of 25,000 contracts, with a marginal increase was ‘‘based upon the universal position of those options as if they were converted marginal increase of 2.5 percent thereafter). Prior to observation that the size of the largest individual to futures.

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TABLE—MAXIMUM FUTURES AND OPTIONS ON FUTURES OPEN INTEREST, 1994–2018—Continued

1994–1999 2000–2004 2005–2009 2010–2014 2015–2018

CBOT Oats (O) ...... 18,879 17,939 16,860 15,375 11,313 CBOT Soybeans (S) ...... 227,379 327,276 672,061 991,258 997,881 CBOT Soybean Meal (SM) ...... 155,658 183,255 241,917 392,265 544,363 CBOT Soybean Oil (SO) ...... 172,424 191,337 328,050 395,743 547,784 CBOT Wheat (W) ...... 163,193 187,181 507,401 576,333 621,750 CBOT Wheat: Kansas City Hard Red Winter (KW) ...... 76,435 87,611 159,332 189,972 311,592 MGEX Wheat: Minneapolis Hard Red Spring (MWE) ...... 24,999 36,155 57,765 68,409 80,635

The table also displays the maximum 200,000. More recently, however, open five or more banks hold reportable open interest figures for subsequent interest has grown above 500,000 for a positions. The BPR is based on the same periods up to, and including, 2018. The majority of the legacy contracts. The 10, large-trader reporting system database maximum open interest for all of these 2.5 percent formula has thus become used to generate the Commission’s contracts, except for oats, generally more restrictive for market participants, Commitments of Traders (‘‘COT’’) increased over the period.218 By the including those entities with positions report.222 2015–2018 period covered in the last that may not be eligible for a bona fide No data was reported for the seven column of the table, five of the contracts hedging exemption, but who might futures contracts in December 2002, had maximum open interest greater than otherwise provide valuable liquidity to indicating that fewer than five banks 500,000 contracts. The contracts for commercial firms. held reportable positions at the time of CBOT Corn (C), CBOT Soybeans (S), and This problem has become worse over the report. The December 2003 report CBOT Hard Red Winter Wheat (KW) time because dealers play a much more shows that five or more banks held saw maximum open interest increase by significant role in the market today than a factor of four to five times the at the time the Commission adopted the reportable positions in four of the maximum open interest during the 10, 2.5 percent formula. Prior to 1999, commodity futures. The number of 1994–1999 period leading up to the the Commission regulated physical banks with reportable positions Commission’s adoption of the 10, 2.5 commodity markets where the largest generally increased in the early to mid- percent formula in 1999. participants were often large 2000s. As described in the commercial interests who held short Commission’s 2008 Staff Report on ii. Changes in Market Composition positions. The offsetting positions were Commodity Swap Dealers & Index As open interest has increased, the often held by small, individual traders, Traders, major changes in the current non-spot limits have become who tended to be long.219 Several years composition of futures markets significantly more restrictive over time. after the Commission adopted the 10, developed over the 20 years prior to In particular, because the 2.5 percent 2.5 percent formula, the composition of 2008, including an influx of swap incremental increase applies after the futures market participants changed, as dealers (‘‘SDs’’), affiliated with banks or first 25,000 contracts of open interest, dealers began to enter the physical other large financial institutions, acting limits on commodities with open commodity futures market in larger size. as aggregators or market makers and interest above 25,000 contracts (i.e., all The table below presents data from the providing swaps to commercial hedgers commodities other than oats) continue Commission’s publicly available ‘‘Bank and to other market participants.223 The to increase at a much slower rate of 2.5 Participation Report’’ (‘‘BPR’’), as of the dealers functioned in the swaps market percent rather than 10 percent, as for the December report for 2002–2018.220 The and also used the futures markets to first 25,000 contracts. This gradual table displays the number of banks hedge their exposures. When the increase was less of a problem in the holding reportable positions for the Commission adopted the 10, 2.5 percent latter part of the 1990s, for example, seven futures contracts for which formula in 1999, it had limited when open interest in each of the nine federal limits apply and that were experience with physical commodity legacy agricultural contracts was below reported in the BPR.221 The report derivatives markets in which such 500,000, and in many cases below presents data for every market where banks were significant participants.

TABLE—NUMBER OF REPORTING COMMERCIAL BANKS WITH LONG FUTURES POSITIONS

Year Corn Cotton Soybeans Soybean meal Soybean oil Wheat Wheat KCBT

2002 ...... NR NR NR NR NR NR NR 2003 ...... 5 6 7 NR NR 5 NR 2004 ...... 5 10 7 NR NR 7 NR 2005 ...... 10 8 6 NR 5 9 9 2006 ...... 11 11 9 NR 7 14 7 2007 ...... 13 8 12 NR 6 14 6 2008 ...... 17 13 16 NR 6 14 9

218 See infra Section II.B.2.e.iii. (discussion of https://www.cftc.gov/MarketReports/ generally still as many large commercial traders in proposed non-spot month limit level for CBOT Oats BankParticipationReports/index.htm . the markets today as there were in the 1990s. (O)). 221 The term ‘‘reportable position’’ is defined in 223 Staff Report on Commodity Swap Dealers & 219 Stewart, Blair, An Analysis of Speculative § 15.00(p) of the Commission’s regulations. 17 CFR Index Traders with Commission Recommendations, 15.00(p). Trading in Grain Futures, Technical Bulletin No. U.S. Commodity Futures Trading Commission 222 Commitments of Traders, U.S. Commodity 1001, U.S. Department of Agriculture (Oct. 1949). (Sept. 2008), available at https://www.cftc.gov/sites/ Futures Trading Commission website, available at 220 Bank Participation Reports, U.S. Commodity www.cftc.gov/MarketReports/ default/files/idc/groups/public/@newsroom/ Futures Trading Commission website, available at CommitmentsofTraders/index.htm. There are documents/file/cftcstaffreportonswapdealers09.pdf.

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TABLE—NUMBER OF REPORTING COMMERCIAL BANKS WITH LONG FUTURES POSITIONS—Continued

Year Corn Cotton Soybeans Soybean meal Soybean oil Wheat Wheat KCBT

2009 ...... 8 8 8 NR NR 13 NR 2010 ...... 7 7 7 NR NR 11 NR 2011 ...... 10 11 9 5 5 10 NR 2012 ...... 8 10 11 6 6 13 5 2013 ...... 11 11 13 10 6 11 5 2014 ...... 15 12 15 10 9 15 6 2015 ...... 12 13 13 12 9 16 9 2016 ...... 15 14 15 12 10 15 6 2017 ...... 16 13 12 11 9 16 8 2018 ...... 16 15 18 15 13 18 12 NR = ‘‘Not Reported’’.

For 2003, the first year in the report that the reporting banks held modest displayed in the table below increased with reported data on the futures for positions, totaling 3.4 percent of futures over the next several years, generally these physical commodities, the BPR long open interest for wheat and smaller peaking around 2005/2006 as a fraction showed, as displayed in the table below, positions in other futures. The positions of the long open interest.

TABLE—PERCENT OF FUTURES LONG OPEN INTEREST HELD BY COMMERCIAL BANKS

Year (Dec.) Corn Cotton Soybeans Soybean meal Soybean oil Wheat Wheat KCBT

2002 .. NR NR NR NR NR NR NR 2003 .. 1.5% 1.4% 0.8% NR NR 3.4% NR 2004 .. 7.0 6.5 3.6 NR NR 14.5 NR 2005 .. 12.5 13.8 8.3 NR 6.8 20.2 5.2 2006 .. 9.4 14.2 7.7 NR 6.7 17.0 6.9 2007 .. 9.2 9.7 6.7 NR 6.5 13.5 5.5 2008 .. 8.9 18.2 10.0 NR 6.4 18.7 7.1 2009 .. 4.3 6.5 3.6 NR NR 9.3 NR 2010 .. 3.7 2.5 4.7 NR NR 6.9 NR 2011 .. 4.1 3.3 4.9 1.9 4.4 7.7 NR 2012 .. 4.7 9.9 3.7 5.8 5.5 7.4 3.5 2013 .. 5.3 9.1 4.4 7.0 4.1 6.2 6.4 2014 .. 9.7 10.0 6.3 6.7 6.5 7.7 10.1 2015 .. 8.1 10.1 5.0 5.9 6.4 7.8 4.3 2016 .. 8.1 8.5 7.1 10.7 6.6 7.3 5.2 2017 .. 5.5 9.5 4.3 9.1 7.3 7.7 4.8 2018 .. 5.8 8.3 5.9 9.2 7.6 10.2 7.0 NR = ‘‘Not Reported’’.

iii. Proposed Non-Spot Month Limits for level appears to have functioned well wheat varieties, which comprises a Hard Red Wheat and Oats for these contracts, and the Commission smaller percentage of the wheat grown sees no market-based reason to reduce in North America. Even though the The Commission proposes partial the levels. CBOT Wheat (W) contract has the wheat parity outside of the spot month: majority of liquidity among the three limits for CBOT KC HRW Wheat (KW) CBOT KC HRW Wheat (KW) and wheat contracts as measured by open and MGEX HRS Wheat (MWE) would be MGEX HRS Wheat (MWE) are both hard interest and trading volume, it is the set at 12,000 contracts, while limits for red wheats representing about 60 hard red wheats that make up the bulk CBOT Wheat (W) would be set at 19,300 percent of the wheat grown in the United States 225 and about 80 percent of wheat crops in North America. Thus, contracts. Based on the Commission’s 226 experience since 2011 with non-spot of the wheat grown in Canada. the Commission proposes to maintain month speculative position limit levels Although the CBOT Wheat (W) contract the non-spot month limit for the CBOT at 12,000 for the CBOT KC HRW Wheat allows for delivery of hard red wheat, it KC HRW Wheat (KW) contract and (KW) and MGEX HRS Wheat (MWE) typically sees deliveries of soft white MGEX HRS Wheat (MWE) contract at core referenced futures contracts, the the 12,000 contract level even though Commission is proposing to maintain these two contracts would result in limit levels of both contracts would have a lower non- 11,900 and 5,700, respectively. the current non-spot month limit levels spot month limit based solely on the 225 Wheat Sector at a Glance, USDA Economic open interest formula. The Commission for those two contracts, rather than Research Service, available at https:// reducing the existing levels to the lower www.ers.usda.gov/topics/crops/wheat/wheat-sector- preliminarily believes that maintaining levels that would result from applying at-a-glance. partial parity and the existing non-spot the proposed modified 10, 2.5 percent 226 Estimated Areas, Yield, Production, Average month limits in this manner will benefit Farm Price and Total Farm Value of Principal Field formula.224 The current 12,000 contract the MWE and KW markets since the two Crops, In Metric and Imperial Units, Statistics species of wheat are similar (i.e., hard Canada website, available at https:// 224 Applying the proposed modified 10, 2.5 www150.statcan.gc.ca/t1/tbl1/en/tv.action? red wheat) to one another relative to percent formula to recent open interest data for pid=3210035901. CBOT Wheat (W), which is soft white

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wheat; and as a result, the Commission for these contracts. Furthermore, even ceilings—exchanges would remain free has preliminarily determined that when relying on a single criterion, such to set exchange levels below the federal decreasing the non-spot month levels as percentage of open interest, the limit. The exchanges currently have for MWE could impose liquidity costs Commission has historically recognized systems and processes in place to on the MWE market and harm bona fide that there can ‘‘result . . . a range of monitor and surveil their markets in real hedgers, which could further harm acceptable position limit levels.’’ 230 time, and have the ability, and liquidity for bona fide hedgers in the For all of the core referenced regulatory responsibility, to act quickly related KW market. contracts, based on decades of in the event of a disturbance.233 However, the Commission has experience overseeing exchange-set Additionally, exchanges have tools determined not to raise the proposed position limits and administering its other than position limits for protecting limit levels for CBOT KC HRW Wheat own federal position limits regime, the markets. For instance, exchanges can (KW) and MGEX HRS Wheat (MWE) to Commission is of the view that the establish position accountability levels the proposed 19,300 contract limit level proposed non-spot month limit levels well below a position limit level, and for CBOT Wheat (W) because 19,300 are also low enough to diminish, can impose liquidity and concentration contracts appears to be extraordinarily eliminate, or prevent excessive surcharges to initial margin if they are large in comparison to open interest in speculation, and to deter and prevent vertically integrated with a derivatives the CBOT KC HRW Wheat (KW) and market manipulation, squeezes, and clearing organization. One reason that MGEX HRS Wheat (MWE) markets, and corners. The Commission has the Commission is proposing to update the limit levels for both contracts are previously studied prior increases in the formula for calculating non-spot already larger than a limit level based federal non-spot month limits and month limit levels is that the exchanges on the 10, 2.5 percent formula. The concluded that the overall impact was may be able in certain circumstances to Commission is concerned that modest, and that any changes in market act much more quickly than the substantially raising non-spot limits on performance were most likely Commission, including quickly altering the KW or MWE contracts could create attributable to factors other than their own limits and accountability a greater likelihood of excessive changes in the federal position limit levels based on changing market speculation given their smaller overall rules.231 The Commission has since conditions. Any decrease in an trading relative to the CBOT Wheat (W) gained further experience which exchange-set limit would effectively contract. In response to prior proposals, supports that conclusion, including by lower the federal limit for that contract, which would have resulted in lower monitoring amendments to position as market participants would be non-spot limits for MWE, MGEX had limit levels by exchanges. Further, given required to comply with both federal requested parity among all wheat the significant increases in open interest and exchange-set limits, and as the contracts. In part, MGEX reasoned that and changes in market composition that Commission has the authority to enforce intermarket spread trading among the have occurred since the 1990s, the violations of both federal and exchange- three contracts is vital to their price Commission is comfortable that the set limits.234 discovery function.227 The Commission proposal to amend the 10, 2.5 percent f. Subsequent Spot and Non-Spot Month notes that intermarket spreading is formula will adequately address each of Limit Levels permitted under this proposal.228 The the policy objectives set forth in CEA intermarket spread exemption should section 4a(a)(3).232 Prior to amending any of the proposed address any concerns over the loss of spot or non-spot month levels, if iv. Conclusion liquidity in spread trades among the adopted, the Commission would three wheat contracts. With the exception of the CBOT KC provide for public notice and comment Likewise, based on the Commission’s HRW Wheat (KW), MGEX HRS Wheat by publishing the proposed levels in the experience since 2011 with the current (MWE), and CBOT Oats (O) contracts, as Federal Register. Under proposed non-spot month speculative position noted above, the proposed formula § 150.2(f), should the Commission wish limit of 2,000 contracts for CBOT Oats would result in higher non-spot month to rely on exchange estimates of (O), the Commission is proposing to limit levels than those currently in deliverable supply to update spot month maintain the current 2,000 contract place. Furthermore, as noted above, speculative limit levels, DCMs would be level rather than reducing it to the lower under the rules proposed herein, the required to supply to the Commission levels that would result from applying nine legacy agricultural contracts would deliverable supply estimates upon the updated 10, 2.5 formula.229 The be the only contracts subject to limits request. Proposed § 150.2(j) would existing 2,000 contract limit for CBOT outside of the spot month. Aside from delegate the authority to make such Oats (O) appears to have functioned the CBOT Oats (O) contract, these requests to the Director of the Division well, and the Commission sees no contracts all have high open interest, of Market Oversight. reason to reduce it. and thus their pricing may be less likely Recognizing that estimating While retaining the existing non-spot to be affected by the trading of large deliverable supply can be a time and month limits for the MWE and KW position holders in non-spot months. resource consuming process for DCMs contracts and for CBOT Oats (O) does Further, consistent with the approach and for the Commission, the break with the proposed non-spot proposed herein to leverage existing Commission is not proposing to require month formula, the Commission has exchange-level programs and expertise, confidence that the existing contract the proposed federal non-spot month 233 For example, under DCM Core Principle 4, limits should continue to be appropriate limit levels would serve simply as DCMs are required to ‘‘have the capacity and responsibility to prevent manipulation, price distortion, and disruptions of the delivery or cash- 227 See Statement of Layne Carlson, CFTC 230 Revision of Speculative Position Limits, 57 FR settlement process through market surveillance, Agricultural Advisory Committee meeting, Sept. 22, 12770, 12766 (Apr. 13, 1992). See also Revision of compliance, and enforcement practices and 2015, at 38–44. Speculative Position Limits and Associated Rules, procedures,’’ including ‘‘methods for conducting 228 See supra Section II.A.20. (definition of spread 63 FR at 38525, 38527 (July 17, 1998). Cf. 2013 real-time monitoring of trading’’ and transaction). Proposal, 78 FR at 75729 (there may be range of ‘‘comprehensive and accurate trade 229 Applying the proposed modified 10, 2.5 spot month limits that maximize policy objectives). reconstructions.’’ 7 U.S.C. 7(d)(4). percent formula to recent open interest data for oats 231 64 FR 24038, 24039 (May 5, 1999). 234 See infra Section II.D.4.g. (discussion of would result in a 700 contract limit level. 232 7 U.S.C. 6a(a)(3)(B). Commission enforcement of exchange-set limits).

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DCMs to submit such estimates on a positions,’’ defined in proposed § 150.1 words, a market participant’s positions regular basis; instead, DCMs would be as positions established in good faith in referenced contracts listed on a DCM required to submit estimates of prior to the effective date of a final and on an FBOT registered to provide deliverable supply if requested by the federal position limits rulemaking, direct access would collectively have to Commission.235 DCMs would also have would be subject to federal spot month stay below the federal limit level for the the option of submitting estimates of limit levels. This clarification is relevant core referenced futures deliverable supply and/or intended to avoid rendering spot month contract. The Commission preliminarily recommended speculative position limit limits ineffective—failing to apply spot believes that, as proposed, § 150.2(h) levels if they wanted the Commission to month limits to such pre-existing would lessen regulatory arbitrage by consider them when setting/adjusting positions could result in a large, pre- eliminating a potential loophole federal limit levels. Any such existing position either intentionally or whereby a market participant could information would be included in a unintentionally causing a disruption to accumulate positions on certain FBOTs Commission action proposing changes the price discovery function of the core in excess of limits in referenced to the levels. The Commission referenced futures contract as positions contracts.239 are rolled into the spot month. The encourages exchanges to submit such j. Anti-Evasion estimates and recommendations Commission is particularly concerned voluntarily, as the exchanges are about protecting the spot month in Pursuant to the Commission’s uniquely situated to recommend physical-delivery futures from price rulemaking authority in section 8a(5) of 240 updated levels due to their knowledge distortions or manipulation that would the CEA, the Commission proposes of individual contract markets. When disrupt the hedging and price discovery § 150.2(i), which is intended to deter submitting estimates, DCMs would be utility of the futures contract. and prevent a number of potential required under proposed § 150.2(f) to Proposed § 150.2(g)(2) would provide methods of evading the position limits provide a description of the that the proposed non-spot month limit proposed herein. The proposed anti- methodology used to derive the levels would not apply to positions evasion provision is not intended to estimate, as well as any statistical data acquired in good faith prior to the capture a merely supporting the estimate, so that the effective date of such limit, recognizing because it may result in smaller position Commission can verify that the estimate that pre-existing large positions may size for purposes of position limits, but is reasonable. DCMs should consult the have a relatively less disruptive effect rather is intended to deter and prevent guidance regarding estimating outside of the spot month than during cases of willful evasion of federal deliverable supply set forth in the spot month given that physical position limits, the specifics of which Appendix C to part 38.236 delivery occurs only during the spot the Commission may be unable to month. However, other than pre- anticipate. The proposed federal g. Relevant Contract Month enactment swaps and transition period position limit requirements would Proposed § 150.2(c) clarifies that the swaps, any pre-existing positions held apply during the spot month for all spot month and single month for any outside the spot month would be referenced contracts subject to federal given referenced contract is determined attributed to such person if the person’s limits and non-spot position limit by the spot month and single month of position is increased after the effective requirements would only apply for the the core referenced futures contract to date of a final federal position limits nine legacy agricultural contracts. which that referenced contract is linked. rulemaking. This requires that referenced contracts authority by a foreign board of trade to an identified i. Positions on Foreign Boards of Trade member or other participant located in the United be linked to the core referenced futures States to enter trades directly into the trade contract in order to be netted for CEA section 4a(a)(6) directs the matching system of the foreign board of trade. 17 position limit purposes. For example, Commission to, among other things, CFR 48.2(c). for the NYMEX NY Harbor ULSD establish limits on the aggregate number 239 In addition, CEA section 4(b)(1)(B) prohibits of positions in contracts based upon the the Commission from permitting an FBOT to Heating Oil (HO) futures core referenced provide direct access to its trading system to its futures contract, the spot month period same underlying commodity that may participants located in the United States unless the starts at the close of trading three be held by any person across contracts Commission determines, in regards to any FBOT business days prior to the last trading listed by DCMs, certain contracts traded contract that settles against any price of one or more contracts listed for trading on a registered entity, day of the contract. The spot month on a foreign board of trade (‘‘FBOT’’) that the FBOT (or its foreign futures authority) period for the NYMEX NY Harbor ULSD with linkages to a contract traded on a adopts position limits that are comparable to the Financial (MPX) futures referenced registered entity, and swap contracts position limits adopted by the registered entity. 7 that perform or affect a significant price U.S.C. 6(b)(1)(B). CEA section 4(b)(1)(B) provides contract would thus start at the same that the Commission may not permit a foreign board time—the close of trading three business discovery function with respect to of trade to provide to the members of the foreign days prior to the last trading day of the regulated entities.237 Pursuant to that board of trade or other participants located in the core referenced futures contract. directive, proposed § 150.2(h) would United States direct access to the electronic trading apply the proposed limits to a market and order-matching system of the foreign board of h. Limits on ‘‘Pre-Existing Positions’’ trade with respect to an agreement, contract, or participant’s aggregate positions in transaction that settles against any price (including Under proposed § 150.2(g)(1), other referenced contracts executed on a DCM the daily or final settlement price) of 1 or more than pre-enactment swaps and and on, or pursuant to the rules of, an contracts listed for trading on a registered entity, transition period swaps as defined in FBOT, provided that the referenced unless the Commission determines that the foreign board of trade (or the foreign futures authority that proposed § 150.1, ‘‘pre-existing contracts settle against a price of a oversees the foreign board of trade) adopts position contract listed for trading on a DCM or limits (including related hedge exemption 235 For example, if a contract has problems with SEF, and that the FBOT makes such provisions) for the agreement, contract, or pricing convergence between the futures and the contract available in the United States transaction that are comparable to the position cash market, it could be a symptom of a deliverable 238 limits (including related hedge exemption supply issue in the market. In such a situation, the through ‘‘direct access.’’ In other provisions) adopted by the registered entity for the Commission may request an updated deliverable 1 or more contracts against which the agreement, supply estimate from the relevant DCM to help 237 7 U.S.C. 6a(a)(6). contract, or transaction traded on the foreign board identify the possible cause of the pricing anomaly. 238 Commission regulation § 48.2(c) defines of trade settles. 236 17 CFR part 38, Appendix C. ‘‘direct access’’ to mean an explicit grant of 240 7 U.S.C. 12a(5).

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Under this proposed framework, and interpretation of the anti-evasion rules particular activity constitutes willful because the threat of corners and that the Commission adopted in its evasion, the Commission will consider squeezes is the greatest in the spot rulemakings to further define the term the extent to which the activity involves month, the Commission preliminarily ‘‘swap’’ and to establish a clearing deceit, deception, or other unlawful or anticipates that it may focus its requirement under section 2(h)(1)(A) of illegitimate activity. Although it is attention on anti-evasion activity during the CEA.242 likely that fraud, deceit, or unlawful the spot month. Generally, consistent with those activity will be present where willful First, the proposed rule would interpretations, in evaluating whether evasion has occurred, the Commission consider a commodity index contract conduct constitutes evasion, the does not believe that these factors are a and/or location basis contract used to Commission would consider, among prerequisite to an evasion finding willfully circumvent position limits to other things, the extent to which the because a position that does not involve be a referenced contract subject to person lacked a legitimate business fraud, deceit, or unlawful activity could federal limits. Because commodity purpose for structuring the transaction still lack a legitimate business purpose index contracts and location basis in that particular manner. For example, or involve other indicia of evasive contracts are excluded from the an analysis of how a swap was activity. The presence or absence of proposed ‘‘referenced contract’’ structured could reveal that persons fraud, deceit, or unlawful activity is one definition and thus not subject to crafted derivatives transactions, fact the Commission will consider when federal limits,241 the Commission structured entities, or conducted evaluating a person’s activity. That said, intends that proposed § 150.2(i) would themselves in a manner without a the proposed anti-evasion provision close a potential loophole whereby a legitimate business purpose and with does require willfulness, i.e. ‘‘scienter.’’ market participant who has reached its the intent to willfully evade position The Commission will interpret ‘‘willful’’ limits could purchase a commodity limits by structuring a swap such that it consistent with how the Commission index contract in a manner that allowed would not meet the proposed has in the past, that acting either the participant to exceed limits when ‘‘economically equivalent swap’’ intentionally or with reckless disregard taking into account the weighting in the definition. As stated in a prior constitutes acting ‘‘willfully.’’ 245 component commodities of the index rulemaking, a person’s specific consideration of, for example, costs or In determining whether a transaction contract. The proposed rule would close has been entered into or structured a similar potential loophole with respect regulatory burdens, including the avoidance thereof, is not, in and of willfully to evade position limits, the to location basis contracts. Commission will not consider the form, Second, proposed § 150.2(i) would itself, dispositive that the person is acting without a legitimate business label, or written documentation as provide that a bona fide hedge dispositive. The Commission also is not recognition or spread exemption would purpose in a particular case.243 The Commission will view legitimate requiring a pattern of evasive no longer apply if used to willfully transactions as a prerequisite to prove circumvent speculative position limits. business purpose considerations on a case-by-case basis in conjunction with evasion, although such a pattern may be This provision is intended to help one factor in analyzing whether evasion ensure that bona fide hedge recognitions all other relevant facts and circumstances. has occurred. In instances where one and spread exemptions are granted and party willfully structures a transaction utilized in a manner that comports with Further, as part of its facts and circumstances analysis, the Commission to evade but the other counterparty does the CEA and Commission regulations, not, proposed § 150.2(i) would apply to and that the ability to obtain a bona fide would look at factors such as the historical practices behind the market the party who willfully structured the hedge recognition or spread exemption transaction to evade. does not become an avenue for market participant and transaction in question. participants to inappropriately exceed For example, with respect to Finally, entering into transactions that speculative position limits. § 150.2(i)(3), the Commission would qualify for the forward exclusion from Third, a swap contract used to consider whether a market participant the swap definition shall not be willfully circumvent speculative has a history of structuring its swaps considered evasive. However, in position limits would be deemed an one way, but then starts structuring its circumstances where a transaction does economically equivalent swap, and thus swaps a different way around the time not, in fact, qualify for the forward a referenced contract, even if the swap the participant risked exceeding a exclusion, the transaction may or may does not meet the economically speculative position limit as a result of not be evasive depending on an analysis equivalent swap definition set forth in its swap position, such as by modifying of all relevant facts and circumstances. the delivery date or other material terms proposed § 150.1. This provision is k. Netting intended to deter and prevent the and conditions such that the swap no structuring of a swap in order to longer meets the definition of an For the reasons discussed above, the willfully evade speculative position ‘‘economically equivalent swap.’’ referenced contract definition in limits. Consistent with interpretive language proposed § 150.1 includes, among other The determination of whether in prior rulemakings addressing things, cash-settled contracts that are 244 particular conduct is intended to evasion, when determining whether a linked, either directly or indirectly, to a circumvent or evade requires a facts and core referenced futures contract; and 242 See Further Definition of ‘‘Swap,’’ ‘‘Security- circumstances analysis. In preliminarily Based Swap,’’ and ‘‘Security-Based Swap any ‘‘economically equivalent interpreting these anti-evasion rules, the Agreement’’; Mixed Swaps; Security-Based Swap Commission is guided by its Agreement Recordkeeping, 77 FR 48207, 48297– Agreement Recordkeeping, 77 FR 48207, 48297– interpretations of anti-evasion 48303 (Aug. 13, 2012); Clearing Requirement 48303 and Clearing Requirement Determination provisions appearing elsewhere in the Determination Under Section 2(h) of the CEA, 77 Under Section 2(h) of the CEA, 77 FR 74284, FR 74284, 74317–74319 (Dec. 13, 2012). 74317–74319. Commission’s regulations, including the 243 See Clearing Requirements Determination 245 See In re Squadrito, [1990–1992 Transfer Under Section 2(h) of the CEA, 77 FR at 74319. Binder] Comm. Fut. L. Rep. (CCH) ¶ 25,262 (CFTC 241 See supra Section II.A.16.b. (explanation of 244 See Further Definition of ‘‘Swap,’’ ‘‘Security- Mar. 27, 1992) (adopting definition of ‘‘willful’’ in proposed exclusions from the ‘‘referenced contract’’ Based Swap,’’ and ‘‘Security-Based Swap McLaughlin v. Richland Shoe Co., 486 U.S. 128 definition). Agreement’’; Mixed Swaps; Security-Based Swap (1987)).

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swaps.’’ 246 Under proposed § 150.2(a), physically-settled contract and the circumstance by making clear that an federal spot month limits would apply linked cash-settled contract, enabling ‘‘eligible affiliate’’ may opt to aggregate to physical-delivery referenced the participant to disrupt the price its positions even though it is eligible to contracts separately from federal spot discovery function as the contracts go to disaggregate. month limits applied to cash-settled expiration by taking large opposite m. Request for Comment referenced contracts, meaning that positions in the physically-settled core during the spot month, positions in referenced futures and cash-settled The Commission requests comment physically-settled contracts may not be referenced contracts, or potentially on all aspects of proposed § 150.2. The netted with positions in linked cash- allowing a participant to effect a corner Commission also invites comments on settled contracts. Specifically, all of a or squeeze.250 the following: trader’s positions (long or short) in a Proposed § 150.2(b), which would (20) Are there legitimate strategies on given physically-settled referenced establish limits outside the spot month, which the Commission should offer contract (across all exchanges and OTC does not use the ‘‘separately’’ language. guidance with respect to the anti- as applicable) 247 are netted and subject Accordingly, outside of the spot month, evasion provision? to the spot month limit for the relevant participants may net positions in linked (21) Should the Commission list by commodity, and all of such trader’s physically-settled and cash-settled regulation specific factors/ positions in any cash-settled referenced referenced contracts, because there is no circumstances in which it may set spot contracts (across all exchanges and OTC immediate threat of delivery. month limits with other than the at or as applicable) linked to such physically- Finally, proposed § 150.2(a) and (b) below 25 percent of deliverable supply settled core referenced futures contract also provide that spot and non-spot formula, and non-spot month limits are netted and independently (rather limits apply ‘‘net long or net short.’’ with other than the modified 10, 2.5 than collectively along with the Consistent with existing § 150.2, this percent formula proposed herein? If so, physically-settled positions) subject to language requires that, both during and please provide examples of any such the federal spot month limit for that outside the spot month, and subject to factors, including an explanation of commodity.248 A position in a the provisions governing netting whether and why different formulas commodity contract that is not a described above, a given participant’s make sense for different commodities. referenced contract is therefore not long positions in a particular contract be (22) Is the proposed compliance date subject to federal limits, and, as a aggregated (including across exchanges of twelve months after publication of a consequence, cannot be netted with and OTC as applicable), and a final federal position limits rulemaking positions in referenced contracts for participant’s short positions be in the Federal Register an appropriate 249 purposes of federal limits. For aggregated (including across exchanges amount of time for compliance? If not, example, a swap that is not a referenced and OTC as applicable), and those please provide reasons supporting a contract because it does not meet the aggregate long and short positons be different timeline. Do market economically equivalent swap netted—in other words, it is the net participants support delaying definition could not be netted with value that is subject to federal limits. compliance until one year after a DCM positions in a referenced contract. Consistent with current and historical has had its new § 150.9 rules approved Allowing the netting of linked practice, the speculative position limits by the Commission under § 40.5? physically-settled and cash-settled proposed herein would apply to (23) The Commission understands contracts during the spot month could positions throughout each trading lead to disruptions in the price that it may be possible for a market session, including as of the close of each participant trading options to start a discovery function of the core trading session.251 referenced futures contract or allow a trading day below the delta-adjusted market participant to manipulate the l. ‘‘Eligible Affiliates’’ and Aggregation federal speculative position limit for price of the core referenced futures that option, but end up above such limit Proposed § 150.2(k) addresses entities as the option becomes in-the-money contract. Absent separate spot month that qualify as an ‘‘eligible affiliate’’ as limits for physically-settled and cash- during the spot month. Should the defined in proposed § 150.1. Under the Commission allow for a one-day grace settled contracts, the spot month limit proposed definition, an ‘‘eligible would be rendered ineffective, as a period with respect to federal position affiliate’’ includes certain entities that, limits for market participants who have participant could maintain large among other things, are required to positions in excess of limits in both the exercised options that were out-of-the aggregate their positions under § 150.4 money on the previous trading day but and that do not claim an exemption 246 that become in-the-money during the See supra Section II.A.16. (discussion of the from aggregation. There may be certain proposed referenced contract definition). trading day in the spot month? 247 In practice, the only physically-settled entities that are eligible for an (24) Given that the contracts in corn referenced contracts under this proposal would be exemption from aggregation but that and soybean complex are more liquid the 25 core referenced futures contracts, none of prefer to aggregate rather than than CBOT Oats (O) and the MGEX HRS which are listed on multiple DCMs, although there disaggregate their positions; for could potentially be physically-settled OTC swaps (MWE) wheat contract, should the that would satisfy the ‘‘economically equivalent example, when aggregation would result Commission employ a higher open swap’’ definition and therefore would also qualify in advantageous netting of positions interest formula for corn and the as referenced contracts. with affiliated entities. Proposed 248 soybean complex? Consistent with CEA section 4a(a)(6), this § 150.2(k) is intended to address such a would include positions across exchanges. (25) Should the Commission phase-in 249 Proposed Appendix C to part 150 provides the proposed increased federal non-spot 250 For example, absent such a restriction in the guidance regarding the referenced contract month limits incrementally over a definition, including that the following types of spot month, a trader could stand for 100 percent of contracts are not deemed referenced contracts, deliverable supply during the spot month by period of time, rather than meaning such contracts are not subject to federal holding a large long position in the physical- implementing the entire increase upon limits and cannot be netted with positions in delivery contract along with an offsetting short the effective date? Please explain why or position in a cash-settled contract, which effectively referenced contracts for purposes of federal limits: why not. If so, please comment on an Location basis contracts; commodity index would corner the market. contracts; and trade options that meet the 251 See, e.g., Elimination of Daily Speculative appropriate phase-in schedule, requirements of 17 CFR 32.3. Trading Limits, 44 FR 7124, 7125 (Feb. 6, 1979). including whether different

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commodities should be subject to limit. 256 Similarly, existing § 1.48 sets and transition period swaps.261 different schedules. forth the process for market participants Proposed § 150.3(b)–(g) respectively (26) The Commission is aware that the to file an application with the address: Requests for relief from non-spot month open interest is skewed Commission to recognize certain position limits submitted directly to the to the first new crop (usually December enumerated anticipatory positions as Commission or Commission staff (rather or November) for the nine legacy bona fide hedging positions.257 Under than to an exchange under proposed agricultural contracts. The Commission that provision, such recognitions must § 150.9, as discussed further below); understands that cotton may be unique be requested 10 days in advance of previously-granted risk management because it has an extended harvest exceeding the limit.258 exemptions to position limits; period starting in July in the south and Further, the Commission provides exemption-related recordkeeping and working its way north until November. self-effectuating spread exemptions for special-call requirements; the There may be some concern with the nine legacy agricultural contracts aggregation of accounts; and the positions being rolled from the prompt currently subject to federal limits, but delegation of certain authorities to the month into deferred contract months does not specify a formal process for Director of the Division of Market causing disruption to the price granting such spread exemptions.259 Oversight. discovery function of the Cotton futures. The Commission’s authority and Should the Commission consider existing regulation for exempting certain a. Bona Fide Hedging Positions and lowering the single month limit to a spread positions can be found in section Spread Exemptions percentage of the all months limits for 4a(a)(1) of the Act and existing The Commission has years of Cotton? If so, what percentage of the all § 150.3(a)(3) of the Commission’s experience granting and monitoring month limit should be used for the regulations, respectively.260 In spread exemptions, and enumerated and single month limit? Please provide a particular, CEA section 4a(a)(1) provides non-enumerated bona fide hedges, as rationale for your percentage. the Commission with authority to well as overseeing exchange processes (27) Should the Commission allow exempt from position limits transactions for administering exemptions from market participants who qualify for the ‘‘normally known to the trade as exchange-set limits on such contracts. conditional spot month limit in natural ‘spreads’ or ‘straddles’ or ‘arbitrage.’ ’’ As a result of this experience, the gas to net cash-settled natural gas 2. Proposed § 150.3 Commission has determined to continue referenced contracts across DCMs? Why to allow self-effectuating enumerated or why not? As described elsewhere in this bona fide hedges and certain spread release, the Commission is proposing a exemptions for all contracts that would C. § 150.3—Exemptions From Federal new bona fide hedging definition in Position Limits be subject to federal position limits, as § 150.1 (described above) and a new explained further below. 1. Existing §§ 150.3, 1.47, and 1.48 streamlined process in proposed § 150.9 i. Bona Fide Hedging Positions Existing § 150.3(a), which pre-dates for recognizing non-enumerated bona the Dodd-Frank Act, lists positions that fide hedging positions (described First, under proposed § 150.3(a)(1)(i), may, under certain circumstances, further below). The Commission thus bona fide hedge recognitions for exceed federal limits: (1) Bona fide proposes to update § 150.3 to conform to positions in referenced contracts that hedging transactions, as defined in the those new proposed provisions. fall within one of the proposed current bona fide hedging definition in Proposed § 150.3 also includes new enumerated hedges set forth in § 1.3; and (2) certain spread or arbitrage exemption types not explicitly listed in proposed Appendix A to part 150, positions.252 So that the Commission existing § 150.3, including: (i) discussed above, would be self- can effectively oversee the use of such Exemptions for financial distress effectuating for purposes of federal exemptions, existing § 150.3(b) provides situations; (ii) conditional exemptions position limits. Market participants that the Commission or certain for certain spot month positions in cash- would thus not be required to request Commission staff may make special settled natural gas contracts; and (iii) Commission approval prior to exceeding calls to demand certain information exemptions for pre-enactment swaps federal position limits in such cases, but from exemption holders, including would be required to request a bona fide 256 17 CFR 1.47(b). hedge exemption from the relevant information regarding positions owned 257 17 CFR 1.48. exchange for purposes of exchange-set or controlled by that person, trading 258 Id. done pursuant to that exemption, and 259 Since 1938, the Commission (known as the limits established pursuant to proposed positions that support the claimed Commodity Exchange Commission in 1938) has § 150.5(a), and submit required cash- exemption.253 Existing § 150.3(a) allows recognized the use of spread positions to facilitate market information to the exchange as for bona fide hedging transactions to liquidity and hedging. Notice of Proposed Order in part of such request.262 The Commission the Matter of Limits on Position and Daily Trading exceed federal limits, and the current in Grain for Future Delivery, 3 FR 1408 (June 14, has also determined to allow the process for a person to request such 1938). proposed enumerated anticipatory bona recognitions for non-enumerated hedges 260 See 7 U.S.C. 6a(a)(1) and 17 CFR 150.3(a)(3) fide hedges (some of which are not appears in § 1.47.254 Under that (providing that the position limits set in § 150.2 currently self-effectuating and thus are may be exceeded to the extent such positions are: provision, persons seeking recognition Spread or arbitrage positions between single required to be approved by the by the Commission of a non-enumerated months of a futures contract and/or, on a futures- Commission under existing § 1.48) to be bona fide hedging transaction or equivalent basis, options thereon, outside of the self-effectuating for purposes of federal position must file statements with the spot month, in the same crop year; provided, limits (and thus would not require prior 255 however, that such spread or arbitrage positions, Commission. Initial statements must when combined with any other net positions in the be filed with the Commission at least 30 single month, do not exceed the all-months limit set 261 The Commission revised § 150.3(a) in 2016, days in advance of exceeding the forth in § 150.2.). Although existing § 150.3(a)(3) relocating the independent account controller does not specify a formal process for granting aggregation exemption from § 150.3(a)(4) in order to consolidate it with the Commission’s aggregation 252 spread exemptions, the Commission is able to 17 CFR 150.3(a). monitor traders’ gross and net positions using part requirements in § 150.4(b)(4). See Final Aggregation 253 17 CFR 150.3(b). 17 data, the monthly Form 204, and information Rulemaking, 81 FR at 91489–90. 254 17 CFR 1.47. from the applicable DCMs to identify any such 262 See infra Section II.D.4.a. See also proposed 255 17 CFR 1.47(a). spread positions. § 150.5(a)(2)(ii)(A)(1).

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Commission approval for such The Commission anticipates that such meet the statutory bona fide hedging enumerated anticipatory hedges). The spread exemptions might include definition and all other existing and Commission may consider expanding spreads that are ‘‘legged in,’’ that is, proposed requirements. the proposed list of enumerated hedges carried out in two steps, or alternatively at a later time, after notice and are ‘‘combination trades,’’ that is, all b. Process for Requesting Commission- comment, as it gains experience with components of the spread are executed Provided Relief for Non-Enumerated the new federal position limits simultaneously or near simultaneously. Bona Fide Hedges and Spread framework proposed herein. The list of spread transactions in Exemptions Second, under proposed proposed § 150.1 reflects the most Under the proposed rules, non- § 150.3(a)(1)(ii), for positions in common types of spread strategies for enumerated bona fide hedging which the Commission and/or referenced contracts that do not fit recognitions may only be granted by the exchanges have previously granted within one of the proposed enumerated Commission as proposed in § 150.3(b), hedges in Appendix A, (i.e., non- spread exemptions. Under proposed § 150.3(a)(2)(ii), for or under the streamlined process enumerated bona fide hedges), market proposed in § 150.9. Further, spread participants must request approval from all contracts subject to federal limits, if the spread position does not fit within exemptions that do not meet the the Commission, or from an exchange, proposed spread transaction definition prior to exceeding federal limits. Such one of the spreads listed in the spread transaction definition in proposed may only be granted by the Commission exemptions thus would not be self- as proposed in § 150.3(b). Under the effectuating and market participants in § 150.1, market participants must apply for the spread exemption relief directly Commission process in § 150.3(b), a such cases would have two options for person seeking a bona fide hedge requesting such a non-enumerated bona from the Commission in accordance with proposed § 150.3(b). The market recognition or spread exemption may fide hedge recognition: (1) Apply submit a request to the Commission. directly to the Commission in participant must receive notification of accordance with proposed § 150.3(b) the approved spread exemption under With respect to bona fide hedge (described below), and separately also proposed § 150.3(b)(4) before exceeding recognitions, such request must include: apply to an exchange pursuant to the federal speculative position limits (i) A description of the position in the exchange rules established under for that spread position. The commodity derivative contract for proposed § 150.5(a); 263 or, alternatively Commission may consider expanding which the application is submitted, (2) apply to an exchange pursuant to the proposed spread transactions including the name of the underlying proposed § 150.9 for a non-enumerated definition at a later time, after notice commodity and the position size; (ii) bona fide hedge recognition that could and comment, as it gains experience information to demonstrate why the be valid both for purposes of federal and with the new federal position limits position satisfies section 4a(c)(2) of the exchange-set position limit framework proposed herein. Act and the definition of bona fide requirements, unless the Commission iii. Removal of Existing §§ 1.47, 1.48, hedging transaction or position in (and not staff) objects to the exchange’s and 140.97 proposed § 150.1, including factual and legal analysis; (iii) a statement determination within a limited period of Given the proposal set forth in time.264 As discussed elsewhere in this concerning the maximum size of all § 150.9, as described in detail below, to gross positions in derivative contracts release, market participants relying on allow for a streamlined process for enumerated or non-enumerated bona for which the application is submitted recognizing bona fide hedges for (in order to provide a view of the true fide hedge recognitions would no longer purposes of federal limits,267 the have to file the monthly Form 204/304 footprint of the position in the market); Commission also proposes to delete (iv) information regarding the with supporting cash market existing §§ 1.47 and 1.48. The information.265 applicant’s activity in the cash markets Commission preliminarily believes that and the swaps markets for the ii. Spread Exemptions overall, the proposed approach would commodity underlying the position for lead to a more efficient bona fide hedge which the application is submitted; 269 Under proposed § 150.3(a)(2)(i), recognition process. As the Commission and (v) any other information that may spread exemptions for positions in proposes to delete §§ 1.47 and 1.48, the help the Commission determine referenced contracts would be self- Commission also proposes to delete whether the position meets the effectuating, provided that the position existing § 140.97, which delegates to the requirements of section 4a(c)(2) of the fits within one of the types of spreads Director of the Division of Enforcement Act and the definition of bona fide listed in the spread transaction or his designee authority regarding 266 hedging transaction or position in definition in proposed § 150.1, and requests for classification of positions as § 150.1.270 provided further that the market bona fide hedges under existing §§ 1.47 participant separately requests a spread and 1.48.268 With respect to spread exemptions, exemption from the relevant exchange’s The Commission does not intend the such request must include: (i) A limits established pursuant to proposed proposed replacement of §§ 1.47 and description of the spread transaction for § 150.5(a). 1.48 to have any bearing on bona fide which the exemption application is hedges previously recognized under 263 See infra Section II.D.4. (discussion of those provisions. With the exception of 269 The Commission would expect that applicants proposed § 150.5). certain recognitions for risk would provide cash market data for at least the 264 See infra Section II.G.3. (discussion of management positions discussed below, prior year. proposed § 150.9). 270 For example, the Commission may, in its 265 See infra Section II.H.2. (discussion of the positions that were previously discretion, request a description of any positions in proposed elimination of Form 204). recognized as bona fide hedges under other commodity derivative contracts in the same 266 See supra Section II.A.20. (proposed §§ 1.47 or 1.48 would continue to be commodity underlying the commodity derivative definition of ‘‘spread transaction’’ in § 150.1, which recognized, provided they continue to contract for which the application is submitted. would cover: Calendar spreads; quality differential Other commodity derivatives contracts could spreads; processing spreads (such as energy ‘‘crack’’ include other futures, options, and swaps or soybean ‘‘crush’’ spreads); product or by-product 267 Id. (including over-the-counter swaps) positions held differential spreads; and futures-options spreads.) 268 17 CFR 140.97. by the applicant.

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submitted; 271 (ii) a statement part of the request, or upon request by previously discussed allowing cash and concerning the maximum size of all the Commission or Commission staff.273 carry exemptions as spreads on the gross positions in derivative contracts Finally, the Commission (and not staff) condition that the exchange ensures that for which the application is submitted; may revoke or modify any bona fide exit points in cash and carry spread and (iii) any other information that may hedge recognition or spread exemption exemptions would facilitate an orderly help the Commission determine at any time if the Commission liquidation.275 Should the Commission whether the position is consistent with determines that the bona fide hedge allow the granting of cash and carry section 4a(a)(3)(B) of the Act. recognition or spread exemption, or exemptions under such conditions? If Under proposed § 150.3(b)(2), the portions thereof, are no longer so, please explain why, including how Commission, or Commission staff consistent with the applicable statutory such exemptions would be consistent pursuant to delegated authority and regulatory requirements.274 with the Act and the Commission’s proposed in § 150.3(g), may request The Commission anticipates that most regulations. If not, please explain why additional information from the market participants would utilize the not, and if other circumstances would requestor and must provide the streamlined process set forth in be better, including better for preserving requestor with ten business days to proposed § 150.9 and described below, convergence, which is essential to respond. Under proposed § 150.3(b)(3) rather than the process as proposed in properly functioning markets and price and (4), the requestor, however, may not § 150.3(b), because exchanges would discovery. If cash and carry exemptions exceed federal position limits unless it generally be able to make such were allowed, how could an exchange receives a notice of approval from the determinations more efficiently than ensure that exit points in cash and carry Commission or from Commission staff Commission staff, and because market exemptions facilitate convergence of pursuant to delegated authority participants are likely already familiar cash and futures? with the proposed processes set forth in proposed in § 150.3(g); provided d. Financial Distress Exemptions however, that, due to demonstrated § 150.9, which is intended to leverage sudden or unforeseen increases in its the processes currently in place at the Proposed § 150.3(a)(3) would allow bona fide hedging needs, a person may exchanges for addressing requests for for a financial distress exemption in request a recognition of a bona fide exemptions from exchange-set limits. certain situations, including the hedging transaction or position within Nevertheless, proposed § 150.3(a)(1) and potential default or bankruptcy of a five business days after the person (2) clarify that market participants may customer or a potential acquisition established the position that exceeded seek relief from federal position limits target. For example, in periods of financial distress, such as a customer the federal speculative position limit.272 for non-enumerated bona fide hedges default at an FCM or a potential Under this proposed process, market and spread transactions that do not meet bankruptcy of a market participant, it participants would be encouraged to the proposed spread transactions may be beneficial for a financially- submit their requests for bona fide definition directly from the sound market participant to take on the hedge recognitions and spread Commission. After receiving any positions and corresponding risk of a exemptions as early as possible since approval of a bona fide hedge or spread less stable market participant, and in proposed § 150.3(b) would not set a exemption from the Commission, the doing so, exceed federal speculative specific timeframe within which the market participant would still be position limits. Pursuant to authority Commission must make a determination required to request a bona fide hedge delegated under §§ 140.97 and 140.99, for such requests. recognition or spread exemption from the relevant exchange for purposes of Commission staff previously granted Further, all approved bona fide hedge exchange-set limits established pursuant exemptions in these types of situations recognitions and spread exemptions to proposed § 150.5(a). to avoid sudden liquidations required to must be renewed if there are any comply with a position limit.276 Such changes to the information submitted as c. Request for Comment sudden liquidations could otherwise The Commission requests comments potentially hinder statutory objectives, 271 The nature of such description would depend on the facts and circumstances, and different details on all aspects of proposed § 150.3(a)(1) including by reducing liquidity, may be required depending on the particular and (2). The Commission also invites disrupting price discovery, and/or spread. comment on the following: increasing systemic risk.277 272 Where a person requests a bona fide hedge (28) Out of concern that large demand The proposed exemption would be recognition within five business days after they for delivery against long nearby futures available to positions of ‘‘a person, or exceed federal position limits, such person would positions may outpace demand on spot be required to demonstrate that they encountered related persons,’’ meaning that a sudden or unforeseen circumstances that required cash values, the Commission has financial distress exemption request them to exceed federal position limits before should be specific to the circumstances submitting and receiving approval of their bona fide 273 See proposed § 150.3(b)(5). Currently, the of a particular person, or to persons hedge application. These applications submitted Commission does not require automatic updates to related to that person, and not a more after a person has exceeded federal position limits bona fide hedge applications, and does not require should not be habitual and will be reviewed applications or updates thereto for spread general request by a large group of closely. If the Commission reviews such application exemptions, which are self-effectuating. Consistent unrelated people whose financial and finds that the position does not qualify as a with current practices, under proposed distress circumstances may differ from bona fide hedge, then the applicant would be § 150.3(b)(5), the Commission would not require required to bring their position into compliance automatic annual updates to bona fide hedge and one another. The proposed exemption within a commercially reasonable time, as spread exemption applications; rather, updated would be granted on a case by case basis determined by the Commission in consultation with applications would only be required if there are in response to a request submitted the applicant and the applicable DCM or SEF. If the changes to information the requestor initially pursuant to § 140.99, and would be applicant brings the position into compliance submitted or upon Commission request. This within a commercially reasonable time, then the approach is different than the proposed streamlined applicant will not be considered to have violated process in § 150.9, which would require automatic 275 See, e.g., 2016 Reproposal, 81 FR 96704 at the position limits rules. Further, any intentional annual updates to such applications, which is more 96833. misstatements to the Commission, including consistent with current exchange practices. See, 276 See, e.g., CFTC Press Release No. 5551–08, statements to demonstrate why the bona fide e.g., CME Rule 559. CFTC Update on Efforts Underway to Oversee hedging needs were sudden and unforeseen, would 274 This proposed authority to revoke or modify Markets, (Sept. 19, 2008), available at http:// be a violation of sections 6(c)(2) and 9(a)(2) of the a bona fide hedge recognition or spread exemption www.cftc.gov/PressRoom/PressReleases/pr5551-08. Act. would not be delegated to Commission staff. 277 See 7 U.S.C. 6a(a)(3).

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evaluated based on the specific facts qualify as a referenced contract subject limit that has developed over time, and and circumstances of a particular person to federal limits by virtue of being cash- which the Commission preliminarily or related persons. Any such financial settled to the physically-settled NYMEX believes has functioned well. The distress position would not be a bona NG core referenced futures contract.280 practice balances the needs of certain fide hedging transaction or position Any other cash-settled contract that market participants, who may currently unless it otherwise met the substantive meets the referenced contract definition hold or control 5,000 contracts in each and procedural requirements set forth in would also be subject to federal limits, DCM’s cash-settled natural gas futures proposed §§ 150.1, 150.3, and 150.9, as as would an ‘‘economically equivalent contracts and prefer a sizeable position applicable. swap,’’ as defined in proposed § 150.1, in a cash-settled contract in order to obtain the desired exposure without e. Conditional Spot Month Exemption with respect to any natural gas needing to make or take delivery of in Natural Gas referenced contract. Proposed § 150.3(a)(4) would permit a natural gas, with the policy objectives of Certain natural gas contracts are new federal conditional spot month the Commission, which has historically currently subject to exchange-set limits, limit exemption for certain cash-settled had concerns about the possibility of 278 but not federal limits. This proposal natural gas referenced contracts. Under traders attempting to manipulate the would apply federal limits to certain proposed § 150.3(a)(4), market physically-settled NYMEX NG contract natural gas contracts for the first time by participants seeking to exceed the (i.e., mark-the close) in order to benefit including the physically-settled NYMEX proposed 2,000 NYMEX NG equivalent- from a larger position in the cash-settled Henry Hub Natural Gas (‘‘NYMEX NG’’) size contract spot month limit for a ICE LD1 Natural Gas Swap and/or contract as a core referenced futures cash-settled natural gas referenced NYMEX Henry Hub Natural Gas Last contract listed in proposed § 150.2(d). contract listed on any DCM could Day Financial Futures contract during As set forth in proposed Appendix E to receive an exemption that would be the spot month as these contracts part 150, that physically-settled capped at 10,000 NYMEX NG expired.282 contract, as well as any cash-settled equivalent-size contracts net long or net NYMEX, ICE, NFX, and Nodal natural gas contract that qualifies as a currently have rules in place 279 short per DCM, plus an additional referenced contract, would be 10,000 NYMEX NG futures equivalent establishing a conditional spot month separately subject to a federal spot size contracts in economically limit exemption equivalent to up to month limit, net long or net short, of equivalent swaps. A grant of such an 5,000 contracts (in NYMEX-equivalent 2,000 NYMEX NG equivalent-size exemption would be conditioned on the size) for their respective cash-settled contracts. participant not holding or controlling natural gas contracts, provided that the Under the referenced contract any positions during the spot month in trader does not maintain a position in definition in proposed § 150.1, ICE’s the physically-settled NYMEX NG core the physically-settled NYMEX NG cash-settled Henry Hub LD1 contract, 283 referenced futures contract.281 contract during the spot month. ICE’s Henry Financial Penultimate Together, the ICE, NYMEX, NFX, and Fixed Price Futures, NYMEX’s cash- This proposed conditional exemption level of 10,000 contracts per DCM in Nodal rules allow a trader to hold up to settled Henry Hub Natural Gas Last Day 20,000 (NYMEX-equivalent size) Financial Futures contract, Nodal natural gas would codify into federal regulations the industry practice of an contracts during the spot month Exchange’s (‘‘Nodal’’) cash-settled combined across ICE, NYMEX, NFX, Henry Hub Monthly Natural Gas exchange-set conditional limit that is five times the size of the spot month and Nodal cash-settled natural gas contract, and NFX cash-settled Henry contracts, provided the trader does not Hub Natural Gas Financial Futures 280 On November 12, 2019, Nodal announced that hold positions in excess of 5,000 contract, for example, would each it had reached an agreement to acquire the core assets of NFX. See Nodal Exchange Acquires U.S. 282 As noted above, current exchange rules 278 Some examples include natural gas contracts Commodities Business of Futures, Inc. establish a spot month limit of 1,000 NYMEX that use the NYMEX NG futures contract as a (NFX), Nodal Exchange website (Nov. 12, 2019), equivalent sized contracts. The Commission reference price, such as ICE’s Henry Financial available at https://www.nodalexchange.com/wp- proposes a federal spot month limit of 2,000 Penultimate Fixed Price Futures (PHH), options on content/uploads/20191112-Nodal-NFX-release- NYMEX equivalent sized contracts based on Henry Penultimate Fixed Price (PHE), Henry Basis Final.pdf (press release). The acquisition includes updated deliverable supply estimates. See supra Futures (HEN) and Henry Swing Futures (HHD); all of NFX’s energy complex of futures and options Section II.B.2.b. (2020 proposed spot month limit NYMEX’s E-mini Natural Gas Futures (QG), Henry contracts, including NFX’s Henry Hub Natural Gas chart). The proposed conditional spot month limit Hub Natural Gas Last Day Financial Futures (HH), Financial Futures contract. Because that contract exemption of 10,000 contracts per exchange is thus and Henry Hub Natural Gas Financial Calendar will become part of Nodal’s offerings, that contract, five times the proposed federal spot month limit. Spread (3 Month) Option (G3); and Nasdaq Futures, as well as Nodal’s existing Henry Hub Monthly 283 See ICE Rule 6.20(c), NYMEX Rule 559.F, NFX Inc.’s (‘‘NFX’’) Henry Hub Natural Gas Financial Natural Gas contract, would continue to qualify as Rule Chapter V, Section 13(a), and Nodal Rule Futures (HHQ), and Henry Hub Natural Gas referenced contracts under the proposed definition 6.5.2. The spot month for such contracts is three Penultimate Financial Futures (NPQ). herein, and thus would be subject to federal limits days. See also Position Limits, CMG Group website, 279 Under the referenced contract definition by virtue of being cash-settled to the physically- available at https://www.cmegroup.com/market- proposed in § 150.1, cash-settled natural gas settled NYMEX NG core referenced futures contract. regulation/position-limits.html (NYMEX position referenced contracts are those futures or options According to the November 12, 2019 press release, limits spreadsheet); Market Resources, ICE Futures contracts, including spreads, that are: ‘‘Nodal Exchange and Nodal Clear plan to complete website, available at https://www.theice.com/ (1) Directly or indirectly linked, including being the integration of U.S. Power contracts by December futures-us/market-resources (ICE position limits partially or fully settled on, or priced at a fixed 2019. U.S. Natural Gas, Crude Oil and Ferrous spreadsheet). NYMEX rules establish an exchange- differential to, the price of the physically-settled Metals contracts could transfer to Nodal as soon as set spot month limit of 1,000 contracts for its NYMEX NG core referenced futures contract; or spring 2020.’’ Id. physically-settled NYMEX NG Futures contract and (2) Directly or indirectly linked, including being 281 While the NYMEX NG is the only natural gas a separate spot month limit of 1,000 contracts for partially or fully settled on, or priced at a fixed contract included as a core referenced futures its cash-settled Henry Hub Natural Gas Last Day differential to, the price of the same commodity contract in this release, the conditional spot month Financial Futures contract. As the ICE natural gas underlying the physically-settled NYMEX NG core exemption proposed herein would also apply to any contract is one quarter the size of the NYMEX referenced futures contract for delivery at the same other physically-settled natural gas contract that the contract, ICE’s exchange-set natural gas limits are location or locations as specified in the NYMEX NG Commission may in the future designate as a core shown in NYMEX equivalents throughout this core referenced futures contract. As proposed, the referenced futures contract, as well as to any section of the release. ICE thus has rules in place referenced contract definition does not include a physically-delivered contract that is substantially establishing an exchange-set spot month limit of location basis contract, a commodity index contract, identical to the NYMEX NG and that qualifies as a 4,000 contracts (equivalent to 1,000 NYMEX or a trade option that meets the requirements of referenced contract, or that qualifies as an contracts) for its cash-settled Henry Hub LD1 Fixed § 32.3 of this chapter. See proposed § 150.1. economically equivalent swap. Price Futures contract.

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contracts on any one DCM, and hold spot-month positions in physically be permitted to be netted during the provided further that the trader does not settled natural gas contracts. Because spot month so as to avoid rendering spot hold any positions in the physically- swaps may generally be fungible across month limits ineffective—the settled NYMEX NG contract during the markets, that is, a position may be Commission is particularly concerned spot month.284 established on one SEF and offset on about protecting the spot month in The DCMs originally adopted these another SEF or OTC, the Commission physical-delivery futures from price rules, in consultation with Commission proposes that economically equivalent distortions or manipulation that would staff, in large part to address historical swap contracts have a conditional spot disrupt the hedging and price discovery concerns over the potential for month limit of 10,000 economically utility of the futures contract. equivalent contracts in total across all manipulation of physically-settled g. Previously-Granted Risk Management SEFs and OTC. natural gas contracts during the spot Exemptions month in order to benefit positions in A market participant that sought to cash-settled natural gas contracts, and to hold positions in both the NYMEX NG As discussed elsewhere in this accommodate certain trading dynamics physically-settled contract and in any release, the Commission previously unique to the natural gas contracts. In cash-settled natural gas contract would recognized, as bona fide hedges under particular, in natural gas, open interest not be eligible for the proposed § 1.47, certain risk-management tends to decline in the NYMEX NG conditional exemption. Such a positions in physical commodity futures contract approaching expiration and participant could only hold up to 2,000 and/or options on futures contracts tends to increase rapidly in the ICE contracts net long or net short across thereon held outside of the spot month cash-settled Henry Hub LD1 contract. exchanges/OTC in physically-settled that were used to offset the risk of These dynamics suggest that cash- natural gas referenced contract(s), and commodity index swaps and other settled natural gas contracts serve an another 2,000 contracts net long or net related exposure, but that did not important function for hedgers and short across exchanges/OTC in cash- represent substitutes for transactions or speculators who wish to recreate and/or settled natural gas contract referenced positions to be taken in a physical hedge the physically-settled NYMEX contract(s).285 marketing channel. However, as noted NG contract price without being earlier in this release, the Commission f. Exemption for Pre-Enactment Swaps interprets Dodd-Frank Act amendments required to make or take delivery. and Transition Period Swaps The condition in proposed to the CEA as eliminating the § 150.3(a)(4), however, should remove In order to promote a smooth Commission’s authority to grant such the potential to manipulate the transition to compliance for swaps not relief unless the position satisfies the physically-settled natural gas contract in previously subject to federal speculative pass-through provision in CEA section 287 order to benefit a sizeable position in position limits, proposed § 150.3(a)(5) 4a(c)(2)(B). Accordingly, to ensure the cash-settled contract. To qualify for would provide that federal speculative consistency with the Dodd-Frank Act, the exemption, market participants position limits shall not apply to the Commission will not recognize would not be permitted to hold any spot positions acquired in good faith in any further risk management positions as month positions in the physically- pre-enactment swap or in any transition bona fide hedges, unless the position period swap, in either case as defined otherwise satisfies the requirements of settled contract. This proposed 288 conditional exemption would prevent by § 150.1.286 Any swap that meets the the pass-through provisions. In addition, the Commission proposes manipulation by traders with leveraged proposed economically equivalent swap in § 150.3(c) that such previously- positions in the cash-settled contracts definition, but that otherwise qualifies granted exemptions shall not apply after (in comparison to the level of the limit as a pre-enactment swap or transition the effective date of a final federal in the physical-delivery contract) who period swap, would thus be exempt from federal speculative position limits. position limits rulemaking might otherwise attempt to mark the implementing the Dodd-Frank Act. close or distort physical-delivery prices This exemption would be self- effectuating and would not require a Proposed § 150.3(c) uses the phrase in the physically-settled contract to ‘‘positions in financial instruments’’ to benefit their leveraged cash-settled market participant to request relief. In order to further lessen the impact refer to such commodity index swaps positions. Thus, the exemption would and related exposure and would have establish a higher conditional limit for of the proposed federal limits on market participants, for purposes of complying the effect of revoking the ability to use the cash-settled contract than for the previously-granted risk management physical-delivery contract, so long as with the proposed federal non-spot month limits, the proposed rule would exemptions once the limits proposed in the cash-settled positions are decoupled § 150.2 go into effect. from spot-month positions in physical- also allow both pre-enactment swaps delivery contracts which set or affect the and transition period swaps to be netted h. Recordkeeping with commodity derivative contracts value of such cash-settled positions. Proposed § 150.3(d) establishes acquired more than 60 days after While the Commission is unaware of recordkeeping requirements for persons publication of final rules in the Federal any natural gas swaps that would who claim any exemptions or relief Register. Any such positions would not qualify as ‘‘economically equivalent under proposed § 150.3. Proposed swaps,’’ the Commission proposes to § 150.3(d) should help to ensure that apply the conditional exemption to 285 See supra Section II.B.2.k. (discussion of netting). any person who claims any exemption swaps as well, provided that a given 286 ‘‘Pre-enactment swap’’ would mean any swap permitted under proposed § 150.3 can market participant’s positions in such entered into prior to enactment of the Dodd-Frank demonstrate compliance with the cash-settled swaps do not exceed 10,000 Act of 2010 (July 21, 2010), the terms of which have applicable requirements. Under futures-equivalent contracts and not expired as of the date of enactment of that Act. proposed § 150.3(d)(1), any persons ‘‘Transition period swap’’ would mean a swap provided that the participant does not entered into during the period commencing after the enactment of the Dodd-Frank Act of 2010 (July 287 See supra Section II.A.1.c.ii.(1). (discussion of 284 In practice, a majority of the trading in such 21, 2010), and ending 60 days after the publication the temporary substitute test and risk-management contracts is on ICE and NYMEX. As noted above, in the Federal Register of final amendments to this exemptions). Nodal is acquiring NFX, including its Henry Hub part implementing section 737 of the Dodd-Frank 288 See supra Section II.A.1.c.vi. (discussion of Natural Gas Financial Futures contract. Act of 2010. proposed pass-through language).

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claiming an exemption would be proposed § 150.3(b)(2); determine, in which the Commission should also required to keep and maintain complete consultation with the exchange and consider granting such exemptive relief books and records concerning all details applicant, a commercially reasonable by rule, and why? of their related cash, forward, futures, amount of time required for a person to (32) What types of conditions, options on futures, and swap positions bring its position within the federal restrictions, or criteria should the and transactions, including anticipated position limits pursuant to proposed Commission consider applying with requirements, production and royalties, § 150.3(b)(3)(ii)(B); make a respect to such an exemption? contracts for services, cash commodity determination whether to recognize a (33) Should higher position limits in products and by-products, cross- position as a bona fide hedging cash-settled natural gas futures be commodity hedges, and records of bona transaction or to grant a spread conditioned on the closing of any fide hedging swap counterparties. exemption pursuant to proposed positions in the physically delivered Proposed § 150.3(d)(2) addresses § 150.3(b)(4); and to request that a natural gas contract? Are there recordkeeping requirements related to person submit updated materials or characteristics of the natural gas futures the pass-through swap provision in the renew their request pursuant to markets that weigh in favor of or against proposed definition of bona fide proposed § 150.3(b)(2) or (5). This the higher conditional limits? hedging transaction or position in proposed delegation would enable the proposed § 150.1.289 Under proposed Division of Market Oversight to act D. § 150.5—Exchange-Set Position § 150.3(d)(2), a pass-through swap quickly in the event of financial distress Limits and Exemptions Therefrom counterparty, as contemplated by and in the other circumstances 1. Background proposed § 150.1, that relies on a described above. For the avoidance of confusion, the representation received from a bona fide l. Request for Comment discussion of § 150.5 that follows hedging swap counterparty that a swap addresses exchange-set limits and qualifies in good faith as a bona fide The Commission requests comment exemptions therefrom, not federal hedging position or transaction under on all aspects of proposed § 150.3. In limits. For a discussion of the proposed proposed § 150.1, would be required to: addition, the Commission understands processes by which an exemption may (i) Maintain any written representation that there may be certain not-for-profit be recognized for purposes of federal for at least two years following the electric and natural gas utilities that limits, please see the discussion of expiration of the swap; and (ii) furnish have certain public service missions and proposed § 150.3 above and § 150.9 the representation to the Commission that are prohibited, by their governing below. upon request. body, risk management policies, or otherwise, from speculating, and that Under DCM Core Principle 5, DCMs i. Call for Information would request relief from federal shall adopt for each contract, as is The Commission proposes to move position limits once federal limits on necessary and appropriate, position existing § 150.3(b), which currently swaps are implemented. The limitations or position accountability for allows the Commission or certain Commission requests comment on all speculators, and, for any contract Commission staff to make special calls aspects of the concept of an exemption subject to a federal position limit, DCMs to demand certain information regarding from part 150 of the Commission’s must establish exchange-set limits for positions or trading, to proposed regulations for certain not-for-profit that contract no higher than the federal 290 § 150.3(e), with some technical electric and natural gas utility entities limit level. Similarly, under SEF Core modifications. Together with the that have unique public service Principle 6, SEFs that are trading recordkeeping provision of proposed missions to provide reliable, affordable facilities shall adopt for each contract, § 150.3(d), proposed § 150.3(e) should energy services to residential, as is necessary and appropriate, position enable the Commission to monitor the commercial, and industrial customers, limitations or position accountability for use of exemptions from speculative and that are prohibited from speculators, and, for any contract position limits and help to ensure that speculating. In addition, the subject to a federal position limit, SEFs any person who claims any exemption Commission requests comment on that are trading facilities must establish permitted by proposed § 150.3 can whether the definition of ‘‘economically exchange-set limits for that contract no demonstrate compliance with the equivalent swap’’ would cover the types higher than the federal limit, and must applicable requirements. of hedging activities such utilities monitor positions established on or engage in with respect to their OTC through the SEF for compliance with j. Aggregation of Accounts swap activity. the limit set by the Commission and the Proposed § 150.3(f) would clarify that The Commission also invites limit, if any, set by the SEF.291 Beyond entities required to aggregate under comments on the following: these and other statutory and § 150.4 would be considered the same (29) What are the overarching issues Commission requirements, unless person for purposes of determining or concerns the Commission should otherwise determined by the whether they are eligible for a bona fide consider regarding a potential Commission, DCM and SEF Core hedge recognition under § 150.3(a)(1). exemption from position limits for such Principle 1 afford DCMs and SEFs not- for-profit electric and natural gas ‘‘reasonable discretion’’ in establishing k. Delegation of Authority utilities? the manner in which they comply with Proposed § 150.3(g) would delegate (30) Are there certain provisions in the core principles.292 authority to the Director of the Division part 150 of the Commission’s The current regulatory provisions of Market Oversight to: Grant financial regulations that should apply to such governing exchange-set position limits distress exemptions pursuant to not-for-profit electric and natural gas and exemptions therefrom appear in proposed § 150.3(a)(3); request utilities even if the Commission were to § 150.5.293 To align § 150.5 with Dodd- additional information with respect to grant such entities an exemption with an exemption request pursuant to respect to federal position limits? 290 See 7 U.S.C. 7(d)(5). (31) Are there other types of entities, 291 See 7 U.S.C. 7b–3(f)(6). 289 See supra Section II.A.1.c.vi. (discussion of similar to the not-for-profit electric and 292 See 7 U.S.C. 7(d)(1) and 7 U.S.C. 7b–3(f)(1). proposed pass-through language). natural gas utilities described above, for 293 17 CFR 150.5.

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Frank statutory changes 294 and with other words, exchanges must comply exchange-set speculative position limits other changes proposed herein,295 the with proposed § 150.5 only with respect shall not apply to bona fide hedging Commission proposes a new version of to futures and options on futures traded positions as defined by a DCM in § 150.5. This new proposed § 150.5 on DCMs, and with respect to swaps at accordance with the definition of bona would generally afford exchanges the a later time as determined by the fide hedging transactions and positions discretion to decide for themselves how Commission. for excluded commodities in § 1.3. best to set limit levels and grant Existing § 150.5(d) also addresses factors 3. Existing § 150.5 exemptions from such limits in a for consideration by DCMs in manner that best reflects their specific As noted above, existing § 150.5 pre- recognizing bona fide hedging markets. dates the Dodd-Frank Act and addresses exemptions (or position accountability), the establishment of DCM-set position including whether such positions ‘‘are 2. Implementation of Exchange-Set limits for all contracts not subject to not in accord with sound commercial Limits on Swaps federal limits under existing § 150.2 practices or exceed an amount which With respect to the DCM Core (aside from certain major foreign may be established and liquidated in an Principle 5 and SEF Core Principle 6 currencies).299 Existing § 150.5(a) orderly fashion.’’ 301 requirements addressing exchange-set authorizes DCMs to set different limits Existing § 150.5(e) permits DCMs in limits on swaps, the Commission is for different contracts and contract certain circumstances to submit for preliminarily determining that it is months, and permits DCMs to grant Commission approval, as a substitute for reasonable to delay implementation exemptions from DCM-set limits for the position limits required under because requiring compliance would be spreads, straddles, or arbitrage trades. § 150.5(a), (b), and (c), a DCM rule impracticable, and in some cases Existing § 150.5(b) provides a limited requiring traders ‘‘to be accountable for impossible, at this time.296 set of methodologies for DCMs to use in large positions,’’ meaning that under The Commission has previously establishing initial limit levels, certain circumstances, traders must explained why it has proposed to including separate maximum limit provide information about their position temporarily delay imposition of levels for spot month limits in physical- upon request to the exchange, and/or exchange-set position limits on delivery contracts, spot month limits in consent to halt increasing further a swaps.297 The decision to delay cash-settled contracts, non-spot month position if so ordered by the imposing exchange-set position limits limits for tangible commodities other exchange.302 Among other things, this on swaps is based largely on the lack of than energy, and non-spot month limits provision includes open interest and exchange access to sufficient data for energy products and non-tangible volume-based parameters for regarding individual market commodities, including financials.300 determining when DCMs may do so.303 participants’ open swap positions, Existing § 150.5(c) provides that DCMs Existing § 150.5(f) provides that DCM which means that, without action to may adjust their speculative initial speculative position limits adopted provide further access to swap data to levels as follows: (i) No greater than 25 pursuant to § 150.5 shall not apply to exchanges, the exchanges cannot percent of deliverable supply for certain positions acquired in good faith effectively monitor swap position limits. adjusted spot month levels in prior to the effective date of such limits The Commission preliminarily physically-delivered contracts; (ii) ‘‘no or to a person that is registered as an believes that delayed implementation of greater than necessary to minimize the FCM or as a under authority exchange-set speculative position limits potential for manipulation or distortion of the CEA except to the extent that on swaps at this time is not inconsistent of the contract’s or the underlying transactions made by such person are with the statutory objectives outlined in commodity’s price’’ for adjusted spot made on behalf of or for the account or section 4a(a)(3) of the CEA: To diminish month levels in cash-settled contracts; benefit of such person.304 This excessive speculation, to deter market and (iii) for adjusted non-spot month provision also provides that in addition manipulation, to ensure sufficient limit levels, either no greater than 10 to the express exemptions specified in liquidity for bona fide hedgers, and to percent of open interest, up to 25,000 § 150.5, a DCM may propose such other ensure that the price discovery function contracts, with a marginal increase of exemptions from the requirements of of the underlying market it not 2.5 percent thereafter, or based on § 150.5 as are consistent with the disrupted.298 position sizes customarily held by purposes of § 150.5, and provides Accordingly, while proposed § 150.5 speculative traders on the DCM. procedures for doing so.305 Finally, will apply to DCMs and SEFs, the Existing § 150.5(d) addresses bona existing § 150.5(g) addresses aggregation requirements associated with swaps fide hedging exemptions from DCM-set of positions for which a person directly would be enforced at a later time. In limits, including an exemption or indirectly controls trading. application process, providing that 294 While existing § 150.5 on its face only applies 4. Proposed § 150.5 to contracts that are not subject to federal limits, 299 Existing § 150.5(a) states that the requirement Pursuant to CEA sections 5(d)(1) and DCM Core Principle 5, as amended by Dodd-Frank, to set position limits shall not apply to futures or and SEF Core Principle 6, establish requirements 5h(f)(1), the Commission proposes a option contract markets on major foreign 306 both for contracts that are, and are not, subject to currencies, for which there is no legal impediment new version of § 150.5. Proposed federal limits. 7 U.S.C. 7(d)(5) and 7 U.S.C. 7b– to delivery and for which there exists a highly § 150.5 is intended to provide the ability 3(f)(6). liquid cash market. 17 CFR 150.5(a). for DCMs and SEFs to set limit levels 295 Significant changes proposed herein include 300 See 17 CFR 150.5(b)(1)–(3) (no greater than the process set forth in proposed § 150.9 and one-quarter of the estimated spot month deliverable 301 See 17 CFR 150.5(d)(1). revisions to the bona fide hedging definition supply for physical delivery contracts during the 302 17 CFR 150.5(e). proposed in § 150.1. spot month; no greater than necessary to minimize 303 296 The Commission has observed in prior the potential for manipulation or distortion of the 17 CFR 150.5(e)(1)–(4). releases that courts have upheld relieving regulated contract’s or the underlying commodity’s price for 304 17 CFR 150.5(f). entities of their statutory obligations where cash-settled contracts during the spot month; no 305 Id. compliance is impossible or impracticable. 2016 greater than 1,000 contracts for tangible 306 As mentioned above, while proposed § 150.5 Supplemental Proposal, 81 FR at 38462. commodities other than energy outside the spot will include references to swaps and SEFs, the 297 2016 Supplemental Proposal, 81 FR at 38459– month; and no greater than 5,000 contracts for proposed rule would initially only apply to DCMs, 62; 2016 Reproposal, 81 FR at 96784–86. energy products and nontangible commodities, as requirements relating to exchange-set limits on 298 7 U.S.C. 6a(a)(3). including financials outside the spot month). swaps would be phased in at a later time.

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and grant exemptions in a manner that free to set position limits that are more § 150.3(a). However, in such cases, the best accommodates activity particular to stringent than the federal limit for a exemption level would have to be their markets, while promoting particular contract, and would also be capped at the level of the applicable compliance with DCM Core Principle 5 permitted to adopt position federal position limit, so as not to and SEF Core Principle 6 and ensuring accountability at a level lower than the undermine the federal limit framework, consistency with other changes federal limit, in addition to an unless the Commission has first proposed herein, including the process exchange-set position limit that is equal approved such exemption for purposes for exchanges to administer applications to or less than the federal limit. of federal limits pursuant to § 150.3(b). for non-enumerated bona fide hedge Proposed § 150.5(a)(2) would permit Exchanges that wish to offer exemptions for purposes of federal exchanges to grant exemptions from exemptions from their own limits other limits proposed in § 150.9.307 exchange-set limits established under than the types listed in proposed Proposed § 150.5 contains two main proposed § 150.5(a)(1) as follows: § 150.3(a) could also submit rules to the sub-sections, with each sub-section First, if such exemptions from Commission allowing for such addressing a different category of exchange-set limits conform to the types exemptions pursuant to part 40. The contract: (i) Proposed § 150.5(a) would of exemptions that may be granted for Commission would carefully review any include rules governing exchange-set purposes of federal limits under such exemption types for compliance limits for contracts subject to federal proposed §§ 150.3(a)(1)(i), 150.3(a)(2)(i), with applicable standards, including limits; and (ii) proposed § 150.5(b) and 150.3(a)(4)–(5) (enumerated bona any statutory requirements 309 and would include rules governing fide hedge recognitions and spread Commission-set standards.310 exchange-set limits for physical exemptions that are listed in the spread Under proposed § 150.5(a)(2)(ii)(A), commodity contracts that are not subject transaction definition in proposed exchanges that wish to grant exemptions to federal limits. § 150.1, as well as exempt conditional from their own limits would have to As described in further detail below, spot month positions in natural gas and require traders to file an application. the proposed provisions addressing pre-enactment and transition period Aside from the requirements discussed exchange-set limits on contracts that are swaps), then the level of the exemption below, including the requirement that not subject to federal limits reflect a may exceed the applicable federal the exchange collect cash-market and principles-based approach and include position limit under proposed § 150.2. swaps market information from the acceptable practices that provide for Since the proposed exemptions listed applicant, exchanges would have non-exclusive methods of compliance above are self-effectuating for purposes flexibility to establish the application with the principles-based regulations. of federal position limit levels, process as they see fit, including The Commission would therefore exchanges may grant such exemptions adopting protocols to reduce burdens by provide exchanges with the ability to set pursuant to proposed § 150.5(a)(2)(i). leveraging existing processes with which their participants are already limits and grant exemptions in the Second, if such exemptions from familiar. For all exemption types, manner that most suits their unique exchange-set limits conform to the exchanges would have to generally markets. Each proposed provision of exemptions from federal limits that may require that such applications be filed in § 150.5 is described in detail below. be granted under proposed §§ 150.3(a)(1)(ii) and 150.3(a)(2)(ii) advance of the date such position would a. Proposed § 150.5(a)—Requirements (respectively, non-enumerated bona fide be in excess of the limits, but exchanges for Exchange-Set Limits on Commodity hedges and spread transactions that are would be given the discretion to adopt Derivative Contracts Subject to Federal not currently listed in the spread rules allowing traders to file Limits Set Forth in § 150.2 transaction definition in proposed applications within five business days Proposed § 150.5(a) would apply to all § 150.1), then the level of the exemption after a trader established such position. Exchanges wishing to grant such contracts subject to the federal limits may exceed the applicable federal retroactive exemptions would have to proposed in § 150.2 and, among other position limit under proposed § 150.2, require market participants to things, is intended to help ensure that provided that the exemption for demonstrate circumstances warranting a exchange-set limits do not undermine purposes of federal limits is first sudden and unforeseen hedging need. the federal limits framework. Under approved in accordance with proposed Proposed § 150.5(a)(2)(ii)(B) would proposed § 150.5(a)(1), for any contract § 150.3(b) or § 150.9, as applicable. provide that exchanges must require subject to a federal limit, DCMs and, Third, if such exemptions conform to that a trader reapply for the exemption ultimately, SEFs, would be required to the exemptions from federal limits that granted under proposed § 150.5(a)(2) at establish exchange-set limits for such may be granted under proposed least annually so that the exchange and contracts. Consistent with DCM Core § 150.3(a)(3) (financial distress the Commission can closely monitor Principle 5 and SEF Core Principle 6, positions), then the level of the exemptions for contracts subject to the exchange-set limit levels on such exemption may exceed the applicable contracts, whether cash-settled or federal position limit under proposed § 150.2, provided that the Commission 309 For example, an exchange would not be physically-settled, and whether during permitted to adopt rules allowing for risk or outside the spot month, would have has first issued a letter approving such management exemptions in physical commodities to be no higher than the level specified exemption pursuant to a request because the Commission interprets Dodd-Frank submitted under § 140.99.308 amendments to CEA section 4a(c)(2) as prohibiting for the applicable referenced contract in risk management exemptions in such commodities. proposed § 150.2. Exchanges would be Finally, for purposes of exchange-set limits only, exchanges may grant See supra Section II.A.1.c.ii.(1). (discussion of the temporary substitute test and risk-management 307 To avoid confusion created by the parallel exemption types that are not listed in exemptions). federal and exchange-set position limit frameworks, 310 For example, as discussed below, proposed the Commission clarifies that proposed § 150.5 308 Under the proposal, requests for exemptions § 150.5(a)(2)(ii)(C) would require that exchanges deals solely with exchange-set position limits and for financial distress positions would be submitted take into account whether the requested exemption exemptions therefrom, whereas proposed § 150.9 directly to the Commission (or delegated staff) for would result in positions that are not in accord with deals solely with federal limits and recognition of consideration, and any approval of such exemption sound commercial practices in the relevant exchange-granted exemptions and bona fide would be issued in the form of an exemption letter commodity derivative market and/or would not hedging determinations for purposes of federal from the Commission (or delegated staff) pursuant exceed an amount that may be established and limits. to § 140.99. liquidated in an orderly fashion in that market.

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federal speculative position limits, and The Commission understands that the Outside of the spot month, however, to help ensure that the exchange and the above-described parameters for concerns over corners and squeezes may Commission remain aware of the exemptions from exchange-set limits are be less acute.313 trader’s activities. Proposed generally consistent with current Finally, the Commission seeks a § 150.5(a)(2)(ii)(C) would authorize industry practice among DCMs. Bearing balance between having sufficient exchanges to deny, limit, condition, or in mind that proposed § 150.5(a) would information to oversee the exchange- revoke any exemption request in apply to contracts subject to federal granted exemptions, and not burdening accordance with exchange rules,311 and limits, the Commission proposes exchanges with excessive periodic would set forth a principles-based codifying such parameters, as they reporting requirements. The standard for the granting of exemptions would establish important, minimum Commission thus proposes under that do not conform to the type that the standards needed for exchanges to § 150.5(a)(4) to require one monthly Commission may grant under proposed administer, and the Commission to report by each exchange. Certain § 150.3(a). Specifically, exchanges oversee, a robust program for granting exchanges already voluntarily file these would be required to take into account: exemptions from exchange-set limits in types of monthly reports with the (i) Whether the requested exemption a manner that does not undermine the Commission, and proposed § 150.5(a)(4) from its limits would result in a position federal limits framework. Proposed would standardize such reports for all that is ‘‘not in accord with sound § 150.5(a) also would afford exchanges exchanges that process applications for commercial practices’’ in the market in the ability to generally oversee their bona fide hedges, spread exemptions, which the DCM is granting the programs for granting exemptions from and other exemptions for contracts that exemption; and (ii) whether the exchange limits as they see fit, are subject to federal limits. The requested exemption would result in a including to establish different proposed report would provide position that would ‘‘exceed an amount application processes and requirements information regarding the disposition of that may be established or liquidated in to accommodate the unique any application to recognize a position an orderly fashion in that market.’’ characteristics of different contracts. as a bona fide hedge (both enumerated Exchanges’ evaluation of exemption If adopted, changes proposed herein and non-enumerated) or to grant a requests against these standards would may result in certain ‘‘pre-existing spread or other exemption, including be a facts and circumstances positions’’ being subject to speculative any renewal, revocation of, or determination. position limits even though the position modification to the terms and 312 Activity may reflect ‘‘sound predated the adoption of such limits. conditions of, a prior recognition or commercial practice’’ for a particular So as not to undermine the federal exemption.314 market or market participant but not for position limits framework during the As specified under proposed another. Similarly, activity may reflect spot month, and to minimize disruption § 150.5(a)(4), the report would provide ‘‘sound commercial practice’’ outside outside the spot month, the Commission certain details regarding the bona fide the spot month but not in the spot proposes § 150.5(a)(3), which would hedging position or spread exemption, month. Further, activity with require that during the spot month, for including: The effective date and manipulative intent or effect, or that has contracts subject to federal limits, expiration date of any recognition or the potential or effect of causing price exchanges must impose limits no larger exemption; any unique identifier distortion or disruption, would be than federal levels on ‘‘pre-existing assigned to track the application or inconsistent with ‘‘sound commercial positions,’’ other than for pre-enactment position; identifying information about swaps and transition period swaps. practice,’’ even if common practice the applicant; the derivative contract or However, outside the spot month, among market participants. While an positions to which the application exchanges would not be required to exemption granted to an individual pertains; the maximum size of the market participant may reflect ‘‘sound impose limits on such positions, provided the position is acquired in commodity derivative position that is commercial practice’’ and may not recognized or exempted by the exchange ‘‘exceed an amount that may be good faith consistent with the ‘‘pre- existing position’’ definition of (including any ‘‘walk-down’’ established or liquidated in an orderly requirements); 315 any size limitations fashion in that market,’’ the Commission proposed § 150.1, and provided further that if the person’s position is increased the exchange sets for the position; and expects exchanges to also evaluate a brief narrative summarizing the whether the granting of a particular after the effective date of the limit, such pre-existing position, other than pre- applicant’s relevant cash market exemption type to multiple participants activity. could have a collective impact on the enactment swaps and transition period market in a manner inconsistent with swaps, along with the position increased after the effective date, would 314 In the monthly report, exchanges may elect to ‘‘sound commercial practice’’ or in a list new recognitions or exemptions, and manner that could result in a position be attributed to the person. This modifications to or revocations of prior recognitions that would ‘‘exceed an amount that may provision is consistent with the and exemptions each month; alternatively, be established or liquidated in an proposed treatment of pre-existing exchanges may submit cumulative monthly reports listing all active recognitions and exemptions (i.e., orderly fashion in that market.’’ positions for purposes of federal limits set forth in proposed § 150.2(g) and is including exemptions that are not new or have not changed). 311 Currently, DCMs review and set exemption intended to prevent spot month limits 315 An exchange could determine to recognize as levels annually based on the facts and from being rendered ineffective. a bona fide hedge or spread exemption all, or a circumstances of a particular exemption and the Not subjecting pre-existing positions portion, of the commodity derivative position for market conditions at that time. As such, a DCM may to spot month limits could result in a which an application has been submitted, provided decide to deny, limit, condition, or revoke a that such determination is made in accordance with particular exemption, typically, if the DCM large, pre-existing position either the requirements of proposed § 150.5 and is determines that certain conditions have changed intentionally or unintentionally causing consistent with the Act and the Commission’s and warrant such action. This may happen if, for a disruption as it is rolled into the spot regulations. In addition, an exchange could require example, there are droughts, floods, embargoes, month, and the Commission is that a bona fide hedging positon or spread position trade disputes, or other events that cause shocks to be subject to ‘‘walk-down’’ provisions that require the supply or demand of a particular commodity particularly concerned about protecting the trader to scale down its positions in the spot and thus impact the DCM’s disposition of a the spot month in physical-delivery month in order to reduce market congestion as particular exemption. futures from corners and squeezes. needed based on the facts and circumstances.

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With respect to any unique identifiers need to request such complete records required to establish position limits, and to be included in the proposed monthly in the event that it noticed an issue that such limits would have to be set at a report, the exchange’s assignment of a could cause market disruptions. level that is no greater than 25 percent unique identifier would assist the Proposed § 150.5(a)(4) would require of deliverable supply. As described in Commission’s tracking process. The an exchange, unless instructed detail in connection with the proposed unique identifier could apply to each of otherwise by the Commission, to submit federal spot month limits described the bona fide hedge or spread such monthly reports according to the above, it would be difficult, in the exemption applications that the form and manner requirements the absence of other factors, for a exchange receives, and, separately, each Commission specifies. In order to participant to corner or squeeze a type of commodity derivative position facilitate the processing of such reports, market if the participant holds less than that the exchange wishes to recognize as and the analysis of the information or equal to 25 percent of deliverable a bona fide hedge or spread exemption. contained therein, the Commission supply, and the Commission has long Accordingly, the Commission suggests would establish reporting and used deliverable supply as the basis for that, as a ‘‘best practice,’’ the exchange’s transmission standards. The proposal spot month position limits due to procedures for processing bona fide would also require that such reports be concerns regarding corners, squeezes, hedging position and spread exemption submitted to the Commission using an and other settlement-period applications contemplate the electronic data format, coding structure, manipulative activity.318 assignment of such unique identifiers. and electronic data transmission The Commission recognizes, however, The proposed report would also be procedures approved in writing by the that there may be circumstances where required to specify the maximum size Commission, as specified on its an exchange may not wish to use the 25 and/or size limitations by contract website.316 percent formula, including, for example, month and/or type of limit (e.g., spot Request for Comment if the contract is cash-settled, does not month, single month, or all-months- have a measurable deliverable supply, The Commission requests comment combined), as applicable. or if the exchange can demonstrate that on all aspects of proposed § 150.5(a). The proposed monthly report would a different parameter is better suited for The Commission also invites comments be a critical element of the a particular contract or market.319 Commission’s surveillance program by on the following: (34) The Commission has proposed Accordingly, the proposal would afford facilitating its ability to track bona fide exchanges the ability to submit to the hedging positions and spread that exchanges submit monthly reports under § 150.5(a)(4). Do exchanges prefer Commission alternative potential exemptions approved by exchanges. The methodologies for calculating spot proposed monthly report would also that the Commission specify a particular day each month as a deadline for month limit levels required by proposed keep the Commission informed as to the § 150.5(b)(1), provided that the limits manner in which an exchange is submitting such monthly reports or do are set at a level that is ‘‘necessary and administering its application exchanges prefer to have discretion in appropriate to reduce the potential procedures, the exchange’s rationale for determining which day to submit such threat of market manipulation or price permitting large positions, and relevant reports? distortion of the contract’s or the cash market activity. The Commission b. Proposed § 150.5(b)—Requirements underlying commodity’s price or expects that exchanges would be able to and Acceptable Practices for Exchange- index.’’ This standard has appeared in leverage their current exemption Set Limits on Commodity Derivative existing § 150.5 since its adoption in processes and recordkeeping procedures Contracts in a Physical Commodity That connection with spot month limits on to generate such reports. Are Not Subject to the Limits Set Forth In certain instances, information cash-settled contracts. As noted above, in § 150.2 included in the proposed monthly existing § 150.5 includes separate report may prompt the Commission to As described elsewhere in this parameters for spot month limits in request records required to be release, the Commission is proposing physical-delivery contracts and for cash- maintained by an exchange. For federal speculative limits on 25 core settled contracts, but does not include example, the Commission proposes that, referenced futures contracts and their flexibility for exchanges to consider for each derivative position that an respective referenced contracts.317 alternative parameters. In an effort to exchange wishes to recognize as a bona DCMs, and, ultimately, SEFs, listing both simplify the regulation and provide fide hedge, or any revocation or physical commodity contracts for which the ability for exchanges to consider modification of such recognition or federal limits do not apply would have multiple parameters that may be better exemption, the report would include a to comply with proposed § 150.5(b), suited for certain products, the concise summary of the applicant’s which includes a combination of rules Commission proposes the above activity in the cash markets and swaps and references to acceptable practices. standard as a principles-based markets for the commodity underlying Under proposed § 150.5(b), for requirement for both cash-settled and the position. The Commission expects physical commodity derivatives that are physically-settled contracts subject to that this summary would focus on the not subject to federal limits, whether proposed § 150.5(b). facts and circumstances upon which an cash-settled or physically-settled, Outside of the spot month, where, exchange based its determination to exchanges would be subject to flexible historically, attempts at certain types of recognize a bona fide hedge, to grant a standards during the product’s spot market manipulation are generally less spread exemption, or to revoke or month and non-spot month. During the of a concern, proposed § 150.5(b)(2)(i) modify such recognition or exemption. spot month, under proposed would allow exchanges to choose In light of the information provided in § 150.5(b)(1)(i), exchanges would be between position limits or position the summary, or any other information accountability for physical commodity included in the proposed monthly 316 The Commission would provide such form report regarding the position, the and manner instructions on the Forms and 318 See supra Section II.B.2. (discussion of Submissions page at www.cftc.gov. Such proposed § 150.2). Commission may request the exchange’s instructions would likely be published in the form 319 Guidance for calculating deliverable supply complete record of the application. The of a technical guidebook. can be found in Appendix C to part 38. 17 CFR part Commission expects that it would only 317 See infra Section III.F. 38, Appendix C.

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contracts that are not subject to federal percent of open interest in that contract would be open to considering limits. While exchanges would be for the most recent calendar year up to alternative parameters submitted provided the ability to decide whether 50,000 contracts, with a marginal pursuant to part 40 of the Commission’s to use limit levels or accountability increase of 2.5 percent of open interest regulations, provided, at a minimum, levels for any such contract, under thereafter.323 When evaluating average that the parameter complies with either approach, the exchange would position sizes held by speculative § 150.5(b)(2)(i). The Commission have to set a level that is ‘‘necessary and traders, the Commission expects encourages exchanges to submit appropriate to reduce the potential exchanges: (i) To be cognizant of potential new parameters to threat of market manipulation or price speculative positions that are Commission staff in draft form prior to distortion of the contract’s or the extraordinarily large relative to other submitting them under part 40. underlying commodity’s price or speculative positions, and (ii) to not For exchanges that choose to adopt index.’’ consider any such outliers in their position accountability, rather than To help exchanges efficiently calculations. limits, outside of the spot month, demonstrate compliance with this These proposed parameters have proposed paragraph (a)(2) of Appendix standard for physical commodity largely appeared in existing § 150.5 for F to part 150 would set forth a non- contracts outside of the spot month, the many years in connection with non-spot exclusive acceptable practice that would Commission proposes separate month limits, either for initial or permit exchanges to comply with acceptable practices for exchanges that subsequent levels.324 The Commission proposed § 150.5(b)(2)(i) by adopting wish to adopt non-spot month position is of the view that these parameters rules establishing ‘‘position limits and exchanges that wish to adopt would be useful, flexible standards to accountability’’ as defined in proposed non-spot month accountability.320 For carry forward as acceptable practices. § 150.1. ‘‘Position accountability’’ exchanges that choose to adopt non-spot For example, the Commission expects would mean rules, submitted to the month position limits, rather than that the 5,000-contract acceptable Commission pursuant to part 40, that position accountability, proposed practice would be a useful benchmark require traders to, upon request by the paragraph (a)(1) to Appendix F of part for exchanges because it would allow exchange, consent to: (i) Provide 150 would set forth non-exclusive them to establish limits and information to the exchange about their acceptable practices. Under that demonstrate compliance with position, including, but not limited to, provision, exchanges would be deemed Commission regulations in a relatively information about the nature of the their in compliance with proposed efficient manner, particularly for new positions, trading strategies, and § 150.5(b)(2)(i) if they set non-spot limit contracts that have yet to establish open hedging information; and (ii) halt levels for each contract subject to interest. Similarly, for purposes of further increases to their position or to § 150.5(b) at a level no greater than: (1) exchange-set limits on physical reduce their position in an orderly The average of historical position sizes commodity contracts that are not subject manner.325 held by speculative traders in the to federal limits, the Commission Proposed § 150.5(b)(3) addresses a contract as a percentage of the contract’s proposes to maintain the baseline 10, circumstance where multiple exchanges open interest; 321 (2) the spot month 2.5 percent formula as an acceptable list contracts that are substantially the limit level for the contract; (3) 5,000 practice. Because these parameters are same, including physically-settled contracts (scaled up proportionally to simply acceptable practices, exchanges contracts that have the same underlying the ratio of the notional quantity per may, after evaluation, propose higher commodity and delivery location, or contract to the typical cash market non-spot month limits or accountability cash-settled contracts that are directly or transaction if the notional quantity per levels. indirectly linked to a physically-settled contract is smaller than the typical cash Along those lines, the Commission contract. Under proposed § 150.5(b)(3), market transaction, or scaled down recognizes that other parameters may be exchanges listing contracts that are proportionally if the notional quantity preferable and/or just as effective, and substantially the same in this manner per contract is larger than the typical must either adopt ‘‘comparable’’ limits cash market transaction); 322 or (4) 10 typical cash market transaction. These required for such contracts, or demonstrate to the adjustments to the 5,000 contract metric are Commission how the non-comparable 320 The acceptable practices proposed in intended to avoid a circumstance where an levels comply with the standards set Appendix F to part 150 herein reflect non-exclusive exchange could allow excessive speculation by forth in proposed § 150.5(b)(1) and (2). setting excessively large notional quantities relative methods of compliance. Accordingly, the language Such a determination also must address of this proposed acceptable practice, along with the to typical cash-market transaction sizes. For other acceptable practices proposed herein, uses the example, if the notional quantity per contract is set how the levels are necessary and word ‘‘shall’’ not to indicate that the acceptable at 30,000 units, and the typical observed cash appropriate to reduce the potential practice is a required method of compliance, but market transaction is 2,500 units, the notional threat of market manipulation or price quantity per contract would be 12 times larger than rather to indicate that in order to satisfy the distortion of the contract’s or the acceptable practice, a market participant must (i.e., the typical cash market transaction. In that case, the shall) establish compliance with that particular non-spot month limit would need to be 12 times underlying commodity’s price or index. acceptable practice. smaller than 5,000 (i.e., at 417 contracts.). Similarly, Proposed § 150.5(b)(3) would apply 321 For example, if speculative traders in a if the notional quantity per contract is 1,000 equally to cash-settled and physically- particular contract typically make up 12 percent of contracts, and the typical observed cash market settled contracts, and to limits during open interest in that contract, the exchange could transaction is 2,500 units, the notional quantity per set limit levels no greater than 12 percent of open contract would be 2.5 times smaller than the typical and outside of the spot month, as interest. cash market transaction. In that case, the non-spot 322 For exchanges that choose to adopt a non-spot month limit would need to be 2.5 times larger than 325 While existing § 150.5(e) includes open- month limit level of 5,000 contracts, this level 5,000, and would need to be set at 12,500 contracts. interest and volume-based limitations on the use of assumes that the notional quantity per contract is 323 In connection with the proposed Appendix F accountability, the Commission opts not to include set at a level that reflects the size of a typical cash to part 150 acceptable practices, open interest such limitations in this proposal. Under the rules market transaction in the underlying commodity. should be calculated by averaging the month-end proposed herein, if an exchange submitted a part 40 However, if the notional quantity of the contract is open positions in a futures contract and its related filing seeking to adopt position accountability, the larger/smaller than the typical cash market option contract, on a delta-adjusted basis, for all Commission would determine on a case-by-case transaction in the underlying commodity, then the months listed during the most recent calendar year. basis whether such rules are consistent with the Act DCM must reduce/increase the 5,000 contract non- 324 17 CFR 150.5(b) and (c). Proposed § 150.5(b) and the Commission’s regulations. The Commission spot month limit until it is proportional to the would address physical commodity contracts that does not want to use one-size-fits-all volume-based notional quantity of the contract relative to the are not subject to federal limits. limitations for making such determinations.

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applicable.326 Proposed § 150.5(b)(3) is the discretion of exchanges to utilize considering position limits regulations intended to help ensure that position other tools to protect their markets. for security futures products. limits established on one exchange Among other things, an exchange would d. Proposed § 150.5(d)—Rules on would not jeopardize market integrity or have the discretion to: impose Aggregation otherwise harm other markets. Further, additional restrictions on a person with proposed § 150.5(b)(3) would be a long position in the spot month of a As noted earlier in this release, the consistent with the Commission’s physical-delivery contract who stands Commission adopted in 2016 final proposal to generally apply equivalent for delivery, takes that delivery, then re- aggregation rules under § 150.4 that federal limits to linked contracts, establishes a long position; establish apply to all contracts subject to federal including linked contracts listed on limits on the amount of delivery limits. The Commission recognizes that 327 multiple exchanges. instruments that a person may hold in with respect to contracts not subject to Finally, under proposed § 150.5(b)(4), a physical-delivery contract; and impose federal limits, market participants may exchanges would be permitted to grant such other restrictions as it deems find it burdensome if different exemptions from any limits established necessary to reduce the potential threat exchanges adopt different aggregation under proposed § 150.5(b). As noted, of market manipulation or congestion, standards. Accordingly, under proposed proposed § 150.5(b) would apply to to maintain orderly execution of § 150.5(d), all DCMs, and, ultimately, physical commodity contracts not transactions, or for such other purposes SEFs, that list any physical commodity subject to federal limits; thus, exchanges consistent with its responsibilities. derivatives, regardless of whether the would be given flexibility to grant contract is subject to federal limits, exemptions in such contracts, including c. Proposed § 150.5(c)—Requirements would be required to adopt aggregation exemptions for both intramarket and for Security Futures Products rules for such contracts that conform to intermarket spread positions,328 as well § 150.4.335 Exchanges that list excluded as other exemption types not explicitly As the Commission has previously commodities would be encouraged to listed in proposed § 150.3.329 However, noted, security futures products and such exchanges must require that security options may serve also adopt aggregation rules that traders apply for the exemption. In economically equivalent or similar conform to § 150.4. Aggregation policies considering any such application, the functions to one another.330 Therefore, that otherwise vary from exchange to exchanges would be required to take when the Commission originally exchange would increase the into account whether the exemption adopted position limits regulations for administrative burden on a trader active would result in a position that would security futures products in part 41, it on multiple exchanges, as well as not be in accord with ‘‘sound set levels that were generally increase the administrative burden on commercial practices’’ in the market for comparable to, although not identical the Commission in monitoring and which the exchange is considering the with, the limits that applied to options enforcing exchange-set position limits. application, and/or would ‘‘exceed an on individual securities.331 The e. Proposed § 150.5(e)—Requirements amount that may be established and Commission has pointed out that for Submissions to the Commission liquidated in an orderly fashion in that security futures products may be at a market.’’ competitive disadvantage if position Proposed § 150.5(e) reflects that, While exchanges would be subject to limits for security futures products vary consistent with the definition of ‘‘rule’’ the requirements of § 150.5(a) and (b) too much from those of security in existing § 40.1, any exchange action described above, such proposed options.332 As a result, the Commission establishing or modifying exchange-set requirements are not intended to limit in 2019 adopted amendments to the position limits or exemptions therefrom, position limitations and accountability or position accountability, in any case 326 For reasons discussed elsewhere in this requirements for security futures pursuant to proposed § 150.5(a), (b), (c), release, this provision would not apply to natural products, noting that one goal was to or Appendix F to part 150, would gas contracts. See supra Section II.C.2.e. (discussion of proposed conditional spot month exemption in provide a level regulatory playing field qualify as a ‘‘rule’’ and must be natural gas). with security options.333 Proposed submitted to the Commission as such 327 See supra Section II.A.16. (discussion of the § 150.5(c), therefore, would include a pursuant to part 40 of the Commission’s proposed referenced contract definition and linked cross-reference clarifying that for regulations. Such rules would also contracts). security futures products, position include, among other things, parameters 328 The Commission understands an intramarket spread position to be a long position in one or more limitations and accountability used for determining position limit commodity derivative contracts in a particular requirements for exchanges are levels, and policies and related commodity, or its products or its by-products, and specified in § 41.25.334 This would processes setting forth parameters a short position in one or more commodity derivative contracts in the same, or similar, allow the Commission to take into addressing, among other things, which commodity, or its products or by-products, on the account the position limits regime that types of exemptions are permitted, the same DCM. The Commission understands an applies to security options when parameters for the granting of such intermarket spread position to be a long (or short) exemptions, and any exemption position in one or more commodity derivative 330 contracts in a particular commodity, or its products See Position Limits and Position application requirements. or its by-products, at a particular DCM and a short Accountability for Security Futures Products, 83 FR at 36799, 36802 (July 31, 2018). (or long) position in one or more commodity 335 Under § 150.4, unless an exemption applies, a 331 derivative contracts in that same, or similar, Id. See also Listing Standards and Conditions person’s positions must be aggregated with commodity, or its products or its by-products, away for Trading Security Futures Products, 66 FR at positions for which the person controls trading or from that particular DCM. For instance, the 55078, 55082 (Nov. 1, 2001) (explaining the for which the person holds a 10 percent or greater Commission would consider a spread between Commission’s adoption of position limits for ownership interest. Commission Regulation CBOT Wheat (W) futures and MGEX HRS Wheat security futures products). § 150.4(b) sets forth several permissible exemptions (MWE) futures to be an intermarket spread based on 332 See 83 FR at 36799, 36802 (July 31, 2018). from aggregation. See Final Aggregation the similarity of the commodities. 333 See Position Limits and Position Rulemaking, 81 FR at 91454. The Division of 329 As noted above, proposed § 150.3 would allow Accountability for Security Futures Products, 84 FR Market Oversight has issued time-limited no-action for several exemption types, including: Bona fide at 51005, 51009 (Sept. 27, 2019). relief from some of the aggregation requirements hedging positions; certain spreads; financial 334 See 17 CFR 41.25. Rule § 41.25 establishes contained in that rulemaking. See CFTC Letter No. distress positions; and conditional spot month limit conditions for the trading of security futures 19–19 (July 31, 2019), available at https:// exemption positions in natural gas. products. www.cftc.gov/csl/19–19/download.

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Proposed § 150.5(e) further provides Thus, under CEA section 4a(e), it is a requirements alone does not necessarily that exchanges would be required to violation of the Act for any person to satisfy other obligations of an exchange. review regularly 336 any position limit violate an exchange position limit rule Proposed § 150.6 would provide that levels established under proposed certified to or approved by the part 150 of the Commission’s § 150.5 to ensure the level continues to Commission, including to violate any regulations shall only be construed as comply with the requirements of those subsequent amendments thereto, and having an effect on position limits set by sections. For example, in the case of the Commission has the authority to the Commission or an exchange § 150.5(b), exchanges would be expected enforce those violations. including any associated recordkeeping to ensure the limits comply with the and reporting requirements. Proposed h. Request for Comment requirement that limits be set ‘‘at a level § 150.6 would provide further that that is necessary and appropriate to The Commission requests comment nothing in part 150 shall affect any reduce the potential threat of market on all aspects of proposed § 150.5. other provisions of the Act or manipulation or price distortion of the E. § 150.6—Scope Commission regulations including those contract’s or the underlying relating to actual or attempted commodity’s price or index.’’ Exchanges Existing § 150.6 provides that nothing manipulation, corners, squeezes, would also be required to update such in this part shall be construed to affect fraudulent or deceptive conduct, or to levels as needed, including if the levels any provisions of the Act relating to prohibited transactions. For example, no longer comply with the proposed manipulation or corners nor to relieve proposed § 150.5 would require DCMs, rules. any contract market or its governing and, ultimately, SEFs, to impose and board from responsibility under section f. Delegation of Authority to the Director enforce exchange-set speculative 5(4) of the Act to prevent manipulation of the Division of Market Oversight position limits. The fulfillment of the and corners.339 requirements of § 150.5 alone would not The Commission proposes to delegate Position limits are meant to diminish, satisfy any other legal obligations under its authority, pursuant to proposed eliminate, or prevent excessive the Act or Commission regulations § 150.5(a)(4)(ii), to the Director of the speculation and deter and prevent applicable to exchanges to prevent Commission’s Division of Market market manipulation, squeezes, and manipulation and corners. Likewise, a Oversight, or such other employee(s) corners. The Commission stresses that market participant’s compliance with that the Director may designate from nothing in the proposed revisions to position limits or an exemption thereto time to time, to provide instructions part 150 would impact the anti- does not confer any type of safe harbor regarding the submission of information disruptive, anti-cornering, and anti- or good faith defense to a claim that the required to be reported by exchanges to manipulation provisions of the Act and participant had engaged in an attempted the Commission on a monthly basis, and Commission regulations, including but or perfected manipulation. to determine the manner, format, coding not limited to CEA sections 6(c) or Further, the proposed amendments structure, and electronic data 9(a)(2) regarding manipulation, section are intended to help clarify that § 150.6 transmission procedures for submitting 4c(a)(5) regarding disruptive practices applies to: Regulations related to such information. including spoofing, or sections 180.1 position limits found outside of part 150 g. Commission Enforcement of and 180.2 of the Commission’s of the Commission’s regulations (e.g., Exchange-Set Limits regulations regarding manipulative and relevant sections of part 1 and part 19); deceptive practices. It may be possible As discussed throughout this release, and recordkeeping and reporting for a trader to manipulate or attempt to the framework for exchange-set limits regulations associated with speculative manipulate the prices of futures operates in conjunction with the federal position limits. contracts or the underlying commodity position limits framework. The Futures F. § 150.8—Severability Trading Act of 1982 gave the with a position that is within the federal Commission, under CEA section 4a(5) position limits. It may also be possible The Commission proposes to add new (since re-designated as section 4a(e)), for a trader holding a bona fide hedge § 150.8 to provide for the severability of the authority to directly enforce recognition from the Commission or an individual provisions of part 150. violations of exchange-set, Commission- exchange to manipulate or attempt to Should any provision(s) of part 150 be approved speculative position limits in manipulate the markets. The declared invalid, including the addition to position limits established Commission would not consider it a application thereof to any person or directly by the Commission.337 Since defense to a charge under the anti- circumstance, § 150.8 would provide 2008, it has also been a violation of the manipulation provisions of the Act or that all remaining provisions of part 150 Act for any person to violate an the regulations that a trader’s position shall not be affected to the extent that exchange position limit rule certified to was within position limits. such remaining provisions, or the the Commission by such exchange Like existing § 150.6, proposed application thereof, can be given effect pursuant to CEA section 5c(c)(1).338 § 150.6 is intended to make clear that without the invalid provisions. fulfillment of specific part 150 G. § 150.9—Process for Recognizing 336 An acceptable, regular review regime would Non-Enumerated Bona Fide Hedging consist of both a periodic review and an event- 110–246, 122 Stat. 1624 (June 18, 2008) (also known specific review (e.g., in the event of supply and as the ‘‘Farm Bill’’) (amending CEA section 4a(e), Transactions or Positions With Respect demand shocks such as unanticipated shocks to among other things, to assure that a violation of to Federal Speculative Position Limits supply and demand of the underlying commodity, position limits, regardless of whether such position geo-political shocks, and other events that may limits have been approved by or certified to the 1. Background and Overview result in congestion and/or other disruptions). The Commission, would constitute a violation of the Act Commission also expects that exchanges would re- that the Commission could independently enforce). For the nine legacy agricultural evaluate such levels in the event of unanticipated See also Federal Speculative Position Limits for contracts currently subject to federal shocks to the supply or demand of the underlying Referenced Energy Contracts and Associated position limits, the Commission’s commodity. Regulations, 75 FR at 4144, 4145 (Jan. 26, 2010) current processes for recognizing non- 337 See Futures Trading Act of 1982, Public Law (summarizing the history of the Commission’s 97–444, 96 Stat. 2299–30 (1983). authority to directly enforce violations of exchange- enumerated bona fide hedge positions 338 See CFTC Reauthorization Act of 2008, Food, set speculative position limits). and certain enumerated anticipatory Conservation and Energy Act of 2008, Public Law 339 17 CFR 150.6. bona fide hedge positions exist in

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parallel with exchange processes for required to comply with different fide hedging transactions or positions; granting exemptions from exchange-set federal and exchange-level processes. paragraph (2) provides a list of limits, as described below. The For instance, currently, market enumerated bona fide hedging positions exchange processes for granting participants seeking recognitions of that, generally, are self-effectuating, and exemptions vary by exchange, and non-enumerated bona fide hedges for must be reported (along with supporting generally do not mirror the the nine legacy agricultural cash-market information) to the Commission’s processes. Thus, when commodities must request recognitions Commission monthly on Form 204 after requesting certain bona fide hedging from both the Commission under the positions are taken; 345 and position recognitions that are not self- existing § 1.47, and from the relevant paragraph (3) provides a procedure for effectuating, market participants must exchange. If the recognition is for an market participants to seek recognition currently comply with the exchanges’ ‘‘enumerated’’ hedge under existing from the Commission for non- processes for exchange-set limits and § 1.3 (other than anticipatory enumerated bona fide hedging the Commission’s processes for federal enumerated hedges), the market positions. Under paragraph (3), any limits. Although this disparity is participant would not need to file an person that seeks Commission currently only an issue for the nine application with the Commission (as the recognition of a position as a non- agricultural futures contracts subject to enumerated hedge has a self-effectuating enumerated bona fide hedge must both federal and exchange-set limits, the recognition for purposes of federal submit an application to the parallel approaches may become more limits). Commission in advance of taking on the If the exemption is for a ‘‘non- inefficient and burdensome once the position, and pursuant to the processes enumerated’’ hedge or certain Commission adopts limits on additional found in § 1.47 (30 days in advance for enumerated anticipatory hedges under commodities. non-enumerated bona fide hedges) or Accordingly, the Commission is existing § 1.3, the market participant § 1.48 (10 days in advance for proposing § 150.9 to establish a separate would need to file an application with enumerated anticipatory hedges), as framework, applicable to proposed the Commission pursuant to §§ 1.47 or applicable. referenced contracts in all commodities, 1.48, respectively. In either case, the whereby a market participant who is market participant would also still need b. Exchanges’ Existing Approach for seeking a bona fide hedge recognition to seek an exchange exemption and file Granting Bona Fide Hedge that is not enumerated in proposed a Form 204/304 on a monthly basis with Exemptions 346 With Respect to Appendix A can file one application the Commission. As discussed more Exchange-Set Limits with an exchange to receive a bona fide fully in this section, with respect to hedging recognition for purposes of both bona fide hedges that are not self- Under DCM Core Principle 5,347 exchange-set limits and for federal effectuating for purposes of federal DCMs have, for some time, established limits.340 Given the proposal to limits, proposed § 150.9 would permit exchange-set limits for futures contracts significantly expand the list of such a market participant to file a single that are subject to federal limits, as well enumerated hedges, the Commission application with the exchange and as for contracts that are not. In addition, expects the use of the proposed § 150.9 relieve the market participant from under existing § 150.5(d), DCMs may non-enumerated process described having to separately file an application grant exemptions to exchange-set below would be rare and exceptional. and/or monthly cash-market reporting position limits for positions that meet This separate framework would be information with the Commission. the Commission’s general definition of independent of, and serve as an The existing Commission and bona fide hedging transactions or alternative to, the Commission’s process exchange level approaches are described positions as defined in paragraph (1) of for reviewing exemption requests under in more detail below, followed by a § 1.3.348 As such, with respect to proposed § 150.3. Among other things, more detailed discussion of proposed exchange-set limits, exchanges have proposed § 150.9 would help to § 150.9. adopted processes for handling trader streamline the process by which non- 2. Existing Approaches for Recognizing requests for bona fide hedging enumerated bona fide hedge recognition Bona Fide Hedges exemptions, and generally have granted requests are addressed, minimize such requests pursuant to exchange The Commission’s authority and disruptions by leveraging existing rules that incorporate the Commission’s existing processes for recognizing bona exchange-level processes with which existing general definition of bona fide fide hedges can be found in section many market participants are already hedging transactions or positions in 4a(c) of the Act, and §§ 1.3, 1.47, and familiar,341 and reduce inefficiencies paragraph (1) of § 1.3.349 Accordingly, 1.48 of the Commission’s regulations.342 created when market participants are DCMs currently have rules and In particular, CEA section 4a(c)(1) application forms in place to process provides that no CFTC rule issued 340 Alternatively, under the proposed framework, applications to exempt bona fide a trader could submit a request directly to the under CEA section 4a(a) applies to Commission pursuant to proposed § 150.3(b). A ‘‘transactions or positions which are 345 trader that submitted such a request directly to the As described below, the Commission proposes shown to be bona fide hedging to eliminate Form 204 and to rely instead on the Commission for purposes of federal limits would transactions or positions.’’ 343 Further, have to separately request an exemption from the cash-market information submitted to exchanges applicable exchange for purposes of exchange-set under the existing definition of ‘‘bona pursuant to proposed §§ 150.5 and 150.9. See infra limits. As discussed earlier in this release, the fide hedging transactions and positions’’ Section II.H.3. (discussion of proposed amendments Commission proposes to separately allow for in § 1.3,344 paragraph (1) provides the to part 19). 346 Exchange rules typically refer to ‘‘exemptions’’ enumerated hedges and spreads that meet the Commission’s general definition of bona ‘‘spread transaction’’ definition to be self- in connection with bona fide hedging and spread effectuating. See supra Section II.C.2. (discussion of positions, whereas the Commission uses the proposed § 150.3). 342 See 7 U.S.C. 6a(c) and 17 CFR 1.3, 1.47, and nomenclature ‘‘recognition’’ with respect to bona 341 In particular, the Commission recognizes that, 1.48. fide hedges, and ‘‘exemption’’ with respect to in the energy and metals spaces, market 343 7 U.S.C. 6a(c)(1). spreads. participants are familiar with exchange application 344 As described above, the Commission proposes 347 7 U.S.C. 7(d)(5). processes and are not familiar with the to move an amended version of the bona fide 348 17 CFR 150.5(d). Commission’s processes since, currently, there are hedging definition from § 1.3 to § 150.1. See supra 349 See, e.g., CME Rule 559 and ICE Rule 6.29 no federal position limits for those commodities. Section II.A. (discussion of proposed § 150.1). (addressing position limits and exemptions).

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hedging positions with respect to enumerated bona fide hedges. The exchange’s exemption would be exchange-set position limits.350 Generally, for bona fide hedges valid only if the exchange meets the Separately, under SEF Core Principle enumerated in paragraph (2) of the bona following additional conditions, each 6, currently SEFs are required to adopt, fide hedge definition in § 1.3, no formal described in greater detail below: (1) as is necessary and appropriate, position process is required by the Commission. The exchange maintains rules, approved limits or position accountability levels Instead, such enumerated bona fide by the Commission pursuant to § 40.5, for each swap contract to reduce the hedge recognitions are self-effectuating that establish application processes for potential threat of market manipulation and Commission staff reviews monthly recognizing bona fide hedges in or congestion.351 For contracts that are reporting of cash-market positions on accordance with § 150.9; (2) the subject to a federal position limit, the existing Form 204 and part 17 position exchange meets specified prerequisites SEF must set its position limits at a data to monitor such positions. for granting such recognitions; (3) the level that is no higher than the federal Recognition requests for non- exchange satisfies specified limit, and must monitor positions enumerated bona fide hedging positions recordkeeping requirements; and (4) the established on or through the SEF for and for certain enumerated anticipatory exchange notifies the Commission and compliance with both the Commission’s bona fide hedge positions, as explained the applicant upon determining to federal limit and the exchange-set above, must be submitted to the recognize a bona fide hedging limit.352 Section 37.601 further Commission pursuant to the processes transaction or position. A person may implements SEF Core Principle 6 and in existing §§ 1.47 and 1.48 of the exceed the applicable federal position specifies that until such time that SEFs regulations, as applicable. limit ten business days (for new and are required to comply with the 3. Proposed § 150.9 annually renewed exemptions) or two Commission’s position limits business days (for applications, regulations, a SEF may refer to the Under the proposed procedural including retroactive applications, associated guidance and/or acceptable framework, an exchange’s determination submitted due to sudden and practices set forth in Appendix B to part to recognize a non-enumerated bona unforeseen circumstances) after the 37 of the Commission’s regulations.353 fide hedge in accordance with proposed exchange makes its determination, Currently, in practice, there are no § 150.9 with respect to exchange-set unless the Commission notifies the federal position limits on swaps for limits would serve to inform the exchange and the applicant otherwise. which SEFs would be required to Commission’s own decision as to The above-described elements of the establish exchange-set limits. whether to recognize the exchange’s proposed approach differ from the As noted above, the application determination for purposes of federal regulations proposed in the 2016 processes currently used by exchanges speculative position limits set forth in Reproposal, which did not require a 10- are different than the Commission’s proposed § 150.2. Among other day Commission review period. The processes. In particular, exchanges conditions, the exchange would be 2016 Reproposal allowed DCMs and typically use one application process to required to base its determination on SEFs to recognize non-enumerated bona grant all exemption types, whereas the standards that conform to the fide hedges for purposes of federal Commission has different processes for Commission’s own standards for position limits.355 However, the 2016 different exemptions, as explained recognizing bona fide hedges for Reproposal may not have conformed to below. Also, exchanges generally do not purposes of federal position limits. the legal limits on what an agency may require the submission of monthly cash- Further, the exchange’s determination delegate to persons outside the with respect to its own position limits market information, whereas the agency.356 The 2016 Reproposal and application process would be Commission has various monthly subject to Commission review and 355 reporting requirements under Form 204 Proposed § 150.9(a)(5) of the 2016 Reproposal oversight. These requirements would and part 17 of the Commission’s provided that an applicant’s derivatives position facilitate Commission review and shall be deemed to be recognized as a non- regulations. Finally, exchanges determinations by ensuring that any enumerated bona fide hedging position exempt generally require exemption from federal position limits at the time that a bona fide hedge recognized by an applications to include cash-market designated contract market or swap execution exchange for purposes of exchange-set information supporting positions that facility notifies an applicant that such designated limits and in accordance with proposed contract market or swap execution facility will exceed the limits, to be filed annually § 150.9 conforms to the Commission’s recognize such position as a non-enumerated bona prior to exceeding a position limit, and fide hedging position. 354 standards. 356 to be updated on an annual basis. For a given referenced contract, In U.S. Telecom Ass’n v. FCC, the D.C. Circuit The Commission, on the other hand, held ‘‘that, while federal agency officials may proposed § 150.9 would potentially subdelegate their decision-making authority to currently has different processes for allow a person to exceed federal subordinates absent evidence of contrary permitting enumerated bona fide hedges position limits if the exchange listing congressional intent, they may not subdelegate to and for recognizing positions as non- outside entities—private or sovereign—absent the contract has recognized the position affirmative evidence of authority to do so.’’ U.S. as a bona fide hedge with respect to Telecom Ass’n v. FCC, 359 F.3d 554, 565–68 (D.C. 350 Id. exchange-set limits. Under this Cir. 2004) (citing Shook v. District of Columbia Fin. 351 7 U.S.C. 7b–3(f)(6). The Commission codified framework, the exchange would make Responsibility & Mgmt. Assistance Auth., 132 F.3d Core Principle 6 under § 37.600. 17 CFR 37.600. 775, 783–84 & n. 6 (D.C. Cir.1998); Nat’l Ass’n of 352 Id. such determination with respect to its Reg. Util. Comm’rs (‘‘NARUC’’) v. FCC, 737 F.2d 353 17 CFR 37.601. Under Appendix B to part 37, own speculative position limits, set in 1095, 1143–44 & n. 41 (D.C. Cir.1984); Nat’l Park for Required Transactions, as defined in § 37.9, accordance with proposed § 150.5(a), and Conservation Ass’n v. Stanton, 54 F.Supp.2d 7, SEFs may demonstrate compliance with SEF Core and, unless the Commission denies or 18–20 (D.D.C.1999). Nevertheless, the D.C. Circuit Principle 6 by setting and enforcing position limits recognized three circumstances that the agency may or position accountability levels only with respect stays the application within ten ‘‘delegate’’ its authority to an outside party because to trading on the SEF’s own market. For Permitted business days (or two business days for they do not involve subdelegation of decision- Transactions, as defined in § 37.9, SEFs may applications, including retroactive making authority: (1) Establishing a reasonable demonstrate compliance with SEF Core Principle 6 applications, filed due to sudden or condition for granting federal approval; (2) fact by setting and enforcing position accountability gathering; and (3) advice giving. The first instance levels or by sending the Commission a list of unforeseen circumstances), the involves conditioning of obtaining a permit on the Permitted Transactions traded on the SEF. exemption would be deemed approved approval by an outside entity as an element of its 354 Id. for purposes of federal positions limits. Continued

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delegated to the DCMs and SEFs a limits. Proposed § 150.9 is discussed in risk management exemptions for such significant component of the greater detail below. contracts.357 Commission’s authority to recognize Request for Comment bona fide hedges for purposes of federal Request for Comment The Commission requests comment position limits. Under that proposal, the The Commission requests comment on all aspects of proposed § 150.9. The Commission did not have a substantial on all aspects of proposed § 150.9. The role in reviewing the DCMs’ or SEFs’ Commission also invites comments on Commission also invites comments on the following: recognitions of non-enumerated bona the following: fide hedges for purposes of federal (37) Does the proposed compliance position limits. Upon further reflection, (35) Considering that the date of twelve-months after publication the Commission believes that the 2016 Commission’s proposed position limits of a final federal position limits Reproposal may not have retained would apply to OTC economically rulemaking in the Federal Register enough authority with the Commission equivalent swaps, should the provide a sufficient amount of time for under case law on sub-delegation of Commission develop a mechanism for exchanges to update their exemption agency decision making authority. exchanges to be involved in the review application procedures, as needed, and Under the new proposed model, the of non-enumerated bona fide hedge begin reviewing exemption applications Commission would be informed by the applications for OTC economically in accordance with proposed § 150.9? If exchanges’ determinations to make the equivalent swaps? not, please provide an alternative longer timeline and reasons supporting a Commission’s own determination for (36) If so, what, if any, role should longer timeline. purposes of federal position limits exchanges play in the review of non- within a 10-day review period. enumerated bona fide hedge c. Proposed § 150.9(c)—Application Accordingly, the Commission would applications for OTC economically Process retain its decision-making authority equivalent swaps? Proposed § 150.9(c) sets forth the with respect to the federal position information and representations that the limits and provide legal certainty to a. Proposed § 150.9(a)—Approval of Rules exchange, at a minimum, would be market participants of their required to obtain from applicants as determinations. Under proposed § 150.9(a), the part of the application process for Both DCMs and SEFs would be exchange must have rules, adopted granting bona fide hedges. In this eligible to allow traders to utilize the pursuant to the rule approval process in connection, exchanges may rely upon processes set forth under proposed § 40.5 of the Commission’s regulations, their existing application forms and § 150.9. However, as a practical matter, establishing processes and standards in processes in making such the Commission expects that upon accordance with proposed § 150.9, determinations, provided they collect implementation of § 150.9, the process described below. The Commission the information outlined below. The proposed therein will likely be used would review such rules to ensure that Commission believes the information primarily by DCMs, rather than by SEFs, the exchange’s standards and processes set forth below is sufficient for the given that most economically equivalent for recognizing bona fide hedges from exchange to determine, and the swaps that would be subject to federal its own exchange-set limits conform to Commission to verify, whether a position limits are expected to be traded the Commission’s standards and particular transaction or position OTC and not executed on SEFs. processes for recognizing bona fide satisfies the federal definition of bona The Commission emphasizes that hedges from the federal limits. fide hedging transaction for purposes of proposed § 150.9 is intended to serve as federal position limits. a separate, self-contained process that is b. Proposed § 150.9(b)—Prerequisites for related to, but independent of, the an Exchange To Recognize Non- i. Proposed § 150.9(c)(1)—Required proposed regulations governing: (1) The Enumerated Bona Fide Hedges in Information for Bona Fide Hedging process in proposed § 150.3 for traders Accordance With This Section Positions to apply directly to the Commission for With respect to bona fide hedging a bona fide hedge recognition; and (2) This section sets forth conditions that positions in referenced contracts, exchange processes for establishing would require an exchange-recognized proposed § 150.9(c)(1) would require exchange-set limits and granting bona fide hedge to conform to the that any application include: (i) A exemptions therefrom in proposed corresponding definitions or standards description of the position in the § 150.5. Proposed § 150.9 is intended to the Commission uses in proposed commodity derivative contract for serve as a voluntary process exchanges §§ 150.1 and 150.3 for purposes of the which the application is submitted can implement to provide additional federal position limits regime. (which would include the name of the flexibility for their market participants An exchange would be required to underlying commodity and the position seeking non-enumerated bona fide meet the following prerequisites with size); (ii) information to demonstrate hedges to file one application with an respect to recognizing bona fide hedging why the position satisfies section exchange to receive a recognition or positions under proposed § 150.9(b): (i) 4a(c)(2) of the Act and the definition of exemption for purposes of both The exchange lists the applicable bona fide hedging transaction or exchange-set limits and for federal referenced contract for trading; (ii) the position in proposed § 150.1, including position is consistent with both the factual and legal analysis; (iii) a decision process. The second provides the agency definition of bona fide hedging with nondiscretionary information gathering. The transaction or position in proposed 357 The Commission finds that financial products third allows a federal agency to turn to an outside are not substitutes for positions taken or to be taken entity for advice and policy recommendations, § 150.1 and section 4a(c)(2) of the Act; in a physical marketing channel. Thus, the offset of provided the agency makes the final decisions and (iii) the exchange does not financial risks arising from financial products itself. Id. at 568. ‘‘An agency may not, however, recognize as bona fide hedges any would be inconsistent with the definition of bona merely ‘rubber-stamp’ decisions made by others positions that include commodity index fide hedging transactions or positions for physical under the guise of seeking their ‘advice,’ [ ], nor will contracts and one or more referenced commodities in proposed § 150.1. See supra Section vague or inadequate assertions of final reviewing II.A.1.c.ii.(1) (discussion of the temporary substitute authority save an unlawful subdelegation, [ ].’’ Id. contracts, nor does the exchange grant test and risk-management exemptions).

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statement concerning the maximum size separately require that applicants exchanges’ review of applications of all gross positions in derivative submit their application in advance of pursuant to proposed § 150.9. contracts for which the application is exceeding the applicable federal (39) Currently, certain exchanges submitted (in order to provide a view of position limit for any given referenced allow for the submission of exemption the true footprint of the position in the contract. However, an exchange may requests up to five business days after market); (iv) information regarding the adopt rules that allow a person to the trader established the position that applicant’s activity in the cash markets submit a bona fide hedge application exceeded the exchange-set limit. Under for the commodity underlying the within five days after the person has proposed § 150.9, should exchanges position for which the application is exceeded federal speculative limits if continue to be permitted to recognize submitted; 358 and (v) any other such person exceeds the limits due to bona fide hedges and grant spread information the exchange requires, in its sudden or unforeseen increases in its exemptions retroactively—up to five discretion, to enable the exchange to bona fide hedging needs. Where an days after a trader has established a determine, and the Commission to applicant claims a sudden or unforeseen position that exceeds federal position verify, whether such position should be increase in its bona fide hedging needs, limits? 359 recognized as a bona fide hedge. the proposed rules would require d. Proposed § 150.9(d)—Recordkeeping These proposed application exchanges to require that the person requirements are similar to current provide materials demonstrating that Proposed § 150.9(d) would set forth requirements for recognizing a bona fide the person exceeded the federal recordkeeping requirements for hedging position under existing §§ 1.47 speculative limit due to sudden or purposes of § 150.9. The required and 1.48. unforeseen circumstances. Further, the records would form a critical element of Market participants have raised Commission would caution exchanges the Commission’s oversight of the concerns that such requirements, even if that applications submitted after a exchanges’ application process and such administered by the exchanges, would person has exceeded federal position records could be requested by the require hedging entities to change limits should not be habitual and Commission as needed. Under proposed internal books and records to track should be reviewed closely. Finally, if § 150.9(d), exchanges must maintain which category of bona fide hedge a the Commission finds that the position complete books and records of all position would fall under. The does not qualify as a bona fide hedge, activities relating to the processing and Commission notes that, as part of this then the applicant would be required to disposition of applications in a manner current proposal, exchanges would not bring its position into compliance, and consistent with the Commission’s need to require the identification of a could face a position limits violation if existing general regulations regarding hedging need against a particular it does not reduce the position within a recordkeeping.360 Such records must identified category. So long as the commercially reasonable time. include all information and documents requesting party satisfies all applicable submitted by an applicant in connection requirements in proposed § 150.9, iii. Proposed § 150.9(c)(3)—Renewal of with its application; records of oral and including demonstrating with a factual Applications written communications between the and legal analysis that a position would Under proposed § 150.9(c)(3), the exchange and the applicant in fit within the bona fide hedge exchange must require that persons with connection with the application; and definition, the Commission is not bona fide hedging recognitions in information and documents in intending to require the hedging party’s referenced contracts granted pursuant to connection with the exchange’s analysis books and records to identify the proposed § 150.9 reapply at least on an of and action on such application.361 particular type of hedge being applied. annual basis by updating their original Exchanges would also be required to application, and receive a notice of maintain any documentation submitted ii. Proposed § 150.9(c)(2)—Timing of approval from the exchange prior to by an applicant after the disposition of Application exceeding the applicable position limit. an application, including, for example, The Commission does not propose to any reports or updates the applicant prescribe timelines (e.g., a specified iv. Proposed § 150.9(c)(4)—Exchange filed with the exchange. number of days) for exchanges to review Revocation Authority Exchanges would be required to store applications because the Commission Under proposed § 150.9(c)(4), the and produce records pursuant to believes that exchanges are in the best exchange retains its authority to limit, existing § 1.31,362 and would be subject position to determine how to best condition, or revoke, at any time, any accommodate the needs of their market recognition previously issued pursuant 360 Requirements regarding the keeping and participants. Rather, under proposed to proposed § 150.9, for any reason, inspection of all books and records required to be kept by the Act or the Commission’s regulations are § 150.9(c)(2), the exchange must including if the exchange determines found at § 1.31, 17 CFR 1.31. DCMs are already that the recognition is no longer required to maintain records of their business 358 The Commission would expect that exchanges consistent with the bona fide hedge activities in accordance with the requirements of would require applicants to provide cash market definition in proposed § 150.1 or section § 1.31 of § 38.951, 17 CFR 38.951. 361 data for at least the prior year. 4a(c)(2) of the Act. The Commission does not intend, in proposed 359 Under proposed § 150.9(c)(1)(iv) and (v), § 150.9(d), to create any new obligation for an exchanges, in their discretion, could request Request for Comment exchange to record conversations with applicants or additional information as necessary, including their representatives; however, the Commission information for cash market data similar to what is The Commission requests comment does expect that an exchange would preserve any required in the Commission’s existing Form 204. on all aspects of proposed § 150.9. The written or electronic notes of verbal interactions See infra Section II.H.3. (discussion of Form 204 Commission also invites comments on with such parties. and proposed amendments to part 19). Exchanges 362 Consistent with existing § 1.31, the could also request a description of any positions in the following: Commission expects that these records would be other commodity derivative contracts in the same (38) As described above, the readily available during the first two years of the commodity underlying the commodity derivative Commission does not propose to required five year recordkeeping period for paper contract for which the application is submitted. prescribe timelines for exchanges to records, and readily accessible for the entire five- Other commodity derivatives contracts could year recordkeeping period for electronic records. In include other futures, options, and swaps review applications. Please comment on addition, the Commission expects that records (including OTC swaps) positions held by the what, if any, timing requirements the required to be maintained by an exchange pursuant applicant. Commission should prescribe for Continued

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to requests for information pursuant to exchange issues the required the proposed bona fide hedging position other applicable Commission notification, provided the Commission definition, while still providing a regulations, including, for example, does not notify the exchange or mechanism whereby market existing § 38.5.363 applicant otherwise. That is, the bona participants may exceed federal position fide hedge recognition would be limits pursuant to Commission Request for Comment deemed approved by the Commission determinations. The Commission requests comment two business days after the exchange Request for Comment on all aspects of proposed § 150.9. The issues the required notification, unless Commission also invites comments on the Commission notifies the exchange The Commission requests comment the following: and the applicant otherwise during this on all aspects of proposed § 150.9. The (40) Do the proposed recordkeeping two business day timeframe. Commission also invites comments on requirements set forth in § 150.9 Once those ten (or two) business days the following: comport with existing practice? Are have passed, the person could rely on (41) The Commission has proposed, there any ways in which the the bona fide hedge recognition both for in § 150.9(e)(3), a ten business day Commission could streamline the purposes of exchange-set and federal period for the Commission to review an proposed recordkeeping requirements limits, with the certainty that the exchange’s determination to recognize a while still maintaining access to Commission (and not Commission staff) bona fide hedge for purposes of the sufficient information to carry out its would only revoke that determination in Commission approving such statutory responsibilities? the limited circumstances set forth in determination for federal position limits. Please comment on whether the e. Proposed § 150.9(e)—Process for a proposed § 150.9(f)(1) and (2) described review period is adequate, and if not, Person To Exceed Federal Position further below. please comment on what would be an Limits However, under proposed § 150.9(e)(5), if, during the ten (or two) appropriate amount of time to allow the Under proposed § 150.9(e), once an business day timeframe, the Commission to review exchange exchange recognizes a bona fide hedge Commission notifies the exchange and determinations while also providing a with respect to its own speculative applicant that the Commission (and not timely determination for the applicant. position limits established pursuant to staff) has determined to stay the (42) The Commission has proposed a § 150.5(a), a person could rely on such application, the person would not be two business day review period for determination for purposes of exceeding able to rely on the exchange’s approval retroactive applications submitted to federal position limits provided that of the application for purposes of exchanges after a person has already specified conditions are met, including exceeding federal position limits, unless exceeded federal position limits. Please that the exchange provide the the Commission approves the comment on whether this time period Commission with notice of any application after further review. properly balances the need for the approved application as well as a copy Separately, under proposed Commission to oversee the of the application and any supporting § 150.9(e)(5), the Commission (or administration of federal position limits materials, and the Commission does not Commission staff) may request with the need of hedging parties to have object to the exchange’s determination. additional information from the certainty regarding their positions that The exchange is only required to exchange or applicant in order to are already in excess of the federal provide this notice to the Commission evaluate the application, and the position limits. with respect to its initial (and not exchange and applicant would have an (43) With respect to the Commission’s renewal) determinations for a particular opportunity to provide the Commission review authority in § 150.9(e)(5), if the application. Under proposed § 150.9(e), with any supplemental information Commission stays an application during the exchange must provide such notice requested to continue the application the ten (or two) business-day review to the Commission concurrent with the process. Any such request for additional period, the Commission’s review, as notice provided to the applicant, and, information by the Commission (or would be the case for an exchange, except as provided below, a trader can staff), however, would not stay or toll would not be bound by any time exceed federal position limits ten the ten (or two) business day limitation. Please comment on what, if business days after the exchange issues application review period. any, timing requirements the the required notification, provided the Further, under proposed § 150.9(e)(6), Commission should prescribe for its Commission does not notify the the applicant would not be subject to review of applications pursuant to exchange or applicant otherwise. any finding of a position limits violation proposed § 150.9(e)(5). However, for a person with sudden or during the Commission’s review of the (44) Please comment on whether the unforeseen bona fide hedging needs that application. Or, if the Commission Commission should permit a person to has filed an application, pursuant to determines (in the case of retroactive exceed federal position limits during the proposed § 150.9(c)(2)(ii), after they applications) that the bona fide hedge is ten business day period for the already exceeded federal speculative not approved for purposes of federal Commission’s review of an exchange- position limits, the exchange’s limits after a person has already granted exemption. retroactive approval of such application exceeded federal position limits, the (45) Under proposed § 150.9(e), an would be deemed approved by the Commission would not find that the exchange is only required to notify the Commission two business days after the person has committed a position limits Commission of its initial approval of an violation so long as the person brings exemption application (and not any to this section would be readily accessible during the position into compliance within a renewal approvals). Should the the pendency of any application, and for two years following any disposition that did not recognize a commercially reasonable time. Commission require that exchanges derivative position as a bona fide hedge. The Commission believes that the ten submit approved renewals of 363 See 17 CFR 38.5 (requiring, in general, that (or two) business day period to review applications to the Commission for upon request by the Commission, a DCM must file exchange determinations under review and approval if there are responsive information with the Commission, such as information related to its business, or a written proposed § 150.9 would allow the material changes to the facts and demonstration of the DCM’s compliance with one Commission enough time to identify circumstances underlying the renewal or more core principles). applications that may not comply with application?

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f. Proposed § 150.9(f)—Commission with the certainty that the exchange Form 204 365 and Form 304,366 known Revocation of an Approved Application decision would only be reversed in very collectively as the ‘‘series ‘04’’ reports. Proposed § 150.9(f) sets forth the limited circumstances. Any action Under existing § 19.01, market limited circumstances under which the compelling a market participant to participants that hold bona fide hedging Commission would revoke a bona fide reduce its position pursuant to positions in excess of limits for the nine hedge recognition granted pursuant to § 150.9(f)(2) would be a Commission commodities currently subject to federal proposed § 150.9. The Commission action, and would not be delegated to limits must justify such overages by expects such revocation to be rare, and Commission staff. 364 filing the applicable report each month: this authority would not be delegated to Form 304 for cotton, and Form 204 for g. Proposed § 150.9(g)—Delegation of the other commodities.367 These reports Commission staff. First, under proposed Authority to the Director of the Division § 150.9(f)(1), if an exchange revokes its are generally filed after exceeding the of Market Oversight limit, show a snapshot of such traders’ recognition of a bona fide hedge, then cash positions on one given day each such bona fide hedge would also be The Commission proposes to delegate month, and are used by the Commission deemed revoked for purposes of federal certain of its authorities under proposed to determine whether a trader has limits. § 150.9 to the Director of the Second, under proposed § 150.9(f)(2), sufficient cash positions that justify Commission’s Division of Market futures and options on futures positions if the Commission determines that an Oversight, or such other employee(s) above the speculative limits. application that has been approved or that the Director may designate from deemed approved by the Commission is time to time. Proposed § 150.9(g)(1) 2. Proposed Elimination of Form 204 no longer consistent with the applicable would delegate the Commission’s and Cash-Reporting Elements of Form sections of the Act and the authority, in § 150.9(e)(5), to request 304 Commission’s regulations, the additional information from the For the reasons set forth below, the Commission shall notify the person and exchange and applicant. Commission proposes to eliminate Form exchange, and, after an opportunity to The Commission does not propose, 204 and Parts I and II of existing Form respond, the Commission can require however, to delegate its authority, in 304, which requests information on the person to reduce the derivatives proposed § 150.9(e)(5) and (6) to stay or cash-market positions for cotton akin to position within a commercially reject such application, nor proposed the information requested in Form reasonable time, or otherwise come into 368 § 150.9(f)(2), to revoke a bona fide hedge 204. compliance. In determining a First, the Commission would no commercially reasonable amount of recognition granted pursuant to § 150.9 or to require an applicant to reduce its longer need the cash-market information time, the Commission must consult with currently reported on Forms 204 and the applicable exchange and applicant, positions or otherwise come into compliance. The Commission believes 304 because the exchanges would and may consider factors including, collect, and make available to the that if an exchange’s disposition of an among others, current market conditions Commission, cash-market information application raises concerns regarding and the protection of price discovery in needed to assess whether any such consistency with the Act, presents novel the market. position is a bona fide hedge.369 or complex issues, or requires The Commission expects that it Further, the Commission would would only exercise its revocation remediation, then the Commission, and continue to have access to information, authority under circumstances where not Commission staff, should make the including cash-market information, by the disposition of an application has final determination, after taking into issuing special calls relating to positions resulted, or is likely to result, in price consideration any supplemental exceeding limits. anomalies, threatened manipulation, information provided by the exchange Second, Form 204 as currently actual manipulation, market or the applicant. constituted would be inadequate for the disruptions, or disorderly markets. In As with all authorities delegated by addition, the Commission’s authority to the Commission to staff, the 365 CFTC Form 204: Statement of Cash Positions require a market participant to reduce Commission would maintain the in Grains, Soybeans, Soybean Oil, and Soybean Meal, U.S. Commodity Futures Trading certain positions in proposed authority to consider any matter which Commission website, available at https:// § 150.9(f)(2) would not be subject to the has been delegated, including the www.cftc.gov/sites/default/files/idc/groups/public/ requirements of CEA section 8a(9), that proposed delegations in §§ 150.3 and @forms/documents/file/cftcform204.pdf (existing is, the Commission would not be Form 204). 150.9 described above. The Commission 366 CFTC Form 304: Statement of Cash Positions compelled to find that a CEA section will closely monitor staff administration in Cotton, U.S. Commodity Futures Trading 8a(9) emergency condition exists prior of the proposed processes for granting Commission website, available at http:// to requiring that a market participant bona fide hedge recognitions. www.cftc.gov/ucm/groups/public/@forms/ reduce certain positions pursuant to documents/file/cftcform304.pdf (existing Form H. Part 19 and Related Provisions— 204). Parts I and II of Form 304 address fixed-price proposed § 150.9(f)(2). cash positions used to justify cotton positions in If the Commission determines that a Reporting of Cash-Market Positions excess of federal limits. As described below, Part III person must reduce its position or of Form 304 addresses unfixed-price cotton ‘‘on- 1. Background call’’ information, which is not used to justify otherwise bring it into compliance, the cotton positions in excess of limits, but rather to Commission would not find that the Key reports currently used for allow the Commission to prepare its weekly cotton person has committed a position limit purposes of monitoring compliance on-call report. violation so long as the person comes with federal position limits include 367 17 CFR 19.01. into compliance within the 368 Proposed amendments to Part III of the Form 304, which addresses cotton on-call, are discussed commercially reasonable time identified 364 None of the provisions in proposed § 150.9 below. by the Commission in consultation with would compromise the Commission’s emergency 369 The cash-market reporting regime discussed in the applicable exchange and applicant. authorities under CEA section 8a(9), including the this section of the release only pertains to bona fide The Commission intends for persons to Commission’s authority to fix ‘‘limits that may hedges, not to spread exemptions, because the apply to a market position acquired in good faith Commission has not traditionally relied on cash- be able to rely on recognitions and prior to the effective date of the Commission’s market information when reviewing requests for exemptions granted pursuant to § 150.9 action.’’ CEA section 8a(9). 7 U.S.C. 12a(9). spread exemptions.

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reporting of cash-market positions bona fide hedge recognitions from updated application forms and periodic relating to certain energy contracts exchange-set limits for contracts subject reports that exchanges may require which would be subject to federal limits to federal limits,373 and for recognizing applicants to file regarding their for the first time under this proposal. bona fide hedging positions for positions. To the extent that the For example, when compared to purposes of federal limits.374 Among Commission observes market activity or agricultural contracts, energy contracts other things, such applications would positions that warrant further generally expire more frequently, have a be required to include: (1) Information investigation, § 150.9 would also shorter delivery cycle, and have regarding the applicant’s activity in the provide the Commission with access to significantly more product grades. The cash markets for the underlying any supporting or related records the information required by Form 204, as commodity; and (2) any other exchanges would be required to well as the timing and procedures for its information to enable the exchange to maintain.378 filing, reflects the way agricultural determine, and the Commission to Furthermore, the proposed changes contracts trade, but is inadequate for verify, whether the exchange may would not impact the Commission’s purposes of reporting cash-market recognize such position as a bona fide existing provisions for gathering information involving energy contracts. hedge.375 Second, consistent with information through special calls While the Commission considered existing industry practice for certain relating to positions exceeding limits proposing to modify Form 204 to cover exchanges, exchanges would be and/or to reportable positions. energy and metal contracts, the required to file monthly reports to the Accordingly, as discussed further Commission has opted instead to Commission showing, among other below, the Commission proposes that all propose a more streamlined approach to things, for all bona fide hedges (whether persons exceeding the proposed limits cash-market reporting that reduces enumerated or non-enumerated), a set forth in § 150.2, as well as all duplication between the Commission concise summary of the applicant’s persons holding or controlling and the exchanges. In particular, to activity in the cash markets.376 reportable positions pursuant to obtain information with respect to cash Collectively, these proposed §§ 150.5 § 15.00(p)(1), must file any pertinent market positions, the Commission and 150.9 rules would provide the information as instructed in a special proposes to leverage the cash-market Commission with monthly information call.379 information reported to the exchanges, about all recognitions and exemptions Finally, the Commission understands with some modifications. When granted for purposes of contracts subject that the exchanges maintain regular granting exemptions from their own to federal limits, including cash-market dialogue with their participants limits, exchanges do not use a monthly information supporting the applications, regarding cash-market positions, and cash-market reporting framework akin and annual information regarding all that it is common for exchange to Form 204. Instead, exchanges month-by-month cash-market positions surveillance staff to make informal generally require market participants used to support a bona fide hedging inquiries of market participants, who wish to exceed exchange-set limits, recognition. These reports would help including if the exchange has questions including for bona fide hedging the Commission verify that any person about market events or a participant’s positions, to submit an annual who claims a bona fide hedging position use of an exemption. The Commission exemption application form in advance can demonstrate satisfaction of the encourages exchanges to continue this of exceeding the limit.370 Such relevant requirements. This information practice. Similarly, the Commission applications are typically updated would also help the Commission anticipates that its own staff would annually and generally include a perform market surveillance in order to engage in dialogue with market month-by-month breakdown of cash- detect and deter manipulation and participants, either through the use of market positions for the previous year abusive trading practices in physical informal conversations or, in limited supporting any position-limits overages commodity markets. circumstances, via special call during that period.371 While the Commission would no authority. To ensure that the Commission longer receive the monthly snapshot For market participants who are continues to have access to the same data currently included on Form 204, accustomed to filing Form 204s with information on cash-market positions the Commission would have broad information supporting classification as that is already provided to exchanges, access, at any time, to the cash-market a federally enumerated hedging the Commission proposes several information described above, as well as position, the proposed elimination of reporting and recordkeeping any other data or information exchanges Form 204 would result in a slight requirements in §§ 150.3, 150.5, and collect as part of their application change in practice. Under the proposed 377 150.9, as discussed above.372 First, processes. This would include any rules, such participants’ bona fide hedge exchanges would be required to collect recognitions could still be self- 373 applications, updated at least on an See proposed § 150.5(a)(2)(ii)(A)(1). effectuating for purposes of federal 374 As discussed above in connection with annual basis, for purposes of granting proposed § 150.9, market participants who wish to limits, provided the market participant request a bona fide hedge recognition under § 150.9 also separately applies for a bona fide 370 See, e.g., ICE Rule 6.29 and CME Rule 559. would not be required to file such applications with hedge exemption from exchange-set 371 For certain physically-delivered agricultural both the exchange and the Commission. They limits established pursuant to proposed would only file the applications with the exchange, contracts, some exchanges may require that spot § 150.5(a), and provided further that the month exemption applications be renewed several which would then be subject to recordkeeping times a year for each spot month, rather than requirements in proposed § 150.9(d), as well as participant submits the requisite cash- annually. proposed §§ 150.5 and 150.9 requirements to market information to the exchange as 372 As discussed earlier in this release, proposed provide certain information to the Commission on required by proposed a monthly basis and upon demand. § 150.9 also includes reporting and recordkeeping § 150.5(a)(2)(ii)(A)(1). requirements pertaining to spread exemptions. 375 See proposed § 150.9(c)(1)(iv)–(v). Those requirements will not be discussed again in 376 See proposed § 150.5(a)(4). this section of the release, which addresses cash- 377 See, e.g., proposed § 150.9(d) (requiring that persons exceeding speculative limits who have market reporting in connection with bona fide all such records, including cash-market information received a special call to file any pertinent hedges. This section of the release focuses on the submitted to the exchange, be kept in accordance information as specified in the call). cash-market reporting requirements in § 150.9 that with the requirements of § 1.31) and proposed 378 See proposed § 150.9(d). pertain to bona fide hedges. § 19.00(b) (requiring, among other things, all 379 See proposed § 19.00(b).

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3. Proposed Changes to Parts 15 and 19 § 15.01.382 The Commission proposes Request for Comment To Implement the Proposed Elimination this change to clarify an existing The Commission requests comment of Form 204 and Portions of Form 304 requirement found in § 19.00(a)(3), on all aspects of the proposed The market and large-trader reporting which requires persons holding or amendments to Part 19 and related rules are contained in parts 15 through controlling positions that are reportable provisions. The Commission also invites 21 of the Commission’s regulations. pursuant to § 15.00(p)(1) who have comments on the following: 383 Collectively, these reporting rules received a special call to respond. (46) To what extent, and for what effectuate the Commission’s market and The proposed changes to part 19 operate purpose, do market participants and financial surveillance programs by in tandem with the proposed additional others rely on the information contained enabling the Commission to gather language for § 15.01(d) to reiterate the in the Commission’s weekly cotton on- information concerning the size and Commission’s existing special call call report? composition of the commodity authority without creating any new (47) Does publication of the cotton on- derivative markets and to monitor and substantive reporting obligations. call report create any informational enforce any established speculative Finally, proposed § 19.03 would advantages or disadvantages, and/or position limits, among other regulatory delegate authority to issue such special otherwise impact competition in any goals. calls to the Director of the Division of way? To effectuate the proposed Enforcement, and proposed § 19.03(b) (48) Should the Commission stop elimination of Form 204 and the cash- would delegate to the Director of the publishing the cotton on-call report, but market reporting components of Form Division of Enforcement the authority in continue to collect, for internal use 304, the Commission proposes proposed § 19.00(b) to provide only, the information required in Part III corresponding amendments to certain instructions or to determine the format, of Form 304 (Unfixed-Price Cotton ‘‘On provisions in parts 15 and 19. These coding structure, and electronic data Call’’)? amendments would eliminate: (i) transmission procedures for submitting (49) Alternatively, should the Existing § 19.00(a)(1), which requires data records and any other information Commission stop publishing the cotton persons holding reportable positions required under part 19. on-call report and also eliminate the which constitute bona fide hedging 5. Form 304 Cotton On-Call Reporting Form 304 altogether, including Part III? positions to file a Form 204; and (ii) 6. Proposed Technical Changes to Part existing § 19.01, which, among other With the proposed elimination of the 17 things, sets forth the cash-market cash-market reporting elements of Form information required on Forms 204 and 304 as described above, Form 304 Part 17 of the Commission’s 304.380 Based on the proposed would be used exclusively to collect the regulations addresses reports by elimination of existing § 19.00(a)(1) and information needed to publish the reporting markets, FCMs, clearing Form 204, the Commission also Commission’s weekly cotton on call members, and foreign brokers.386 The proposes to remove related provisions report, which shows the quantity of Commission proposes to amend existing from: (i) The ‘‘reportable position’’ unfixed-price cash cotton purchases and § 17.00(b), which addresses information sales that are outstanding against each to be furnished by FCMs, clearing definition in § 15.00(p); (ii) the list of 384 ‘‘persons required to report’’ in § 15.01; cotton futures month. The members, and foreign brokers, to delete and (iii) the list of reporting forms in requirements pertaining to that report certain provisions related to aggregation, § 15.02. would remain in proposed §§ 19.00(a) because those provisions have become and 19.02, with minor modifications to duplicative of aggregation provisions 4. Special Calls existing provisions. The Commission that were adopted in § 150.4 in the 2016 Notwithstanding the proposed proposes to update cross references Final Aggregation Rulemaking.387 The elimination of Form 204, the (including to renumber § 19.00(a)(2) as Commission also proposes to add a new Commission does not propose to make § 19.00(a)) and to clarify and update the provision, § 17.03(i), which delegates any significant substantive changes to procedures and timing for the certain authority under § 17.00(b) to the information requirements relating to submission of Form 304. In particular, Director of the Office of Data and positions exceeding limits and/or to proposed § 19.02(b) would require that Technology.388 reportable positions. Accordingly, in each Form 304 report be made weekly, proposed § 19.00(b), the Commission dated as of the close of business on identify themselves on Form 304 using their Public proposes that all persons exceeding the Friday, and filed not later than 9 a.m. Trader Identification Number, in lieu of the CFTC proposed limits set forth in § 150.2, as Eastern Time on the third business day Code Number required on previous versions of following that Friday using the format, Form 304. This proposed change would help well as all persons holding or Commission staff to connect the various reports controlling reportable positions coding structure, and electronic data filed by the same market participants. This release pursuant to § 15.00(p)(1), must file any transmission procedures approved in includes a representation of the proposed Form 304, pertinent information as instructed in a writing by the Commission. The which would be submitted in an electronic format Commission also proposes some published pursuant to the proposed rules, either via special call. This proposed provision is the Commission’s web portal or via XML-based, similar to existing § 19.00(a)(3), but modifications to the Form 304 itself, secure FTP transmission. would require any such person to file including conforming and technical 386 17 CFR part 17. the information as instructed in the changes to the organization, 387 See Final Aggregation Rulemaking. special call, rather than to file a series instructions, and required identifying Specifically, the Commission proposes to delete 381 information.385 paragraphs (1), (2), and (3) from § 17.00(b). 17 CFR ’04 report. 17.00(b). The Commission also proposes to add 388 Under § 150.4(e)(2), which was adopted in the 382 language to existing § 15.01(d) to clarify 17 CFR 15.01. 2016 Final Aggregation Rulemaking, the Director of that persons who have received a 383 17 CFR 19.00(a)(3). the Division of Market Oversight is delegated special call are deemed ‘‘persons 384 Cotton On-Call, U.S. Commodity Futures authority to, among other things, provide required to report’’ as defined in Trading Commission website, available at https:// instructions relating to the format, coding structure, www.cftc.gov/MarketReports/CottonOnCall/ and electronic data transmission procedures for index.htm (weekly report). submitting certain data records. 17 CFR 150.4(e)(2). 380 17 CFR 19.01. 385 Among other things, the proposed changes to A subsequent rulemaking changed this delegation 381 17 CFR 19.00(a)(3). the instructions would clarify that traders must Continued

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I. Removal of Part 151 paragraph (1)’’ do not include the contracts’’ as the Commission ‘‘finds are Finally, the Commission is proposing requirement in that paragraph that the necessary to diminish, eliminate, or to remove and reserve part 151 in Commission find position limits prevent such burden.’’ Thus, the 394 response to its vacatur by the U.S. ‘‘necessary.’’ Rather, the Commission Commission’s original authority to District Court for the District of determined, ‘‘the standards set forth in establish a position limit required it first Columbia,389 as well as in light of the paragraph (1)’’ refer only to what the to find that it was necessary to do so. proposed revisions to part 150 that Commission called the ‘‘aggregation Section 4a(a)(1) also includes what the standard’’ and the ‘‘flexibility Commission has referred to as the conform part 150 to the amendments 395 made to the CEA section 4a by the standard.’’ The ‘‘aggregation aggregation and flexibility standards. Section 4a(a)(2)(A) provides, in Dodd-Frank Act. standard’’ referred to directions under section 4a(a)(1)(A) that in determining relevant part, that ‘‘[i]n accordance with III. Legal Matters whether any person has exceeded an the standards set forth in paragraph (1) of this subsection,’’ i.e., paragraph A. Introduction applicable position limit, the Commission must aggregate the 4a(a)(1) discussed above, the Section 737 (a)(4) of the Dodd-Frank positions a party controls directly or Commission shall, by rule, regulation, Act,390 codified as section 4a(a)(2)(A) of indirectly, or held by two persons acting or order establish limits on the amount the Commodity Exchange Act,391 states in concert ‘‘the same as if the positions of positions, as appropriate, other than in relevant part that ‘‘the Commission were held by, or the trading were done bona fide hedge positions, that may be shall’’ establish position limits for by, a single person.’’ 396 The ‘‘flexibility held by any person with respect to contracts in physical commodities other standard’’ referred to the statement in contracts of sale for future delivery or than excluded commodities ‘‘[i]n section 4a(a)(1)(A) that ‘‘[n]othing in with respect to options on the contracts accordance with the standards set forth this section shall be construed to or commodities traded on or subject to in’’ section 4a(a)(1), which primarily prohibit’’ the Commission from fixing the rules of a DCM. This direction contains the Commission’s preexisting different limits for different applies only to physical commodities authority to establish such position commodities, markets, futures, delivery other than excluded commodities. limits as it ‘‘finds are necessary.’’ 392 In months, numbers of days remaining on Paragraph 4a(a)(2)(B) states that the connection with the 2011 Final the contract, or for buying and selling limits for exempt physical commodities Rulemaking, the Commission operations.397 ‘‘required’’ under subparagraph (A) determined that section 4a(a)(2)(A) is an The Commission here preliminarily ‘‘shall’’ be established within 180 days, unambiguous mandate to establish reaches a different conclusion. In light and for agricultural commodities the position limits for all physical of its experience with and expertise in limits ‘‘required’’ under subparagraph commodities. In ISDA,393 however, the position limits and the competing (A) ‘‘shall’’ be established within 270 U.S. District Court for the District of interests at stake, the Commission now days. Paragraph 4a(a)(2)(C) establishes Columbia held that the term ‘‘standards determines that it should interpret ‘‘the as a ‘‘goal’’ that the Commission ‘‘shall set forth in paragraph (1)’’ is ambiguous standards set forth in paragraph (1)’’ to strive to ensure that trading on foreign as to whether it includes the include the traditional necessity and boards of trade in the same commodity requirement under section 4a(a)(1) that aggregation standards. The Commission will be subject to comparable limits’’ before the Commission establishes a also preliminarily determines that the and that any limits imposed by the position limit, it must first find it ‘‘flexibility standard’’ is not an accurate Commission not cause price discovery ‘‘necessary’’ to do so. The court way of describing the statute’s lack of a to shift to foreign boards of trade. therefore vacated the 2011 Final prohibition on differential limits, and Next, paragraph 4a(a)(3) establishes Rulemaking and directed the therefore is not included in ‘‘the certain requirements for position limits Commission to determine, in light of the standards set forth in paragraph (1)’’ set pursuant to paragraph 4a(a)(2). It Commission’s ‘‘experience and with which position limits must accord. directs that when the Commission expertise’’ ’’ and the ‘‘competing However, even if that were not so, the establishes ‘‘the limits required in interests at stake,’’ whether section Commission would still preliminarily paragraph (2),’’ it shall, ‘‘as 4a(a)(2)(A) requires the Commission to determine that ‘‘the standards set forth appropriate,’’ set limits on the number make a necessity finding before in paragraph (1)’’ should be interpreted of positions that may be held in the spot establishing the relevant limits, or if to include necessity. month, each other month, and the aggregate number of positions that may section 4a(a)(2)(A) is a mandate from B. Key Statutory Provisions Congress to do so without that be held by any person for all months; antecedent finding. The Commission’s authority to and ‘‘to the extent practicable, in its Following the court’s order, the establish position limits dates back to discretion’’ the Commission shall Commission subsequently determined the Commodity Exchange Act of fashion the limits to (i) ‘‘diminish, 398 that the ‘‘standards set forth in 1936. The relevant CEA language, eliminate, or prevent excessive now codified in its present form as speculation as described under this of authority from the Director of the Division of section 4a(a)(1), states, among other section;’’ (ii) ‘‘deter and prevent market Market Oversight to the Director of the Office of things that the Commission ‘‘shall, from manipulation, squeezes, and corners;’’ Data and Technology, with the concurrence of the time to time . . . proclaim and fix such (iii) ‘‘ensure sufficient market liquidity Director of the Division of Enforcement. See 82 FR limits on the amounts of trading which for bona fide hedgers;’’ and (iv) ‘‘ensure at 28763 (June 26, 2017). The proposed addition of § 17.03(i) would conform § 17.03 to that change in may be done or positions which may be that the price discovery function of the delegation. held by any person under such underlying market is not disrupted.’’ 389 See supra note 11 and accompanying Paragraph 4a(a)(5) adds a further discussion. 394 See, e.g., 2013 Proposal, 78 FR at 75680, requirement that when the Commission 390 Dodd-Frank Wall Street Reform and Consumer 75684. establishes limits under paragraph Protection Act of 2010, § 737(a)(4), Public Law 111– 395 See, e.g., id. 4a(a)(2), the Commission must establish 203, 124 Stat. 1376, 1723 (July 21, 2010). 396 7 U.S.C. 6a(a)(1). 391 7 U.S.C. 6a(a)(2)(A). 397 Id. limits on the amount of positions, ‘‘as 392 7 U.S.C. 6a(a)(1). 398 Public Law 74–675 § 5, 49 Stat. 1491, 1492 appropriate,’’ on swaps that are 393 887 F. Supp.2d 259. (June 15, 1936). ‘‘economically equivalent’’ to futures

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and options contracts subject to dictionary definitions of ‘‘standard,’’ 406 called ‘‘flexibility’’ language constrains paragraph 4a(a)(2). and the Commission now believes it the Commission at all. In other words, was an overly narrow interpretation. the express lack of any prohibition of C. Ambiguity of Section 4a With Respect The word ‘‘standard’’ is used in differential limits under section 4a(a)(1) to Necessity Finding different ways in different contexts, and is better understood as the absence of The district court held that section many reasonable definitions would any standard.411 And if flexibility is not 4a(a)(2) is ambiguous as to whether, encompass ‘‘necessity.’’ 407 In legal a standard, then necessity must be, before the Commission establishes a contexts, ‘‘necessity’’ is routinely called because section 4a(a)(2)(A) refers to position limit, it must first find that a a ‘‘standard.’’ 408 The Commission ‘‘standards,’’ plural. limit is ‘‘necessary.’’ The court found preliminarily believes that the more Third, the requirement that position the phrase ‘‘[i]n accordance with the natural reading of ‘‘standard’’ in section limits be ‘‘appropriate’’ is an additional standards set forth in paragraph (1) of 4a(a)(2)(A) does include the requirement ground to interpret the statute as lacking this subsection’’ unclear as to whether of a necessity finding. an across-the board-mandate. In the it includes the proviso in paragraph (1) Second, and relatedly, the past, the Commission has taken the that position limits be established only Commission believes the term view that the word ‘‘appropriate’’ as ‘‘as the Commission finds are ‘‘standard’’ is a less natural fit for the used in section 4a(a)(2)(A)—and in necessary.’’ 399 The court noted that, by language in subparagraph 4a(a)(1) that sections 4a(a)(3) and 4a(a)(5) in some definitions of ‘‘standard,’’ a the Commission has previously called connection with position limits requirement that position limits be the ‘‘flexibility standard.’’ The sentence established pursuant to section ‘‘necessary’’ could qualify.400 provides that ‘‘[n]othing in this section 4a(a)(2)(A)—refers to position limit The district court found the ambiguity shall be construed to prohibit the levels but not to the determination of compounded by the phrase ‘‘as Commission from fixing different whether to establish a limit.412 appropriate’’ in sections 4a(a)(2)(A), trading or position limits for different’’ However, the Supreme Court has opined 4a(a)(3), and 4a(a)(5).401 It was unclear contracts or situations.409 Typically a in the context of the Clean Air Act that to the court whether this phrase gives legal standard constrains an agency’s ‘‘[n]o regulation is ‘appropriate’ if it the Commission discretion not to discretion.410 But nothing in the so- does significantly more harm than impose position limits at all if it finds good.’’ 413 That was not a CEA case, but them not appropriate, or if the 406 ISDA, Defendant Commodity Futures Trading the Commission finds the Court’s Commission’s Cross-Motion for Summary Judgment reasoning persuasive in this context. discretion extends only to determining at 24–25, (quoting definition of ‘‘standard’’ as ‘‘appropriate’’ levels at which to set the ‘‘something set up and established by authority as It is reasonable to interpret the limits.402 Neither the grammar of the a rule for the measure of quantity, weight, extent, direction to set a position limit ‘‘as relevant provisions nor the available value, or quality’’ from Merriam-Webster’s appropriate’’ to mean that in a given Collegiate Dictionary 1216 (11th ed. 2011)). context, it may be that no position limit legislative history resolved these issues 407 Black’s Law Dictionary 1624 (10th ed. 2014) is justified. Under an across-the-board to the court’s satisfaction.403 In sum, (‘‘A criterion for measuring acceptability, quality, or ‘‘the Dodd-Frank amendments do not accuracy.’’); The American Heritage Dictionary of mandate, however, the Commission the English Language (5th ed. 2011) (‘‘A degree or would be compelled to impose some constitute a clear and unambiguous level of requirement, excellence, or attainment.’’); 404 limit even if any level of position limit mandate to set position limits.’’ The New Oxford American Dictionary 1699 (3rd ed. court therefore directed the Commission 2010) (‘‘an idea or thing used as a measure, norm, would do significantly more harm than to resolve the ambiguity, not by or model in comparative evaluations’’); The good, including with respect to the Random House Unabridged Dictionary 1857 (2d ed. public interests Congress set forth in ‘‘rest[ing] simply on its parsing of the 1993) (‘‘rule or principle that is used as a basis for statutory language,’’ but by ‘‘bring[ing] section 4a(a)(1) itself and elsewhere in judgment’’); XVI The Oxford English Dictionary 505 414 its experience and expertise to bear in (2d ed. 1989) (‘‘A rule, principle, or means of section 4a and the CEA generally. light of the competing interests at judgment or estimation; a criterion, measure.’’). The Commission does not believe that is 408 stake.’’ 405 Home Buyers Warranty Corp. v. Hanna, 750 the best reading of section 4a(a)(2)(A). F.3d 427, 435 (4th Cir. 2014) (applying a Rather, Congress’s use of ‘‘appropriate’’ D. Resolution of Ambiguity ‘‘ ‘necessity’ standard’’ under Fed. R. Civ. P. 19(a)(1)(A)); United States v. Cartagena, 593 F.3d in that section and elsewhere in the The Commission has applied its 104, 111 n.4 (1st Cir. 2010) (discussing a ‘‘necessity Dodd-Frank amendments is more experience and expertise in light of the standard’’ under the Omnibus Crime Control and consistent with a directive that the Safe Streets Act of 1968); Fones4All Corp. v. F.C.C., competing interests at stake and 550 F.3d 811, 820 (9th Cir. 2008) (applying a 411 preliminarily determined that paragraph ‘‘necessity standard’’ under the Tamenut v. Mukasey, 521 F.3d 1000, 1004 (8th Cir. 2008) (explaining that a statute placing ‘‘no 4a(a)(2) should be interpreted as Telecommunications Act of 1996); Swonger v. Surface Transp. Bd., 265 F.3d 1135, 1141–42 (10th constraints on the [agency’s] discretion . . . incorporating the requirement of Cir. 2001) (applying a ‘‘necessity standard’’ under specifie[d] no standards’’); United States v. paragraph 4a(a)(1) that position limits transportation law); see also Minnesota v. Mille Gonzalez-Aparicio, 663 F.3d 419, 435 (9th Cir. be established only ‘‘as the Commission Lacs Band of Chippewa Indians, 526 U.S. 172, 205 2011) (Tashima, J., dissenting) (‘‘If we can pick whatever standard suits us, free from the direction finds are necessary.’’ This is based on a (1999) (‘‘conservation necessity standard’’); Int’l Union, United Auto., Aerospace & Agr. Implement of binding principles, then there is no standard at number of considerations. Workers of Am., UAW v. Johnson Controls, Inc., 499 all.’’); Downs v. Am. Emp. Ins. Co., 423 F.2d 1160, First, while the Commission has U.S. 187, 198 (1991) (‘‘business necessity 1163 (5th Cir. 1970) (‘‘best judgment is no standard previously taken the position that standard’’). at all’’). 412 necessity does not fall within the 409 7 U.S.C. 6a(a)(1)(A). E.g., ISDA, Commission Appellate Brief at 37– 410 See, e.g., OSU Student Alliance v. Ray, 699 38. definition of the word ‘‘standard,’’ that 413 F.3d 1053, 1064 (9th Cir. 2012) (holding that the Michigan v. EPA, 135 S.Ct. 2699, 2707 (2015). view relied on only one of the many First Amendment was violated by enforcement of Because Michigan was not a CEA case, the a rule that ‘‘created no standards to cabin Commission does not mean to imply that Michigan 399 ISDA, 887 F.Supp.2d at 274. discretion’’); Lenis v. U.S. Attorney General, 525 would be controlling or compels any particular result in determining when a position limit is 400 Id. F.3d 1291, 1294 (11th Cir. 2008) (dismissing appropriate. To the contrary, the court in ISDA held 401 petition for review where agency procedural Id. at 276–278. that the CEA is ambiguous in that regard. The 402 regulation ‘‘specifie[d] no standards for a court to Id. use to cabin’’ the agency’s discretion); Tamenut v. Commission merely finds the Supreme Court’s 403 Id. Mukasey, 521 F.3d 1000, 1004 (8th Cir. 2008); discussion in Michigan useful in reasonably 404 Id. at 280. Drake v. FAA, 291 F.3d 59, 71 (D.C. Cir. 2002) resolving that ambiguity. 405 Id. at 281. (similar). 414 7 U.S.C. 5, 6a(a)(2)(C) and (a)(3)(B).

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Commission consider all relevant speculation, the Commission does not speculation’’—not all speculation—as factors and, on that basis, set an believe it should interpret a statute by ‘‘an undue burden on interstate appropriate limit level—or no limit at extrapolating from one Senate commerce.’’ To needlessly reduce all, if to establish one would contravene subcommittee’s interest in three specific liquidity, impair price discovery, and the public interests Congress articulated commodities to a requirement to impose make hedging more difficult for in section 4a(a)(1) and the CEA limits on all of the many hundreds of commodity end-users without sufficient generally. That is also better policy. To physical futures contracts listed on beneficial effects on interstate be clear, this does not mean the exchanges, where Congress as a whole commerce is unsound policy, as Commission must conduct a formal has not said so unambiguously. Congress has defined the policy. If cost-benefit analysis in which each DCMs also regularly create new Congress had drafted the statute advantage and disadvantage is assigned contracts. If Congress intended federal unambiguously to reflect the judgment a monetary value. To the contrary, the position limits to apply to all physical that these costs of position limits are Commission retains broad discretion to commodity contracts, the Commission justified in all instances, the decide how to determine whether a would expect there to be a provision Commission of course would follow it. position limit is appropriate.415 directing it to establish position limits Without such clarity, the Commission Fourth, mandatory federal position on a continuous basis. There is no such does not believe it should interpret the limits for all physical commodities provision—and Congress directed the statute to impose those costs regardless would be a sea change in derivatives Commission to complete its position- of whether and to what extent doing so regulation, and the Commission does limits rulemaking within 270 days.420 advances Congress’ stated goals. not believe it should infer that Congress The only other relevant provision is the Sixth, while Congress has deemed would have acted so dramatically preexisting and broadly discretionary position limits an effective tool, it is without speaking clearly and requirement that the Commission make sound regulatory policy for the unequivocally.416 It is important to an assessment ‘‘from time to time.’’ That Commission to apply its experience and understand the reach of the proposition structure is inconsistent, both as a expertise to determine whether that the Commission must impose statutory and policy matter, with an economic conditions with respect to a position limits for every physical across-the-board mandate. given commodity at a given point in commodity. The Commission estimates, Fifth, the Commission believes as a time render it likely that position limits based on information from the matter of policy judgment that requiring will achieve positive outcomes. A Commission’s surveillance system, that a necessity finding better carries out the mandate without the requirement of a currently there are over 1,200 contracts purposes of section 4a. As Congress necessity finding would eliminate the on physical commodities listed on presumably was aware, position limits Commission’s expertise and experience DCMs. Some of these contracts have create costs as well as potential benefits. from the process and could lead to little or no active trading.417 Absent The Commission has recognized, and position limits that do not have clearer statutory language than is Congress also presumably understood, significantly positive effects, or even present in the statute, the Commission that there are costs even for well-crafted position limits that are does not believe it should interpret the position limits. As discussed below in counterproductive. Necessity findings statute as though Congress had concerns the Commission’s consideration of costs may also enhance public confidence about or even considered each and and benefits, market participants must that position limits in place are every one of the similar number of monitor their positions and have necessary to their statutory purposes, contracts listed at the time of Dodd- safeguards in place to ensure potentially improving public confidence Frank. In a similar vein, the compliance with limits. In addition to in the markets themselves. It is therefore Commission previously has cited Senate compliance costs, position limits may sound policy to construe the statute in Subcommittee’s staff studies of potential constrain some economically beneficial a way that requires the Commission to excessive speculation that preceded the uses of derivatives, because a limit make a necessity finding before enactment of section 4a(a)(2).418 But calculated to prevent excessive establishing position limits.421 those studies covered only a few speculation or to restrict opportunities Finally, also as a matter of policy, the commodities—oil, natural gas, and for manipulation may, in some Commission’s approach will prevent wheat.419 While these studies circumstances, affect speculation that is market participants from suffering the demonstrate that Senate subcommittee’s desirable. While the Commission has costs of statutory ambiguity. Mandating concern with potential excessive designed limits to avoid interference position limits across all products with normal trading, certain negative would automatically impose costs on 415 135 S.Ct. at 2707, 2711. effects cannot be ruled out. market participants regardless of 416 E.g., Whiteman v. American Trucking Assns., For example, to interpret section Inc., 531 U.S. 457, 468 (2000) (Congress . . . does whether doing so fulfills the purpose of 4a(a)(2) as a mandate even where section 4a. The associated compliance not alter the fundamental details of a regulatory unnecessary could pose risks to scheme in vague terms. . . .’’); EEOC v. Staten costs remain as long as those limits are Island Sav. Bank, 207 F.3d 144, (2d Cir. 2000) (‘‘we liquidity and hedging. Well-calibrated in place. Reading a mandate into section are reluctant to infer . . . a mandate for radical position limits can protect liquidity by 4a would exchange regulatory change absent a clearer legislative command’’); checking excessive speculation, but Canup v. Chipman-Union, Inc., 123 F.3d 1440, convenience, with or without any (11th Cir. 1997) (‘‘We would expect Congress to unnecessary limits can have the public benefit, for long-term burdens on speak more clearly if it intended such a radical opposite effect by drawing capital out of market participants. The Commission change. . . .’’). markets. Indeed, the liquidity of a 417 does not believe that ambiguity should See, e.g., Daily Agricultural Volume and Open futures contract, upon which hedging Interest, CME Group website, available at https:// www.cmegroup.com/market-data/volume-open- depends, is directly related to the 421 The Commission also does not believe that interest/agriculture-commodities-volume.html amount of speculation that takes place. establishing and enforcing position limits for all (tables of daily trading volume and open interest for Speculators contribute valuable contracts on physical commodities, regardless of CME futures contracts). liquidity to commodity markets, and their importance to the price or delivery process of 418 E.g., 2013 Proposal, 78 FR at 75787 nn.122– the underlying commodities or to the economy 124; ISDA, Brief for Appellant Commodity Futures section 4a(a)(1) identified ‘‘excessive more broadly, would be a productive use of the Trading Commission at 14–15. public resources Congress has appropriated to the 419 Id. 420 7 U.S.C. 6a(a)(2)(B). Commission.

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be resolved reflexively in a manner that Commission to consider position limits maximum extent practicable.’’ 424 The shifts costs to market participants. promptly within two specified time Commission described these as Rather, the Commission believes that limits after Congress passed the Dodd- ‘‘constraints’’ and found it ‘‘unlikely’’ where an agency has discretion to Frank Act. That is a new directive, and that Congress intended to place new choose from among reasonable it is consistent with maintaining the constraints on the Commission’s alternative interpretations, it should not requirement for, and preserving the preexisting authority to establish impose costs without a strong benefits of, a necessity finding. This position limits, given the background of justification, which in this context interpretation is also consistent with the the amendments and in particular the would be lacking without a necessity Commission’s belief that Congress studies that preceded their finding. would not have intended a drastic enactment.425 However, on further E. Evaluation of Considerations Relied mandate without a clear statement to consideration of this statutory language, Upon by the Commission in Previous that effect. This interpretation is the Commission does not interpret that Interpretation of Paragraph 4a(a)(2) likewise consistent with Congress’ language as a set of constraints in the addition of swaps to the Commission’s sense of directing the Commission to As noted above, the Commission jurisdiction—it makes sense to direct make less use of limits or to impose previously has identified a number of the Commission to give prompt higher limits than in the past. Rather, it considerations it believed supported consideration to whether position limits focuses the Commission’s decision interpreting paragraph 4a(a)(2) to are necessary at the same time Congress process by identifying relevant mandate position limits for all physical was expanding the Commission’s objectives and directing the Commission commodities other than excluded oversight responsibilities to new to achieve them to the maximum extent commodities, without the need for a markets, and the Commission believes practicable. Requiring the Commission necessity finding. Although the that is sound policy to ensure that the Administrative Procedure Act does not to prioritize, to the extent practicable, regime works well as a whole. Rather preventing excessive speculation and require the Commission to rebut those than leave it to the Commission’s previous points, the Commission manipulation, ensuring liquidity, and preexisting discretion to set limits ‘‘from avoiding disruption of price discovery is believes it is useful to discuss them. time to time,’’ it is reasonable to believe While certain of these considerations reasonable regardless of whether there is that Congress found it important for the an across-the-board mandate. could support such an interpretation, Commission to focus on this issue at a the Commission is no longer persuaded time certain. In past releases the Commission has that, on balance, they support also suggested that it is unclear why interpreting paragraph 4a(a)(2) as an In addition, paragraph 4a(a)(2) triggers Congress would have imposed the across-the-board mandate. other requirements added to section decisional ‘‘constraints’’ of paragraph Considerations on which the 4a(a) by Dodd-Frank and not included 4a(a)(3) ‘‘with respect to physical Commission previously relied include in paragraph 4a(a)(1). For example, as commodities but not excluded the following: described above, paragraph 4a(a)(3)(B) commodities or others’’ unless this 1. When Congress enacted paragraph identifies objectives the Commission is provision was enacted as part of a 4a(a)(2), the text of what previously was required to pursue in establishing mandate to impose limits without a paragraph 4a(a),422 already provided position limits, including three, set forth necessity finding.426 However, all of that the Commission ‘‘shall . . . in subparagraphs 4a(a)(3)(B)(ii)–(iv), these relevant amendments pertain only proclaim and fix’’ position limits ‘‘as the that are not explicitly mentioned in to physical commodities other than Commission finds are necessary’’ to paragraph 4a(a)(1). The Commission excluded commodities. The diminish, eliminate, or prevent the previously opined that paragraph Congressional studies that preceded the 4a(a)(5), which directs the Commission burdens on commerce associated with enactment of paragraph 4a(a)(2) to establish, position limits on swaps excessive speculation. This directive demonstrated concern specifically with ‘‘economically equivalent’’ to futures applied—and still applies—to all problems in markets for physical subject to new position limits, would exchange-traded commodities, commodities such as oil and natural add nothing to paragraph 4a(a)(1), including the physical commodities that gas.427 It therefore is not surprising that because if there were no mandate. The are the subject of paragraph 4a(a)(2). Congress enacted provisions specifically The Commission has previously Commission no longer finds that addressing limits for physical reasoned that if paragraph 4a(a)(2) were reasoning persuasive. Paragraph 4a(a)(5) commodities and not others, whether or not a mandate to establish position goes beyond paragraph 4a(a)(1), because not Congress intended a necessity limits without such a necessity finding, it separately requires that when the finding. Those physical commodities it would be a nullity.423 That is, the Commission imposes limits on futures were the focus of Congress’ concern. Commission already had the authority pursuant to paragraph 4a(a)(2), it also to issue position limits, so 4a(a)(2) does so on economically equivalent 3. The Commission has previously would add nothing were it not a swaps. Without that text, the stated that the time requirements for mandate. The Commission is no longer Commission would have no such establishing limits set forth in convinced that is correct. obligation to issue both types of limits subparagraph 4a(a)(2)(B) are Whereas the Commission’s at the same time. inconsistent with a necessity finding preexisting authority under the 2. The Commission has also because, based on past experience, predecessor to paragraph 4a(a)(1) previously been influenced by the necessity findings for individual directed the Commission to establish requirements of paragraph 4a(a)(3), commodity markets cannot be made position limits ‘‘from time to time,’’ new which directs the Commission, ‘‘as paragraph 4a(a)(2) directed the appropriate’’ when setting limits, to 424 7 U.S.C. 6a(a)(3). establish them for the spot month, each 425 E.g., 2016 Reproposal, 81 FR at 96716 422 7 U.S.C. 6a(a). other month, and all months; and sets (discussing comments on earlier releases). 423 426 Id. E.g., 2016 Reproposal, 81 FR at 96715, 96716 forth four policy objectives the (discussing comments on past releases); 2013 427 See, e.g., 2013 Proposal, 78 FR at 75682 and Proposal, 78 FR at 75684. Commission must pursue ‘‘to the nn.24–26 (describing Congressional studies).

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within the specified time periods.428 construed to prohibit a contract market Although the wording of the 1981 rule However, the fact that many decades from fixing different and separate and paragraph 4a(a)(2) have similarities, ago a number of months may have position limits for different types of there are also differences. These elapsed between proposals and final futures contracts based on the same differences weaken the inference that position limits does not mean that much commodity, different position limits for Congress intended the statute to hew time was necessary then or is necessary different futures, or for different closely to the rule. There is no now. There are a number of possible delivery months, or from exempting legislative history articulating any reasons, such as limits on agency positions which are normally known in relationship between the two. And even resources and why the agency took that the trade as ‘spreads, straddles or if Congress in Dodd-Frank did borrow amount of time. It is not a like-to-like arbitrage’ or from fixing limits which concepts from the 1981 rule, there is comparison, because the agencies acting apply to such positions which are little reason to infer that Congress was many decades ago were not acting different from limits fixed for other borrowing the precise meaning of any pursuant to a mandate. The speed with positions.’’ 435 Section 1.61(d)(1) of the individual word—much less that the which an agency could or would enact rule required every exchange to submit use of ‘‘standards’’ includes what discretionary position limits is not information to the Commission ‘‘nothing in this section shall be necessarily a good proxy for how long demonstrating that it had ‘‘complied construed to prohibit . . . .’’ would be required under a mandate.429 with the purpose and standards set forth 5. In past releases the Commission has There is accordingly no inconsistency, in paragraph (a).’’ 436 In the 2013 and also observed that, in 1983, as part of and thus the deadlines do not 2016 proposals, the Commission the Futures Trading Act of 1982, Public necessarily imply that Congress concluded that the cross-reference to the Law 96–444, 96 Stat. 2294 (1983), intended to eliminate a necessity ‘‘standards set forth in paragraph (a)’’ Congress added a provision to the CEA finding for limits under paragraph meant both the aggregation and making it a violation of the Act to 4a(a)(2). flexibility language, because both of violate exchange-set position limits, 4. The Commission previously has those sets of language appear in thus, in effect, ratifying the stated that Congress appears to have paragraph (a). By contrast, paragraph (a) Commission’s 1981 rule.441 The modeled the text of paragraph 4a(a)(2) did not include a requirement for a Commission reasoned that this history on the text of the Commission’s 1981 necessity finding, since the 1981 rule supports the possibility that Congress rule requiring exchanges to set required position limits on all actively could reasonably have followed an speculative position limits for all traded contracts.437 across-the-board approach here.442 But contracts.430 The Commission has On further review, the Commission while that may be so, the Commission further stated that the 1981 rule treated does not find this reasoning persuasive. today does not find that mere possibility aggregation and flexibility as The ‘‘flexibility’’ language gave the helpful in interpreting the ambiguous ‘‘standards,’’ and Congress therefore exchange unfettered discretion to set term ‘‘standards,’’ because there is no likely did the same in paragraph different limits for different kinds of evidence that Congress in 1982 431 4a(a)(2). The Commission no longer positions—there was expressly considered the lack of a prohibition on agrees with that description or that ‘‘nothing’’ in that language to limit the different position limit levels in the rule 438 reasoning. exchange’s discretion. In other to be a ‘‘standard.’’ By extension, the Under the 1981 rule, former section words, there is nothing in that flexibility Futures Trading Act does not bear on 1.61(a) of the Commission’s regulations text with which to ‘‘comply,’’ so it the Commission’s preliminary required exchanges to adopt position cannot be part of what section 1.61(d)(1) interpretation of ‘‘standards’’ in section limits for all contracts listed to trade.432 referenced as a ‘‘standard’’ for which 4a(a)(2)(A) today. The rule also established requirements compliance must be demonstrated. 6. In briefs in the ISDA case, the similar to the current statutory As discussed above, ‘‘standard’’ is an Commission pointed out that CEA aggregation requirements: Section ill-fitting label for this lack of a paragraphs 4a(a)(2)(B) and 4a(a)(3) 1.61(a) required that limits apply to prohibition. Indeed, the 1981 release repeatedly use the word ‘‘required’’ in positions a person may either ‘‘hold’’ or and associated 1980 NPRM did use the 433 connection with position limits ‘‘control,’’ section 1.61(g) established word ‘‘standard’’ to refer to certain established pursuant to paragraph more detailed aggregation language directing and constraining the 4a(a)(2), implying that the Commission requirements.434 Section 1.61(a)(1) discretion of the exchanges, a much is required to establish those limits contained language the Commission has more natural use of that word. For regardless of whether it finds them to be called the ‘‘flexibility standard,’’ i.e., example, the preambles to both releases necessary.443 But that is not the only that ‘‘nothing’’ in section 1.61 ‘‘shall be called requirements to aggregate certain way to interpret the word ‘‘required.’’ holdings ‘‘aggregation standards.’’ 439 Position limits are required under 428 E.g., 2016 Reproposal, 81 FR at 96708; 2013 And, in both the 1980 NPRM (in the certain circumstances even if there is no Proposal, 78 FR at 75682, 75683. preamble) and the 1981 Final Rule (in 429 across-the-board mandate—i.e., when The Commission’s reasoning in this respect rule text), the Commission used the has also assumed that a necessity finding means a the Commission finds that they are word ‘‘standard’’ to describe factors, granular market-by-market study of whether ‘‘necessary.’’ Under the Commission’s position limits will be useful for a given contract. such as position sizes customarily held As explained below, however, the Commission here by speculative traders, that exchanges current preliminary interpretation, the preliminarily determines that such an analysis is were required to consider in setting the Commission was required to assess not required. Under the Commission’s current level of position limits.440 within a specified timeframe if position preliminary interpretation of the necessity finding limits were ‘‘necessary’’ and, if so, requirement, it would have been plausible to complete the required findings under the deadlines 435 Id. at 50945. section 4a(a)(2) states that the Congress established. 436 Id. Commission ‘‘shall’’ establish them. 430 E.g., 2013 Proposal, 78 FR at 75683, 75684. 437 Id. 431 Id. 438 46 FR at 50945 (section 1.61(a)(1)). 441 See, e.g., 2016 Reproposal, 81 FR at 96709, 432 Establishment of Speculative Position Limits, 439 Id. at 50943; Speculative Position Limits, 45 96710. 46 FR at 50945 (Oct. 16, 1981). FR at 79834. 442 Id. at 96710. 433 Id. 440 46 FR at 50945 (in section 1.61(a)(2)); 45 FR 443 E.g., ISDA, Brief for Appellant Commodity 434 Id. at 50946. at 79833, 79834. Futures Trading Commission at 26–27.

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Thus, the word ‘‘required’’ in Congress intended to drop the necessity describe them with specificity.454 In the paragraphs 4a(a)(2)(B) and 4a(a)(3) finding requirement when it enacted Senate, the chairman of the Senate leaves open the question of whether paragraph 4a(a)(2) as part of the Dodd- Committee on Agriculture, Nutrition, paragraph 4a(a)(2) itself requires Frank Act. and Forestry stated that the conference position limits for all physical The language of paragraph 4a(a)(2) bill would ‘‘grant broad authority to the commodity contracts or, on the other derives from section 6(a) of a bill, the Commodity Futures Trading hand, only requires them where the Derivatives Markets Transparency and Commission to once and for all set Commission finds them necessary under Accountability Act of 2009, H.R. 977 aggregate position limits across all (111th Cong.), which was approved by the standards of paragraph 4a(a)(1). The markets on non-commercial market the House Committee on Agriculture in use of the word ‘‘required’’ in participants.’’ 455 The statement that the paragraphs 4a(a)(2)(B) and 4a(a)(3) February of 2009.448 The committee report on this bill included explanatory bill would grant ‘‘authority’’ to set therefore does not resolve the ambiguity position limits implies an exercise of in the statute. For the same reason, the language stating that the relevant judgement by the Commission in evolution of the statutory language provision required the Commission to set position limits ‘‘for all physical determining whether to set particular during the legislative process, during 456 which the word ‘‘may’’ was changed to commodities other than excluded limits. Thus, this legislative history is ‘‘shall’’ in a number of places, also does commodities.’’ 449 However, H.R. 977 itself ambiguous on the question of not resolve the ambiguity.444 was never approved by the full House whether federal position limits are now 7. The Commission has pointed out of Representatives.450 mandatory on all physical commodities that section 719 of the Dodd-Frank Act The relevant language concerning in the absence of a finding of necessity. required the Commission to ‘‘conduct a position limits was incorporated into Looking at legislative history in more study of the effects (if any) of the the House of Representatives version of general terms, the Commission, in past position limits imposed’’ pursuant to what became the Dodd-Frank Act, H.R. releases, has pointed out that the 4173 (111th Cong.), as part of a floor paragraph 4a(a)(2) and report the results enactment of paragraph 4a(a)(2) amendment that was introduced by the to Congress within twelve months after followed congressional investigations in the imposition of limits.445 The chairman of the Committee on 451 the late 1990s and early 2000s that Commission has suggested that Agriculture. In explaining the amendment’s language regarding concluded that excessive speculation Congress would not have required such accounted for volatility and prices a study if paragraph 4a(a)(2) left the position limits, the chairman stated that it ‘‘strengthens confidence in position increases in the markets for a number of Commission with discretion to find that commodities.457 However, while the limits were unnecessary so that there limits on physically deliverable commodities as a way to prevent history of congressional investigations would be nothing for the Commission to supports the conclusion that Congress 446 excessive speculation trading’’ but did study and report on to Congress. intended the Commission to take action However, while the study requirement not specify that limits would be required for all physical commodities with respect to position limits, it does implies that Congress perhaps not resolve the specific interpretive anticipated that at least some limits without the need for a necessity 452 issue of whether the ‘‘[i]n accordance would be imposed pursuant to finding. The House of with the standards set forth in paragraph 4a(a)(2), it leaves open the Representatives language regarding paragraph (1)’’ language that was question of whether Congress mandated position limits was ultimately ultimately enacted by Congress limits for every physical commodity incorporated into the Dodd-Frank Act without the need for a necessity finding. by a conference committee. However, incorporates a necessity finding. As In addition, the phrase ‘‘the effects (if the explanatory statement in the discussed above, the congressional any)’’ language does not imply that Conference report states, with respect to investigations focused on only a few Congress expected position limits on all position limits, only that the act’s commodities, which weakens the physical commodities. This language ‘‘regulatory framework outlines inference that Congress considered the simply recognizes that new position provisions for: . . . [p]osition limits on question of what speculative positions limits could be imposed, but have no swaps contracts that perform or affect a to limit a closed question. demonstrable effects. significant price discovery function and Overall, in past releases the requirements to aggregate limits across 8. In past releases and court filings, Commission has expressed the view that markets.’’ 453 the Commission has stated that the construing section 4a as an ‘‘integrated legislative history of section 4a, as In subsequent floor debate, the chairman of the House Agriculture whole’’ leads to the conclusion that amended by the Dodd-Frank Act, paragraph 4a(a)(2) does not require a supports the conclusion that paragraph Committee alluded to position limits provisions deriving from earlier bills 4a(a)(2) requires the establishment of 454 reported by that committee, but did not He stated, ‘‘This conference report includes position limits for all physical the tools we authorized [in response to concerns commodities whether or not the about excessive speculation] and the direction to 448 See H.R. Rep. 111–385 part 1 at 4 (Dec. 19, the CFTC to mitigate outrageous price spikes we Commission finds them necessary to 2009). 447 saw 2 years ago.’’ 156 Cong. Rec. H5245 (daily ed. achieve the objectives of the statute. 449 Id. at 19. June 30, 2010). However, the most relevant legislative 450 See Actions—H.R.977—111th Congress (2009– 455 156 Cong. Rec. S5919 (daily ed. July 15, 2010). history, taken as a whole, does not 2010) Derivatives Markets Transparency and 456 In addition, the remainder of the Senate resolve the ambiguity in the statutory Accountability Act of 2009, Congress website, chairman’s floor statement with regard to position available at https://www.congress.gov/bill/111th- language or compel the conclusion that limits focused on volatility and price discovery congress/house-bill/977/all-actions? problems arising from the use of commodity swaps, overview=closed#tabs (bill history). implying that her reference to setting position limits 444 See, e.g., 2013 Proposal, 78 FR at 75684, 75685 451 155 Cong. Rec. H14682, H14692 (daily ed. ‘‘across all markets’’ refers to Dodd-Frank’s (discussing evolution of statutory language as Dec. 10, 2009). extension of position limits authority to swaps supporting mandate). 452 Id. at H14705. markets. 156 Cong. Rec. at S5919–20 (daily ed. July 445 See, e.g., id. at 75684. 453 Dodd-Frank Wall Street Reform and Consumer 15, 2010). 446 See, e.g., id. Protection Act, Conference Report to Accompany 457 See, e.g., 2016 Reproposal, 81 FR at 96711– 447 See, e.g., 2016 Reproposal, 81 FR at 96709. H.R. 4173 at 969 (H.R. Rep. 111–517 June 29, 2010). 96713.

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necessity finding.458 However, for analysis, therefore, proceeds on the and the Commission’s emergency reasons explained above, the basis of these legislative findings that powers.468 Commission preliminarily believes that excessive speculation threatens negative Yet the Commission is directed by the better interpretation is that prior to consequences for interstate commerce section 4a(a)(1) not only to impose imposing position limits, it must make and the accompanying proposition that position limits to diminish or eliminate a finding that the position limits are position limits are an effective tool to sudden and unwarranted fluctuations in necessary. diminish, eliminate, or prevent the price caused by excessive speculation once those other protections have failed, F. Necessity Finding undue and unnecessary burdens Congress has targeted in the statute.462 it is directed to establish position limits The Commission preliminarily finds The Commission will therefore as necessary to ‘‘prevent’’ those burdens that federal speculative position limits determine whether position limits are on interstate commerce from arising in are necessary for the 25 core referenced necessary for a given contract, in light the first place. It makes little sense to futures contracts, and any associated of those premises, considering facts and suppose that Congress meant for the referenced contracts. This preliminary circumstances and economic factors. Commission to ‘‘prevent’’ unreasonable finding is based on a combination of fluctuations or unwarranted price factors including: The particular The statute does not define changes caused by excessive importance of these contracts in the ‘‘necessary.’’ In legal contexts, the term speculation only after they have already 463 price discovery process for their can have ‘‘a spectrum of meanings.’’ begun to occur, or when the respective underlying commodities; the ‘‘At one end, it may ‘import an absolute Commission can somehow predict with fact that they require physical delivery physical necessity, so strong, that one confidence that the Act’s other tools of the underlying commodity; and, in thing, to which another may be termed will be absolutely ineffective.469 The some cases, the especially acute necessary, cannot exist without that Act uses the word ‘‘necessary’’ in a economic burdens that would arise from other;’ at the opposite, it may simply number of places to authorize measures excessive speculation causing sudden or mean ‘no more than that one thing is it is highly unlikely Congress meant to unreasonable fluctuations or convenient, or useful, or essential to apply only where the relevant policy unwarranted changes in the price of the another.’ ’’ 464 The Commission does not goals will otherwise certainly fail.470 commodities underlying these contracts. believe Congress intended either end of On the other hand, the Commission The Commission has preliminarily this spectrum in section 4a(a)(1). On one also does not believe that Congress determined that the benefit of advancing hand, ‘‘necessary’’ in this context intended position limits where they are the statutory goal of preventing those cannot mean that position limits must merely ‘‘useful’’ or ‘‘convenient.’’ As undue burdens with respect to these be the only means capable of addressing explained above, Congress has already commodities in interstate commerce the burdens associated with excessive determined that position limits are justifies the potential burdens or speculation. The Act contains numerous useful in preventing undue burdens on negative consequences associated with provisions designed to prevent, interstate commerce associated with establishing these targeted position diminish, or eliminate price disruptions excessive speculation, but requires the limits.459 or distortions or unreasonable volatility. Commission to make the further finding 1. Meaning of ‘‘Necessary’’ Under For example, the Commission’s anti- that they are also necessary. A Section 4a(a)(1) manipulation authority is designed to ‘‘convenience’’ standard would be stop, redress, and deter intentional acts similarly toothless. Section 4a(a)(1) of the Act contains a that may give rise to uneconomic prices Rather than accepting either extreme, congressional finding that ‘‘[e]xcessive or unreasonable volatility.465 Other the Commission preliminarily interprets speculation . . . causing sudden or examples include prohibitions on that sections 4a(a)(1) and 4a(a)(2) direct unreasonable fluctuations or disruptive trading practices,466 certain the Commission to establish position unwarranted changes in . . . price . . . core principles for contract markets,467 is an undue and unnecessary burden on 468 7 U.S.C. 12a(9). interstate commerce in such 469 See Nat. Res. Def. Council, Inc. v. Thomas, 838 462 It is not the Commission’s role to determine 460 F.2d 1224, 1236–37 (D.C. Cir. 1988) (‘‘[A] measure commodity.’’ For the purpose of if these findings are correct. See Public Citizen v. may be ’necessary’ even though acceptable ‘‘diminishing, eliminating, or FTC, 869 F.2d 1541, 1557 (D.C. Cir. 1989) alternatives have not been exhausted.’’); F.T.C. v. (‘‘[A]gencies surely do not have inherent authority preventing’’ that burden, section 4a(a)(1) Rockefeller, 591 F.2d 182, 188 (2d Cir. 1979) to second-guess Congress’ calculations.’’); see also tasks the Commission with establishing (rejecting ‘‘the notion that ’necessary’ means that 46 FR at 50938, 50940 (‘‘Section 4a(1) [now 4a(a)(1)] the [Federal Trade Commission] must pursue all such position limits as it finds are represents an express Congressional finding that 461 other ‘reasonably available alternatives’’’ before ‘‘necessary.’’ The Commission’s excessive speculation is harmful to the market, and undertaking the measure at issue). Indeed, where a finding that speculative limits are an effective the Commission considers setting such prophylactic 458 prophylactic measure.’’). See, e.g., 2016 Reproposal, 81 FR at 96713, limits, it is unlikely to be knowable whether 463 96714. Jewell v. Life Ins. Co. of N. Am., 508 F.3d 1303, position limits will be the only effective tool. The 459 As discussed, the Commission is not 1310 (10th Cir. 2007). existence of other tools to prevent unwarranted proposing non-spot-month limits apart from the 464 Jewell v. Life Ins. Co. of N. Am., 508 F.3d 1303, volatility and price changes may be relevant, but legacy agricultural contracts. Non-spot-month 1310 (10th Cir. 2007); see also Black’s Law cannot be dispositive in all cases. prices serve as references for cash-market Dictionary 1227 (3d ed. 1933) (‘‘As used in 470 See, e.g., 7 U.S.C. 2(h)(4)(A) (empowering the transactions much less frequently than spot-month jurisprudence, the word ‘necessary’ does not always Commission to prescribe rules ‘‘as determined by prices. Accordingly, the burdens of excessive import an actual physical necessity, so strong that the Commission to be necessary to prevent evasions speculation in non-spot-months on commodities in one thing, to which another may be termed of the mandatory clearing requirements’’); 7 U.S.C. interstate commerce would be substantially less ‘necessary,’ cannot exist without the other.... To 2(h)(4)(B)(iii) (requiring that the Commission than the burdens of excessive speculation in spot- employ the means necessary to an end is generally ‘‘shall’’ take such actions ‘‘as the Commission months. It is also not possible to execute a corner understood as employing any means calculated to determines to be necessary’’ when it finds that or squeeze in non-spot-months. And because there produce the end, and not as being confined to those certain swaps subject to the clearing requirement generally are fewer market participants in non-spot- single means without which the end would be are not listed by any derivatives clearing months, holders of large speculative positions may entirely unattainable.’’ (citing McCullouch v. organization); 7 U.S.C. 21(e) (subjecting registered play a more important role in providing liquidity Maryland, 4 Wheat. 216, 4 L. Ed. 579 (1819)). persons to such ‘‘rules and regulations as the to bona fide hedgers. 465 7 U.S.C. 9(1), 9(3), 13(a)(2). Commission may find necessary to protect the 460 7 U.S.C. 6a(a)(1). 466 7 U.S.C. 6c(a). public interest and promote just and equitable 461 7 U.S.C. 6a(a)(1). 467 7 U.S.C. 7(d). principles of trade.’’).

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limits where the Commission finds, any associated referenced contracts. excessive speculation. Specifically, ‘‘it based on the relevant facts and Going forward, the Commission will appears that the capacity of any contract circumstances, that position limits make this assessment ‘‘from time to market to absorb the establishment and would be an efficient mechanism to time’’ as required under section 4a(a)(1). liquidation of large speculative advance the congressional goal of The Commission recognizes that this positions in an orderly manner is preventing undue burdens on interstate approach differs from that taken in related to the relative size of such commerce in the given underlying earlier necessity findings. For example, positions, i.e., the capacity of the market commodity caused by excessive when the Commission’s predecessor is not unlimited.’’ 480 speculation. For example, it may be that agency, the Commodity Exchange In 2013, the Commission proposed a for a given commodity, volatility in Commission (‘‘CEC’’), established necessity finding applicable to all derivatives markets would be unlikely position limits, it would publish them physical commodities, and then to cause high levels of sudden or in the Federal Register along with reproposed it in 2016. In that finding, unreasonable fluctuations or necessity findings that were generally the Commission discussed incidents in unwarranted changes in the price of the conclusory recitations of the statutory which the Hunt family in 1979 and 1980 underlying commodity and would have language.474 The published basis would accumulated unusually large silver little overall impact on the national be a recitation that trading of a given positions, and in which Amaranth economy/interstate commerce. Under commodity for future delivery by a Advisors L.L.C. in 2006 accumulated those circumstances, the Commission person who holds or controls a net unusually large natural gas positions.481 may find that position limits are position in excess of a given amount The Commission preliminarily unnecessary. There are, however, also tends to cause sudden or unreasonable determined that the size of those contract markets in which volatility fluctuations or changes in the price of positions contributed to unwarranted would be highly likely to cause sudden that commodity, not warranted by volatility and price changes in those or unreasonable fluctuations or changes in the conditions of supply and respective markets, which imposed unwarranted changes in the price of the demand.475 Apart from that, the CEC undue burdens on interstate commerce, underlying commodity or have typically would refer to a public and that position limits could have significantly negative effects on the hearing, but provide no specifics of the prevented this.482 The Commission here broader economy. Even if such evidence presented or what the CEC preliminarily finds those parts of the disruptions would be unlikely due to found persuasive.476 The CEC variously 2013 and 2016 proposed necessity the characteristics of an individual imposed limits one commodity at a finding to be beside the point, because market, the Commission may time, or for several commodities at Congress has already determined that 477 nevertheless determine that position once. excessive speculation can place undue limits are necessary as a prophylactic In 1981, the Commission issued a rule burdens on interstate commerce in a measure given the potential magnitude directing all exchanges to establish commodity, and that position limits can or impact of the event.471 position limits for each contract not diminish, eliminate, or prevent those Most commodities lie somewhere in already subject to federal limits, and for burdens. In 2013 and 2016, the between, with varying degrees of which delivery months were listed to Commission also considered numerous 478 linkage between derivative contracts trade. There, as here, the Commission studies concerning position limits.483 and cash-market prices, and differences explained that section 4a(a)(1) To the extent that those studies merely in importance to the overall economy. represents an ‘‘express Congressional examined whether or not position limits There is no mathematical formula to finding that excessive speculation is are an effective tool, the Commission make this determination, though the harmful to the market, and a finding here does not find them directly Commission will consider relevant data that speculative limits are an effective relevant, again because Congress has 479 where it is available. The Commission prophylactic measure.’’ The already determined that position limits must instead exercise its judgment in Commission observed that all futures can be effective to diminish, eliminate, light of facts and circumstances, markets share the salient characteristics or prevent sudden or unreasonable including its experience and expertise, that make position limits a useful tool fluctuations or unwarranted changes in 484 to determine what limits are to prevent the potential burdens of commodity prices. In the 2013 and 2016 necessity economically justified.472 In all 474 findings, the Commission stated again instances, the Commission will consider See, e.g., Limits on Position and Daily Trading in Soybeans for Future Delivery, 16 FR at 8107 that ‘‘all markets in physical the applicable costs and benefits as (Aug. 16, 1951); Findings of Fact, Conclusions, and commodities’’ are susceptible to the required under section 15(a) of the Order in the Matter of Limits on Position and Daily burdens of excessive speculation Act.473 With this interpretation of Trading in Cotton for Future Delivery, 5 FR at 3198 because all such markets have a finite ‘‘necessary’’ in mind, the Commission (Aug. 28, 1940); In re Limits on Position and Daily Trading in Wheat, Corn, Oats, Barley, Rye, and ability to absorb the establishment and below explains its selection of the 25 Flaxseed, for Future Delivery, 3 FR at 3146, 3147 liquidation of large speculative core referenced futures contracts, and (Dec. 24, 1938). 485 475 See, e.g., Limits on Position and Daily Trading positions in an orderly manner. The 471 The Commission will also be mindful that the in Soybeans for Future Delivery, 16 FR at 8107 480 undue burdens Congress tasked the Commission (Aug. 16, 1951); Findings of Fact, Conclusions, and 46 FR at 50940 (Oct. 16, 1981). The with diminishing, eliminating, or preventing would Order in the Matter of Limits on Position and Daily Commission based this finding in part upon then- not generally be borne exclusively by speculators or Trading in Cotton for Future Delivery, 5 FR at 3198 recent events in the silver market, an apparent other participants in futures and swaps markets, but (Aug. 28, 1940); In re Limits on Position and Daily reference to the corner and squeeze perpetrated by instead the public at large or a certain industry or Trading in Wheat, Corn, Oats, Barley, Rye, and members of the Hunt family in 1979 and 1980. sector of the economy. In a given context, the Flaxseed, for Future Delivery, 3 FR at 3146, 3147 481 2013 Proposal, 78 FR at 75686, 75693. Commission may find that this factor supports a (Dec. 24, 1938). 482 Id. at 75691, 75193. finding that position limits are necessary. 476 The records available from the National 483 See 2016 Reproposal, 81 FR at 96894, 96924. 472 The Commission is well positioned to select Archives during this period are sparse. 484 In any event, the Commission found those from among all commodities within the scope of 477 Compare 5 FR at 3198 (cotton) with 3 FR at studies inconclusive. 2016 Reproposal, 81 FR at 4a(a)(1) and (2)(A), from its ongoing regulatory 3146, 3147 (six types of grain). 96723. activities, including but not limited to market 478 46 FR at 50945. 485 2016 Reproposal, 81 FR at 96722; see also surveillance and product review. 479 Id. at 50938, 50940. Section 4a(a)(1) was at the Corn Products Refining Co. v. Benson, 232 F.2d 554, 473 7 U.S.C. 19(a). time numbered 4a(1). Continued

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Commission here, however, underlying commodity, i.e., fluctuations all companies use derivatives in preliminarily determines that this not attributable to the forces of supply physical commodity markets such as the characteristic is not sufficient to support of and demand for that underlying 25 core referenced futures contracts.487 a finding that position limits are commodity; second, that such price The 25 core referenced futures ‘‘necessary’’ for all physical fluctuations and changes are an undue contracts are vital for establishing commodities, within the meaning of and unnecessary burden on interstate reliable commodity prices and enabling section 4a(a)(1). Congress has already commerce in that commodity, and; the beneficial risk transfer between determined that excessive speculation third, that position limits can diminish, buyers and sellers of commodities, can give rise to unwarranted burdens on eliminate, or prevent that burden. With allowing participants to hedge risk and interstate commerce and that position those propositions established by undertake planning with greater limits can be an effective tool to Congress, the Commission’s task is to certainty. By providing a highly efficient eliminate, diminish, or prevent those make the further determination of marketplace for participants to offset burdens. Yet the statute directs the whether it is necessary to use position risks, the 25 core referenced futures Commission to establish position limits limits, Congress’s prescribed tool to contracts attract a broad range of only when they are ‘‘necessary.’’ In that address those burdens on interstate participants, including farmers, context, the Commission considers it commerce, in light of the facts and ranchers, producers, utilities, retailers, unlikely that Congress intended the circumstances. Unlike prior preliminary , banking institutions, and Commission to find that position limits necessity findings which focused on others. These participants hedge are ‘‘necessary’’ even where facts and evidence of excessive speculation in just production costs and delivery prices so circumstances show the significant wheat and natural gas, this necessity that, among other things, consumers can potential that they will cause finding addresses all 25 core referenced always find plenty of food at reliable disproportionate negative consequences futures contracts and focuses on two prices on the grocery store shelves. for markets, market participants, or the interrelated factors: (1) The importance Futures prices are used for pricing of commodity end users they are intended of the derivatives markets to the cash market transactions but also serve to protect. Similarly, because the underlying cash markets, including as economic signals that help various Commission has preliminarily whether they call for physical delivery members of society plan. These signals determined that section 4a(a)(2) does of the underlying commodity; and (2) help farmers decide which crops to not mandate federal speculative the importance of the cash markets plant as well as assist producers to position limits for all physical underlying the referenced futures decide how to implement their commodities,486 it cannot be that federal contracts to the national economy. The production processes given the position limits are ‘‘necessary’’ for all Commission will apply the relevant anticipated costs of various inputs and physical commodities, within the facts and circumstances holistically the anticipated prices of any anticipated meaning of section 4a(a)(1), on the basis rather than formulaically, in light of its finished products, and they serve of a property shared by all of them, i.e., experience and expertise. similar functions in other areas of the a limited capacity to absorb the With respect to the first factor, the economy. For the commodities that are establishment and liquidation of large markets for the 25 core referenced the subject of this necessity finding, the speculative positions in an orderly futures contracts are large in terms of Commission preliminarily has fashion. notional value and open interest, and determined that there is a significant The Commission requests comments are critically important to the amount of participation in these underlying cash markets. These on all aspects of this interpretation of commodity markets, both directly and derivatives markets enable food the requirement in section 4a(a)(1) of a indirectly, through price discovery necessity finding. processors, farmers, mining operations, signals.488 utilities, textile merchants, 2. Necessity Findings as to the 25 Core Two key features of the 25 core confectioners, and others to hedge the Referenced Futures Contracts referenced futures contracts are the role risks associated with volatile changes in they play in the price discovery process As noted above, the proposed rule price that are the hallmark of cash for their respective underlying would impose federal position limits commodity markets. on: 25 core referenced futures contracts, Futures markets were established to commodities and the fact that they including 16 agricultural products, five allow industries that are vital to the U.S. 487 ISDA Survey of the Derivatives Usage by the metals products, and four energy economy and critical to the American World’s Largest Companies 2009. It has also been products; any futures or options on public to accurately manage future estimated that the use of commercial derivatives futures directly or indirectly linked to receipts, expenses, and financial added 1.1 percent to the size of the U.S. economy the core referenced futures contracts; obligations with a high level of between 2003 and 2012. See Apanard Prabha et al., Deriving the Economic Impact of Derivatives, (Mar. and any economically equivalent swaps. certainty. In general, futures markets 2014), available at http:// As discussed above, the Commission’s perform valuable functions for society assets1b.milkeninstitute.org/assets/Publication/ necessity analysis proceeds on the basis such as ‘‘price discovery’’ and by ResearchReport/PDF/Derivatives-Report.pdf. of certain propositions reflected in the allowing counterparties to transfer price 488 The Commission observes that there has been text of section 4a(a)(1): First, that risk to their counterparty. The risk much written in the academic literature about price discovery of the 25 core referenced futures excessive speculation in derivatives transfer function that the futures contracts. This demonstrates the importance of the markets can cause sudden or markets facilitate allows someone to commodities underlying such contracts in our unreasonable fluctuations or hedge against price movements by society. The Commission’s Office of the Chief unwarranted changes in the price of an establishing a price for a commodity for Economist conducted a preliminary search on the JSTOR and Science Direct academic research a time in the future. Prices in databases for journal articles that contain the key 560 (1956) (finding it ‘‘obvious that transactions in derivatives markets can inform the cash words: Price Discovery such vast amounts as those involved here might market prices of, for example, energy Futures. While the articles made varying cause ‘sudden or unreasonable fluctuations in the used in homes, cars, factories, and conclusions regarding aspects of the futures price’ of corn and hence be an undue and markets, and in some cases position limits, almost unnecessary burden on interstate commerce’’ hospitals. More than 90 percent of all articles agreed that the futures markets in (alteration omitted)). Fortune 500 companies use derivatives general are important for facilitating price discovery 486 See supra Section III.D. to manage risk, and over 50 percent of within their respective markets.

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require physical delivery of the physical delivery and price discovery this proposed rule is not to constrain underlying commodity. Price discovery process contributes to the complexity of those legitimate price movements. is the process by which markets, the markets for the 25 core referenced Instead, the Commission’s purpose is to through the interaction of buyers and futures contracts. If these markets prevent volatility caused by excessive sellers, produce prices that are used to function properly, American producers speculation, which Congress has value underlying futures contracts that and consumers enjoy reliable deemed a potential burden on interstate allow society to infer the value of commodity prices. Excessive commerce. underlying physical commodities. speculation causing sudden or Further, excessive speculation in the Adjustments in futures market unreasonable fluctuations or futures market could result in price requirements and valuations by a unwarranted changes in the price of uncertainty in the cash market, which in diverse array of futures market those commodities could, in some cases, turn could cause periods of surplus or participants, each with different have far reaching consequences for the shortage that would not have occurred perspectives and access to supply and U.S. economy by interfering with proper if prices were more reliable. Properly demand information, can result in market functioning. functioning futures markets free from adjustments to the pricing of the The cash markets underlying the 25 excessive speculation are essential for commodities underlying the futures core referenced futures contracts are to hedging the volatility in cash markets contract. The futures markets are varying degrees vitally important to the for these commodities that are the result generally the first to react to such price- U.S. economy, driving job growth, of real supply and demand. Specific moving information, and price stimulating economic activity, and attributes of the cash and derivatives movements in the futures markets reducing trade deficits while impacting markets for these 25 commodities are reflect a judgment of what is likely to everyone from consumers to automobile discussed below. happen in the future in the underlying manufacturers and farmers to financial 3. Agricultural Commodities cash markets. The 25 core referenced institutions. These 25 cash markets futures contracts were selected in part include some of the largest cash markets Futures contracts on the 16 because they generally serve as in the world, contributing together, agricultural commodities are essential reference prices for a large number of along with related industries, tools for hedging against price moves of cash-market transactions, and the approximately 5 percent to the U.S. these widely grown crops, and are key Commission knows from large trader gross domestic product (‘‘GDP’’) directly instruments in helping to smooth out reporting that there is a significant and a further 10 percent indirectly.491 volatility and to ensure that prices presence of commercial traders in these As described in detail below, the cash remain reliable and that food remains contracts, many of whom may be using markets underlying the 25 core on the shelves. These agricultural the contracts for hedging and price referenced futures contracts are critical futures contracts are used by grain discovery purposes. to consumers, producers, and, in some elevators, farmers, merchants, and For example, a grain elevator may use cases, the overall economy. others and are particularly important the futures markets as a benchmark for By ‘‘excessive speculation,’’ the because prices in the underlying cash the price it offers local farmers at Commission here refers to the markets swing regularly depending on harvest. In return, farmers look to accumulation of speculative positions of factors such as crop conditions, futures prices to determine for a size that threaten to cause the ills weather, shipping issues, and political themselves whether they are getting fair Congress addressed in Section 4a— events. value for their crops. The physical sudden or unreasonable fluctuations or Settlement prices of futures contracts delivery mechanism further links the unwarranted changes in the price of the are made available to the public by cash and futures markets, with cash and underlying commodity. These exchanges in a process known as ‘‘price futures prices expected to converge at potentially violent price moves in the discovery.’’ To be an effective hedge for settlement of the futures contract.489 In futures markets could impact producers cash market prices, futures contracts addition to facilitating price such as utilities, farmers, ranchers, and should converge to the spot price at convergence, the physical delivery other hedging market participants. Such expiration of the futures contract. mechanism allows the 25 core unwarranted volatility could result in Otherwise, positions in a futures referenced futures contracts to be an significant costs and price movements, contract will be a less effective tool to alternative means of obtaining or selling compromising budgeting and planning, hedge price risk in the cash market the underlying commodity for market making it difficult for producers to since the futures positions will less than participants. While most physically- manage the costs of farmlands and oil perfectly offset cash market positions. settled futures contracts are rolled-over refineries, and impacting retailers’ Convergence is so important for the 16 ability to provide reliable prices to or unwound and are not ultimately agricultural contracts that exchanges consumers for everything from cereal to settled using the physical delivery have deliveries occurring during the gasoline. To be clear, volatility is mechanism, because the futures spot month, unlike for the energy sometimes warranted in the sense that contracts have standardized terms and commodities covered by this it reflects legitimate forces of supply conditions that reflect the cash market proposal.492 This delivery mechanism and demand, which can sometimes commodity, participants can reasonably helps to force convergence because change very quickly. The purpose of expect that the commodity sold or shorts who can deliver cheaper than the purchased will meet their needs.490 This futures prices may do so, and longs can and locations for delivery that are commonly used in the commodity cash market. stand in for delivery if it’s cheaper to 489 Futures contracts are traded for settlement at 491 See The Bureau of Economic Analysis, U.S. a date in the future. At a contract’s delivery month Department of Commerce, Interactive Access to 492 For energy contracts, physical delivery of the and date, a commodity cash market price and its Industry Economic Accounts Data: GDP by Industry underlying commodity does not occur during the futures price converge, allowing an efficient transfer (Historical) that includes GDP contributions by U.S. spot month. This allows time to schedule pipeline of physical commodities between buyers and sellers Farms, Oil & Gas extraction, pipeline deliveries and so forth. Instead, a shipping of the futures contract. transportation, petroleum and coal products, certificate (a financial instrument claim to the 490 Standardized terms and conditions for utilities, mining and support activities, primary and physical product), not the underlying commodity, physically-settled futures contracts typically fabricated metal products and finance in securities, is the delivery instrument that is exchanged at include delivery quantities, qualities, sizes, grades commodity contracts and investments. expiration of the futures contract.

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obtain the underlying through the that reflects the economic value of the Many of these agricultural futures market than the cash market. underlying commodity to farmers, commodities are also crucial to rural The Commission does not collect ranchers, and producers. areas. In Arkansas alone, which ranks information on all cash market The 16 agricultural core referenced first among rice-producing states, the transactions. Nevertheless, the futures contracts 498 are key drivers to annual rice crop contributes $1.3 billion Commission understands that futures the success of the American agricultural to the state’s economy and accounts for prices are often used by counterparties industry. The commodities underlying tens of thousands of jobs to an industry to settle many cash-market transactions these markets are used in a variety of that contributes more than $35 billion to due to approximate convergence of the consumer products including: the U.S. economy on an annual basis.504 futures contract price to the cash-market Ingredients in animal feeds for Similarly, the U.S. meat and poultry price at expiration. production of meat and dairy (soybean industry, which includes cattle, Agricultural futures markets are some meal and corn); margarine, shortening, accounts for $1.02 trillion in total of the most active, and open interest on paints, adhesives, and fertilizer economic output equaling 5.6 percent of agricultural futures have some of the (soybean oil); home furnishings and GDP, and is responsible for 5.4 million highest notional value. The CBOT Corn apparel (cotton); and food staples (corn, jobs.505 Coffee-related economic activity (C) and CBOT Soybean (S) contracts, for soybeans, wheat, oats, frozen orange comprises 1.6 percent of total U.S. example, trade over 350,000 and juice, cattle, rough rice, cocoa, coffee, GDP,506 and U.S. sugar producers 200,000 contracts respectively per and sugar). generate nearly $20 billion per year for day.493 Outstanding futures and options The cash markets underlying the 16 the U.S. economy, supporting 142,000 notional values range anywhere from agricultural core referenced futures jobs in 22 states.507 Even some of the approximately $ 71 billion for CBOT contracts help create jobs and stimulate smaller agricultural markets have a Corn (C) to approximately $ 70 million economic activity. The soybean meal noteworthy economic impact.508 For for CBOT Oats (O), with the other core market alone has an implied value to example, oats are planted on over 2.6 referenced futures contracts on the U.S. economy through animal million acres in the United States, with agricultural commodities all falling agriculture which contributed more the total U.S. supply in the order of 182 499 somewhere in between.494 than 1.8 million American jobs, and million bushels,509 and in 2010 the The American agricultural market, wheat remains the largest produced United States exported chocolate and including markets for the commodities food grain in the United States, with chocolate-type confectionary products underlying the 16 agricultural core planted acreage, production, and farm worth $799 million to more than 50 referenced contracts, is foundational to receipts ranking third after corn and countries around the world. 510 the U.S. economy. Agricultural, food, soybeans.500 The United States is the and related industries contributed $ world’s largest producer of beef, and 4. Metal Commodities 1.053 trillion to the U.S. economy in also produced 327,000 metric tons of The core referenced futures contracts 501 2017, representing 5.4 percent of U.S. frozen orange juice in 2018. Total on metal commodities play an GDP.495 In 2017, agriculture provided economic activity stimulated by the important role in the price discovery 21.6 million full and part time jobs, or cotton crop is estimated at over $ 75 502 process and are some of the most active 11 percent of total U.S. employment.496 billion. Many of these markets are and valuable in terms of notional value. Agriculture’s contribution to also significant export commodities, international trade is also sizeable. For helping to reduce the trade deficit. The 504 Where is Rice Grown, Think Rice website, fiscal year 2019, it was projected that United States exports between 10 and available at http://www.thinkrice.com/on-the-farm/ agricultural exports would exceed $ 137 20 percent of its corn crop and 47 where-is-rice-grown. billion, with imports at $ 129 billion for percent of its soybean crop, generating 505 The United States Meat Industry at a Glance, North American Meat Institute website, available at a net balance of trade of $ 8 billion.497 tens of billions of dollars in annual 503 https://www.meatinstitute.org/index.php?ht=d/sp/i/ This balance of trade is good for the economic output. 47465/pid/47465. nation and for American farmers. The 506 The Economic Impact of the Coffee Industry, U.S. commodity futures markets have 498 The 16 agricultural core referenced futures National Coffee Association, available at http:// contracts are: CBOT Corn (C), CBOT Oats (O), CBOT www.ncausa.org/Industry-Resources/Economic- provided risk mitigation and pricing Soybeans (S), CBOT Soybean Meal (SM), CBOT Impact. Soybean Oil (SO), CBOT Wheat (W), CBOT KC 507 U.S. Sugar Industry, The Sugar Association, 493 CME Group website, available at https:// HRW Wheat (KW), ICE Cotton No. 2 (CT), MGEX available at https://www.sugar.org/about/us- www.cmegroup.com/trading/products/ HRS Wheat (MWE), CBOT Rough Rice (RR), CME industry. While Sugar No. 11 (SB) is primarily an #pageNumber=1&sortAsc=false&sortField=oi. Live Cattle (LC), ICE Cocoa (CC), ICE Coffee C (KC), international benchmark, the contract is still used 494 Notional values here and throughout this ICE FCOJ–A (OJ), ICE U.S. Sugar No. 11 (SB), and for price discovery and hedging within the United section of the release are derived from CFTC ICE U.S. Sugar No. 16 (SF). States and has significantly more open interest and internal data obtained from the Commitments of 499 Decision Innovation Solutions, 2018 Soybean daily volume than the domestic Sugar No. 16 (SF). Traders Reports. Notional value means the U.S. Meal Demand Assessment, United Soybean Board, As a pair, these two contracts are crucial tools for dollar value of both long and short contracts available at https://www.unitedsoybean.org/wp- risk management and for ensuring reliable pricing, without adjusting for delta in options. Data is as of content/uploads/LOW-RES-FY2018-Soybean-Meal- with much of the price discovery occurring in the June 30, 2019. Demand-Analysis-1.pdf. higher-volume Sugar No. 11 (SB) contract. 495 What is Agriculture’s Share of the Overall U.S. 500 Wheat Sector at a Glance, USDA Economic 508 Although the macroeconomic impact of these Economy, USDA Economic Research Services, Research Service, available at https:// markets is smaller, the Commission reiterates that available at https://www.ers.usda.gov/data- www.ers.usda.gov/topics/crops/wheat/wheat-sector- it has selected the 25 core referenced futures products/chart-gallery/gallery/chart-detail/ at-a-glance. contracts also based on the importance of ?chartId=58270. 501 Cattle & Beef Sector at a Glance, USDA derivatives in these commodities to cash-market 496 Ag and Food Sales and the Economy, USDA Economic Research Service, available at https:// pricing. Economic Research Services, available at https:// www.ers.usda.gov/topics/animal-products/cattle- 509 Feed Outlook: May 2019, USDA Economic www.ers.usda.gov/data-products/ag-and-food- beef/sector-at-a-glance. Research Service, available at https:// statistics-charting-the-essentials/ag-and-food- 502 World of Cotton, National Cotton Council of www.ers.usda.gov/publications/pub-details/ sectors-and-the-economy. America, available at http://www.cotton.org/econ/ ?pubid=93094. 497 Outlook for U.S. Agricultural Trade, USDA world/index.cfm. 510 Economic Profile of the U.S. Chocolate Economic Research Services, available at https:// 503 Feedgrains Sector at a Glance, USDA Industry, World Cocoa Foundation, available at www.ers.usda.gov/topics/international-markets-us- Economic Research Service, available at https:// https://www.worldcocoafoundation.org/wp-content/ trade/us-agricultural-trade/outlook-for-us- www.ers.usda.gov/topics/crops/corn-and-other- uploads/Economic_Profile_of_the_US_Chocolate_ agricultural-trade. feedgrains/feedgrains-sector-at-a-glance. Industry_2011.pdf.

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The Gold (GC) contract, for example, catalysts for gasoline engines and in highly volatile due to changes in trades the equivalent of nearly 27 dental and medical applications weather, economic health, demand- million ounces and 170,000 contracts (palladium). A disruption in any of related price swings, and pipeline and daily. 511 Outstanding futures and these markets would impact highly supply availability or disruptions. These options notional values range from important and sensitive industries, futures contracts are used by some of approximately $234 billion in the case including those critical to national the largest refiners, exploration and of Gold (GC), to approximately $2.34 security, and would also impact the production companies, distributors, and billion in the case of Palladium (PA), price of consumer products. by other key players in the energy with the other metals core referenced The underlying metals markets also industry, and are some of the most futures contracts all falling somewhere create jobs and contribute to GDP. Over widely traded and valuable contracts in in between.512 Metals futures are used 20,000 people were employed in U.S. the world in terms of notional value. by a diverse array of commercial end- gold and copper mines and mills in The NYMEX Light Sweet Crude Oil (CL) users to hedge their operations, 2017 and 2018, metal ore mining contract, for example, is the world’s including mining companies, merchants contributed $54.5 billion to U.S. GDP in most liquid and actively traded crude and refiners. 2015, and the global copper mining oil contract, trading nearly 1.2 million The underlying commodities are also industry drives more than 45 percent of contracts a day, and the NYMEX Henry important to the U.S. economy. In 2018, the world’s GDP, either on a direct basis Hub Natural Gas (NG) contract trades U.S. mines produced $82.2 billion of or through the use of products that 400,000 contracts daily.520 Futures and raw materials, including the facilitate other industries.517 option notional values range from $ 53 commodities underlying the five metals The gold and silver markets are billion in the case of NYMEX NY Harbor core referenced futures contracts: especially important because they serve RBOB Gasoline (RB) and NYMEX NY COMEX Gold (GC), COMEX Silver (SI), as financial assets and a store of value Harbor ULSD Heating Oil (HO), to $ 498 COMEX Copper (HG), NYMEX Platinum for individual and institutional billion for NYMEX Light Sweet Crude 513 (PL), and NYMEX Palladium (PA). investors, including in times of Oil (CL).521 U.S. mines produced 6.6 million ounces economic or political uncertainty. Some of the energy core referenced of gold in 2018 worth around $9.24 Several exchange-traded funds (‘‘ETFs’’) futures contracts also serve as key billion as of July 1, 2019, and the United that are important instruments for U.S. benchmarks for use in pricing cash- States holds the largest official gold retail and institutional investors also market and other transactions. NYMEX reserves of any country, worth around hold significant quantities of these NY Harbor RBOB Gasoline (RB) is the $366 billion and representing 75 percent metals to back their shares. A disruption main benchmark used for pricing of the value of total U.S. foreign to any of these metals markets would gasoline in the U.S. petroleum products 514 reserves. U.S. silver refineries thus not only impact producers and market, a huge physical market with retailers, but also potentially retail and produced around 52.5 million ounces of total U.S. refinery capacity of institutional investors. The iShares silver worth around $800 million in approximately 9.5 million barrels per 515 Silver Trust ETF, for example, holds 2018 at current prices. day of gasoline.522 Similarly, the Major industries, including steel, around 323.3 million ounces of silver NYMEX NY Harbor ULSD Heating Oil aerospace, and electronics, process and worth $4.93 billion, and the largest U.S. (HO) contract is the main benchmark transform these materials, creating about listed gold-backed ETF holds around used for pricing the distillate products $3.02 trillion in value-added 25.5 million ounces to back its shares market, which includes diesel fuel, products.516 The five metals worth around $35.7 billion.518 Platinum heating oil, and jet fuel. 523 commodities are key components of and palladium ETFs are worth hundreds The U.S. energy markets are some of these products, including for use in: of millions of dollars as well.519 Batteries, solar panels, water the most important and complex in the 5. Energy Commodities world, contributing over $ 1.3 trillion to purification systems, electronics, and 524 chemical refining (silver); jewelry, The energy core referenced futures the U.S. economy. Crude oil, heating electronics, and as a store of value markets are crucial tools for hedging oil, gasoline, and natural gas, the price risk for commodities which can be commodities underlying the four energy (gold); building construction, 525 transportation equipment, and core reference futures contracts, are industrial machinery (copper); 517 Creamer, Martin, Global Mining Derives 45%- key contributors to job growth and GDP. automobile catalysts for diesel engines Plus of World GDP, Mining Weekly (July. 4, 2012), In 2015, the natural gas and oil available at https://www.miningweekly.com/print- industries supported 10.3 million jobs and in chemical, electric, medical and version/global-mining-drives-45-plus-of-world-gdp- biomedical applications, and petroleum cutifani-2012-07-04. Platinum and palladium mine directly and indirectly, accounting for refining (platinum); and automobile production in 2018 was less substantial, worth $114 5.6 percent of total U.S. employment, million and $695 million, respectively (All such and generating $ 714 billion in wages to valuations throughout this release are at current 511 Gold Futures Quotes, CME Group website, prices as of July 2, 2019.). See Bloxham, Lucy, et 520 Calculations based on data submitted to the available at https://www.cmegroup.com/trading/ al., Pgm Market Report May 2019, Johnson Matthey, _ _ Commission pursuant to part 16 of the metals/precious/gold quotes globex.html. available at http://www.platinum.matthey.com/ 512 Commission’s regulations. Calculations based on data submitted to the documents/new-item/pgm%20market%20reports/ 521 Commission pursuant to part 16 of the pgm_market_report_may_19.pdf. However, Calculations based on data submitted to the Commission’s regulations. derivatives contracts in those commodities do play Commission pursuant to part 16 of the 513 Mineral Commodity Summaries 2019, U.S. a role in price discovery. Commission’s regulations. 522 Geological Survey, available at http://prd-wret.s3- 518 Historical Data, SPDR Gold Shares, available CME Comment letter dated April 24, 2015 at us-west-2.amazonaws.com/assets/palladium/ at http://www.spdrgoldshares.com/usa/historical- 79. production/atoms/files/mcs2019_all.pdf. data. Data as of July 1, 2019. 523 Id. at 136. 514 CPM Gold Yearbook 2019, CPM Group, 519 iShares Silver Trust Fund, iShares, available 524 Natural Gas and Oil National Factsheet, API available at https://www.cpmgroup.com/store/cpm- at https://www.ishares.com/us/products/239855/ Energy, available at https://www.api.org/∼/media/ gold-yearbook-2019; Goldhub, World Gold Council, ishares-silver-trust-fund/1521942788811. Files/Policy/Jobs/National-Factsheet.pdf. available at https://www.gold.org/goldhub. ajax?fileType=xls&fileName=iShares-Silver-Trust_ 525 The four energy core referenced futures 515 World Silver Survey 2019, The Silver Institute, fund&dataType=fund, https:// contracts are: NYMEX Light Sweet Crude Oil (CL), available at https://www.silverinstitute.org/wp- www.aberdeenstandardetfs.us/institutional/us/en- NYMEX NY Harbor ULSD Heating Oil (HO), content/uploads/2019/04/WSS2019V3.pdf. us/products/product/etfs-physical-platinum-shares- NYMEX NY Harbor RBOB Gasoline (RB), and 516 Id. pplt-arca#15. NYMEX Henry Hub Natural Gas (NG).

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account for 6.7 percent of national Similarly, S&P’s GSCI index is, among contracts as measured by open interest income.526 Crude oil alone, which is a other things, ‘‘designed to reflect the and volume. In that regard, based on key component in making gasoline, relative significance of each of the FIA end of month open interest data and contributes 7.6 percent of total U.S. constituent commodities to the world 12-month total trading volume data for GDP. RBOB gasoline, which is a economy.’’ 532 Applying these criteria, December 2019, CBOT Oats had end of byproduct of crude oil that is used as Bloomberg and S&P have deemed month open interest of 4,720 contracts fuel for vehicles and appliances, eligible for inclusion in their indices and 12-month total trading volume contributes $ 35.5 billion in income and lists of commodities that overlap ending in December 2019 of 162,682 $57 billion in economic activity.527 significantly with the Commission’s round turn contracts.533 In comparison, ULSD comprises all on-highway diesel proposed list of 25 core referenced the end of month December 2019 open fuel consumed in the United States, and futures contracts. Independent index interest and 12-month total trading is also commonly used as heating oil.528 providers thus appear to have arrived at volume ending in December 2019 for Natural gas is similarly important, similar conclusions to the Commission’s the other commodity futures contracts serving nearly 69 million homes, preliminary necessity finding regarding that were not selected to be included as 185,400 factories, and 5.5 million the relative importance of certain core referenced futures contracts were businesses such as hotels, restaurants, commodity markets. as follows: COMEX Aluminum (267 OI/ 2,721 Vol), COMEX Lead (0 OI/0 Vol), hospitals, schools, and supermarkets. 7. Conclusion More than 2.5 million miles of pipeline CME Random Length Lumber (3,275 OI/ transport natural gas to more than 178 This proposal only sets limits for 11,893 Vol), and CBOT Ethanol (708 OI/ million Americans.529 Natural gas is referenced contracts for which a DCM 2,686 Vol.). It would be impracticable also a key input for electricity currently lists a physically-settled core for the Commission to analyze in generation and comprises more than one referenced futures contract. As comprehensive fashion all contracts that quarter of all primary energy used in the discussed above, there are currently have either feature, so the Commission United States. 530 U.S. agricultural over 1,200 contracts on physical has chosen commodities for which the producers also rely on an affordable, commodities listed on DCMs, and there underlying and derivatives markets both dependable supply of natural gas, as are physical commodities other than play important economic roles, fertilizer used to grow crops is those underlying the 25 core referenced including the potential for especially composed almost entirely of natural gas futures contracts that are important to acute burdens on a given commodity in components. the national economy, including, for interstate commerce that would arise example, steel, butter, uranium, from excessive speculation in 6. Consistency With Commodity Indices aluminum, lead, random length lumber, derivatives markets. Line drawing of The criteria underlying the and ethanol. However, unlike the 25 this nature is inherently inexact, and the Commission’s necessity finding is core referenced futures contracts, the Commission will revisit these and other consistent with the criteria used by derivatives markets for those contracts ‘‘from time to time’’ as the several widely tracked third party commodities are not as large as the statute requires.534 Depending on facts commodity index providers in markets for the 25 core referenced and circumstances, including the determining the composition of their futures contracts and/or play a less Commission’s experience administering indices. Bloomberg selects commodities significant role in the price discovery the proposed limits with respect to the for its Bloomberg Commodity Index that process. 25 core referenced futures contracts, the in its view are ‘‘sufficiently significant For example, the futures contracts on Commission may determine that to the world economy to merit steel, butter, and uranium were not additional limits are necessary within consideration,’’ that are ‘‘tradeable included as core referenced futures the meaning of section 4a(a)(1). through a qualifying related futures contracts because they are cash-settled As discussed in the cost benefit contract’’ and that generally are the contracts that settle to a third party consideration below, the Commission’s ‘‘subject of at least one futures contract index. Among the agricultural proposed limits are not without costs, commodity futures listed on CME that that trades on a U.S. exchange.’’ 531 and there are potential burdens or are cash-settled only to an index are: negative consequences associated with 535 526 Natural Gas and Oil National Factsheet, API class III milk, feeder cattle, and lean establishing the proposed limits. In Energy, available at https://www.api.org/∼/media/ hogs. All three of these were included particular, if the levels are set too high, Files/Policy/Jobs/National-Factsheet.pdf; in the 2011 Final Rulemaking. Because there is a greater risk of excessive PricewaterhouseCoopers, Impacts of the Natural there are no physically-settled futures speculation that could harm market Gas and Oil Industry on the US Economy in 2015, API Energy, available at https://www.api.org/∼/ contracts on these commodities, these participants and the public. If the levels media/Files/Policy/Jobs/Oil-and-Gas-2015- cash-settled contracts would not qualify are set too low, transaction costs may Economic-Impacts-Final-Cover-07-17-2017.pdf. as referenced contracts are would not be rise and liquidity could be reduced.536 527 PricewaterhouseCoopers, Impacts of the subject to the proposed rule. While the Nevertheless, the Commission Natural Gas and Oil Industry on the US Economy futures contracts on aluminum, lead, preliminarily believes that the specific in 2015, API Energy, at 12, available at https:// www.api.org/∼/media/Files/Policy/Jobs/Oil-and- random length lumber, and ethanol are proposed limits applicable to the 25 Gas-2015-Economic-Impacts-Final-Cover-07-17- physically settled contracts, their open core referenced futures contracts would 2017.pdf. interest and trading volume is lower 528 CME Comment Letter dated April 24, 2015 at than that of the CBOT Oats contract, 533 FIA notes that volume for exchange-traded 135. which is the smallest market included futures is measured by the number of contracts 529 Natural Gas: The Facts, American Gas traded on a round-trip basis to avoid double- Association, available at https://www.aga.org/ among the 25 core referenced futures counting. Furthermore, FIA notes that open interest globalassets/2019-natural-gas-factsts-updated.pdf. for exchange-traded futures is measured by the 530 Id. overlaps significantly with the Commission’s number of contracts outstanding at the end of the 531 The Bloomberg Commodity Index proposed list of 25 core referenced futures month. Methodology, Bloomberg, at 17 (Dec. 2018) contracts. 534 CEA section 4a(a)(1). available at https://data.bloomberglp.com/ 532 S&P GSCI Methodology, S&P Dow Jones 535 See infra Section IV.A. (discussion of cost- professional/sites/10/BCOM-Methodology- Indices, at 8 (Oct. 2019) available at https:// benefit considerations for the proposed changes). December-2019.pdf. The list of commodities that us.spindices.com/documents/methodologies/ 536 See infra Section IV.A.2.a. (cost-benefit Bloomberg deems eligible for inclusion in its index methodology-sp-gsci.pdf?force_download=true. discussion of market liquidity and integrity).

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limit such potential costs, and that the status quo requirements. For this the costs and benefits that quantification significant benefits associated with purpose, the status quo requirements is not feasible with reasonable precision advancing the statutory goal of include the CEA’s statutory because doing so would require preventing the undue burdens requirements as well as any applicable understanding all market participants’ associated with excessive speculation in Commission regulations that are business models, operating models, cost these commodities justify the potential consistent with the CEA.539 As a result, structures, and hedging strategies, costs associated with establishing the any proposed changes to the including an evaluation of the potential proposed limits. Commission’s regulations that are alternative hedging or business required by the CEA or other applicable strategies that could be adopted under G. Request for Comment statutes would not be deemed to be a the proposal. Further, while Congress The Commission requests comment discretionary change for purposes of has tasked the Commission with on all aspects of the proposed necessity discussing related costs and benefits. establishing such position limits as the finding. The Commission also invites The Commission anticipates that the Commission finds are ‘‘necessary,’’ comments on the following: proposed position limits regulations some of the benefits, such as mitigating (50) Does the proposed necessity will affect market participants or eliminating manipulation or finding take into account the relevant differently depending on their business excessive speculation, may be very factors to ascertain whether position model and scale of participation in the difficult or infeasible to quantify. These limits would be necessary on a core commodity contracts that are covered by benefits, moreover, would likely referenced futures contract? the proposal.540 The Commission also manifest over time and be distributed (51) Does the proposed necessity anticipates that the proposal may result over the entire market. finding base its analysis on the correct in ‘‘programmatic’’ costs to some market In light of these limitations, to inform levels of trading volume and open participants. Generally, affected market its consideration of costs and benefits of interest? If not, what would be a more participants may incur increased costs the proposed regulations, the appropriate minimum level of trading associated with developing or revising, Commission in its discretion relies on: volume and/or open interest upon implementing, and maintaining (1) Its experience and expertise in which to evaluate whether federal compliance functions and procedures. regulating the derivatives markets; (2) position limits are necessary to prevent Such costs might include those related information gathered through public excessive speculation? to the monitoring of positions in the comment letters 542 and meetings with a (52) Are there particular attributes of relevant referenced contracts; related broad range of market participants; and any of the 25 proposed core referenced filing, reporting, and recordkeeping (3) certain Commission data, such as the futures contracts that the Commission requirements, and the costs of changes Commission’s Large Trader Reporting should consider when determining to information technology systems. System and data reported to swap data whether federal position limits are or The Commission has preliminarily repositories. are not necessary for that particular determined that it is not feasible to In addition to the specific questions product? quantify the costs or benefits with included throughout the discussion reasonable precision and instead has below, the Commission generally IV. Related Matters identified and considered the costs and requests comment on all aspects of its A. Cost-Benefit Considerations benefits qualitatively.541 The consideration of costs and benefits, Commission believes that for many of including: Identification and assessment 1. Introduction of any costs and benefits not discussed Section 15(a) of the Commodity 539 This cost-benefit consideration section is herein; data and any other information Exchange Act (‘‘CEA’’ or ‘‘Act’’) requires divided into seven parts, including this to assist or otherwise inform the introductory section, each discussing their the Commodity Futures Trading respective baseline benchmarks with respect to any Commission’s ability to quantify or Commission (‘‘Commission’’) to applicable CEA or regulatory provisions. qualify the costs and benefits of the consider the costs and benefits of its 540 For example, the proposal could result in proposed rules; and substantiating data, actions before promulgating a regulation increased costs to market participants who may statistics, and any other information to 537 need to adjust their trading and hedging strategies under the CEA. Section 15(a) further to ensure that their aggregate positions do not support positions posited by specifies that the costs and benefits exceed federal position limits, particularly those commenters with respect to the shall be evaluated in light of five broad who will be subject to federal position limits for the Commission’s consideration of costs areas of market and public concern: (1) first time (i.e., those who may trade contracts for and benefits. which there are currently no federal limits). On the The Commission preliminarily Protection of market participants and other hand, existing costs could decrease for those the public; (2) efficiency, existing traders whose positions would fall below considers the benefits and costs competitiveness, and financial integrity the new proposed limits and therefore would not discussed below in the context of of futures markets; (3) price discovery; be forced to adjust their trading strategies and/or international markets, because market apply for exemptions from the limits, particularly participants and exchanges subject to (4) sound risk management practices; if the Commission’s proposal improves market and (5) other public interest liquidity or other metrics of market health. the Commission’s jurisdiction for considerations (collectively, the Similarly, for those market participants who would purposes of position limits may be ‘‘section 15(a) factors’’).538 become subject to the federal position limits, organized outside of the United States; general costs would be lower to the extent such The Commission interprets section market participants can leverage their existing some industry leaders typically conduct 15(a) to require the Commission to compliance infrastructure in connection with operations both within and outside the consider only those costs and benefits of existing exchange position limit regimes relative to United States; and market participants its proposed changes that are those market participants that do not currently have may follow substantially similar such systems. business practices wherever located. attributable to the Commission’s 541 With respect to the Commission’s analysis discretionary determinations (i.e., under its discussion of its obligations under the changes that are not otherwise required Paperwork Reduction Act (‘‘PRA’’), the Commission 542 While the general themes contained in by statute) compared to the existing has endeavored to quantify certain costs and other comments submitted in response to prior proposals burdens imposed on market participants related to informed this rulemaking, the Commission is collections of information as defined by the PRA. withdrawing the 2013 Proposal, the 2016 537 7 U.S.C. 19(a). See generally Section IV.B. (discussing the Supplemental Proposal, and the 2016 Reproposal. 538 Id. Commission’s PRA determinations). See supra Section I.A.

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Where the Commission does not month limits would apply to futures the effects that these contracts have on specifically refer to matters of location, and options on futures on 16 additional the underlying commodity, especially the discussion of benefits and costs physical commodities, for a total of 25 with respect to price discovery; the fact below refers to the effects of this physical commodities.546 that they require physical delivery of proposal on all activity subject to the The Commission has preliminarily the underlying commodity and therefore proposed regulations, whether by virtue interpreted CEA section 4a to require may be more affected by manipulation of the activity’s physical location in the that the Commission must make an such as corners and squeezes compared United States or by virtue of the antecedent ‘‘necessity’’ finding that to cash-settled contracts; and, in some activity’s connection with or effect on establishing federal position limits is cases, the especially acute economic U.S. commerce under CEA section ‘‘necessary’’ to diminish, eliminate, or burdens on interstate commerce that 2(i).543 prevent certain burdens on interstate could arise from excessive speculation The Commission will identify and commerce with respect to the physical in these contracts causing sudden or discuss the costs and benefits organized commodities in question.547 As the unreasonable fluctuations or conceptually by topic, and certain statute does not define the term unwarranted changes in the price of the topics may generally correspond with a ‘‘necessary,’’ the Commission must commodities underlying these specific proposed regulatory section. apply its expertise in construing such contracts.549 The Commission’s discussion is term, and, as discussed further below, More specifically, the 25 core organized as follows: (1) The scope of must do so consistent with the policy referenced futures contracts were the commodity derivative contracts that goals articulated by Congress, including selected because they: (i) Physically would be subject to the proposed in CEA sections 4a(a)(2)(C) and 4a(a)(3), settle, (ii) have high levels of open position limits framework, including as noted throughout this discussion of interest 550 and significant notional with respect to the 25 proposed core the Commission’s cost-benefit value of open interest,551 (iii) serve as a referenced futures contracts and the considerations.548 As discussed in reference price for a significant number proposed definitions of ‘‘referenced greater detail in the preamble, the of swaps and/or cash market contract’’ and ‘‘economically equivalent Commission proposes to establish transactions, and/or (iv) have, in most swaps;’’ (2) the proposed federal position limits on futures and options cases, relatively higher average trading position limit levels (proposed § 150.2); on futures for these 25 commodities on volumes.552 These factors reflect the (3) the proposed federal bona fide the basis that position limits on such important and varying degrees of hedging definition (proposed § 150.1) contracts are ‘‘necessary.’’ In linkage between the derivatives markets and other Commission exemptions from determining to include the proposed 25 and the underlying cash markets. The federal position limits (proposed core referenced futures contracts within Commission preliminarily § 150.3); (4) proposed streamlined the proposed federal position limit acknowledges that there is no process for the Commission and framework, the Commission considered mathematical formula that would be exchanges to recognize bona fide hedges dispositive, though the Commission has and to grant exemptions for purposes of the vacated 2011 Position Limits Rulemaking’s considered relevant data where it is amendments to 17 CFR 150.2 (see International federal position limits (proposed available. Swaps and Derivatives Association v. United States As a result, the Commission §§ 150.3 and 150.9) and related Commodity Futures Trading Commission, 887 F. reporting changes to part 19 of the Supp. 2d 259 (D.D.C. 2012)), the baseline or status preliminarily has concluded that it must quo consists of the provisions of the CEA relating exercise its judgment in light of facts Commission’s regulations; (5) the to position limits immediately prior to effectiveness proposed exchange-set position limits and circumstances, including its of the Dodd-Frank Act amendments to the CEA and experience and expertise, to determine framework and exchange-granted the relevant provisions of existing parts 1, 15, 17, exemptions thereto (proposed § 150.5); 19, 37, 38, 140, and 150 of the Commission’s whether federal position limit levels are regulations, subject to the aforementioned economically justified. For example, and (6) the section 15(a) factors. exceptions. based on its general experience, the 2. ‘‘Necessity Finding’’ and Scope of 546 The 16 proposed new products that would be Commission preliminarily recognizes subject to federal spot month limits would include Referenced Futures Contracts Subject to seven agricultural (CME Live Cattle (LC), CBOT that contracts that physically settle can, Proposed Federal Position Limit Levels Rough Rice (RR), ICE Cocoa (CC), ICE Coffee C (KC), in certain circumstances during the spot Federal spot and non-spot month ICE FCOJ–A (OJ), ICE U.S. Sugar No. 11 (SB), and month, be at risk of corners and ICE U.S. Sugar No. 16 (SF)), four energy (NYMEX squeezes, which could distort pricing limits currently apply to futures and Light Sweet Crude Oil (CL), NYMEX New York options on futures on the nine legacy Harbor ULSD Heating Oil (HO), NYMEX New York and resource allocation, make it more agricultural commodities.544 The Harbor RBOB Gasoline (RB), NYMEX Henry Hub costly to implement hedge strategies, Commission’s proposal would expand Natural Gas (NG)), and five metals (COMEX Gold and harm the underlying cash market. (GC), COMEX Silver (SI), COMEX Copper (HG), Similarly, certain contracts with higher the scope of commodity derivative NYMEX Palladium (PA), and NYMEX Platinum contracts currently subject to the (PL)) contracts. 547 See supra Section III.F. (discussion of the 549 See supra Section III.F. (discussion of the Commission’s existing federal position necessity finding). 545 necessity finding). limits framework so that federal spot- 550 548 In promulgating the position limits Open interest for this purpose includes the framework, Congress instructed the Commission to sum of open contracts, as defined in § 1.3 of the 543 7 U.S.C. 2(i). consider several factors: First, CEA section 4a(a)(3) Commission’s regulations, in futures contracts and 544 The nine legacy agricultural contracts requires the Commission when establishing in futures option contracts converted to a futures- currently subject to federal spot and non-spot position limits, to the maximum extent practicable, equivalent amount, as defined in current § 150.1(f) month limits are: CBOT Corn (C), CBOT Oats (O), in its discretion, to (i) diminish, eliminate, or of the Commission’s regulations. See 17 CFR 1.3 CBOT Soybeans (S), CBOT Wheat (W), CBOT prevent excessive speculation; (ii) deter and prevent and 150.1(f). Soybean Oil (SO), CBOT Soybean Meal (SM), market manipulation, squeezes, and corners; (iii) 551 Notional value of open interest for this MGEX Hard Red Spring Wheat (MWE), ICE Cotton ensure sufficient market liquidity for bona fide purpose is open interest multiplied by the unit of No. 2 (CT), and CBOT KC Hard Red Winter Wheat hedgers; and (iv) ensure that the price discovery trading for the relevant futures contract multiplied (KW). function of the underlying market is not disrupted. by the price of that futures contract. 545 17 CFR 150.2. Because the Commission has Second, CEA section 4a(a)(2)(C) requires the 552 A combination of higher average trading not yet implemented the Dodd-Frank Act’s Commission to strive to ensure that any limits volumes and open interest is an indicator of a amendments to the CEA regarding position limits, imposed by the Commission will not cause price contract’s market liquidity. Higher trading volumes except with respect to aggregation (see generally discovery in a commodity subject to position limits make it more likely that the cost of transactions is Final Aggregation Rulemaking, 81 FR at 91454) and to shift to trading on a foreign exchange. lower with narrower bid-ask spreads.

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open interest and/or trading volume are positions limits on these contracts may may ultimately benefit commercial end more likely to serve as benchmarks and/ impose costs on market participants by users and possibly be passed on to the or references for pricing cash market constraining liquidity. However, the general public in the form of better and other transactions, meaning a Commission believes that the potential pricing. As noted above, the scope of the distortion of the price of any such harmful effect on liquidity will be Commission’s necessity finding with contract could potentially impact muted, as a result of the generally high respect to the 25 proposed core underlying cash markets that are levels of open interest and trading referenced futures contracts will allow important to interstate commerce.553 volumes of the respective 25 core the Commission to focus on those As discussed in more detail in referenced futures contracts.555 contracts that, in general, the connection with proposed § 150.2 The Commission has preliminarily Commission preliminarily recognizes as below, the Commission preliminarily determined that, as a general matter, having particular importance in the believes that establishing federal focusing on the 25 proposed core price discovery process for their position limits at the proposed levels for referenced futures contracts may benefit respective underlying commodities as the proposed 25 core referenced futures market integrity since these contracts well as potentially acute economic contracts and related referenced generally are amongst the largest burdens that would arise from excessive contracts would result in several physically-settled contracts with respect speculation causing sudden or benefits, including a reduction in the to relative levels of open interest and/ unreasonable fluctuations or probability of excessive speculation and or trading volumes. As a result, the unwarranted changes in the commodity market manipulation (e.g., squeezes and Commission preliminarily believes that prices underlying these contracts. corners) and the attendant harms to excessive speculation or potential To the extent the Commission does price discovery that may result. The market manipulation in such contracts not include additional commodities in Commission acknowledges, in would be more likely to affect more its necessity finding, the Commission’s connection with establishing federal market participants and therefore approach may also introduce additional position limit levels under proposed potentially more likely to cause an costs in the form of loss of certain § 150.2 (discussed below), that position undue and unnecessary burden (e.g., benefits associated with the proposed limits, especially if set too low, could potential harm to market integrity or federal position limits framework, such adversely affect market liquidity and liquidity) on interstate commerce. as stronger prevention of market increase transaction costs, especially for Because each proposed core referenced manipulation, such as corners and bona fide hedgers, which ultimately futures contract is physically-settled, as squeezes. Accordingly, the greater the might be passed on to the general opposed to cash-settled, the proposal potential benefits of the proposed public. However, the Commission is focuses on preventing corners and federal position limits framework in also cognizant that setting position limit squeezes in those contracts where such general, the greater the potential cost in levels too high may result in an increase market manipulation could cause the reduction in market integrity in in the possibility of excessive significant harm in the price discovery general from not including other speculation and the harms that may process for their respective underlying possible commodities within the federal 556 result, such as sudden or unreasonable commodities. position limits framework (only to the fluctuations or unwarranted changes in While the Commission recognizes that extent any such additional commodities market participants may engage in the price of the commodities underlying would be found to be ‘‘necessary’’ for market manipulation through cash- these contracts. purposes of CEA section 4a). For purposes of this discussion, rather settled futures and options on futures, Nonetheless, some of the potential than discussing the general potential the Commission preliminarily has harms to market integrity associated benefits and costs of the federal position determined that focusing on the with not including additional physically-settled core referenced limit framework, the Commission will commodities within the federal position futures contracts will benefit market instead focus on the benefits and costs limits framework could be mitigated to integrity by reducing the risk of corners resulting from the Commission’s an extent by exchanges, which can use and squeezes in particular. In addition, proposed necessity finding with respect tools other than position limits, such as not imposing position limits on to the 25 core referenced futures margin requirements or position additional commodities may foster non- contracts.554 The Commission will accountability at lower levels than excessive speculation, leading to better address potential benefits and costs of potential federal limits, to defend prices and more efficient resource against certain market behavior. its approach with respect to: (1) The allocation in these commodities. This Similarly, for those contracts that would liquidity and integrity of the futures and not be subject to the proposal, exchange- related options markets and (2) market 555 The contracts that would be subject to the set position limits alternatively may participants and exchanges. Commission’s proposal generally have higher achieve the same benefits discussed in trading volumes and open interest, which tend to a. Potential Impact of the Scope of the have greater liquidity, including relatively narrower connection with the proposed federal Commission’s Necessity Finding on bid-ask spreads and relatively smaller price impacts position limits. Market Liquidity and Integrity from larger transaction sizes. Further, all other factors being equal, markets for contracts that are b. Potential Impact of the Scope of the The Commission has preliminarily more illiquid tend to be more concentrated, so that Commission’s Necessity Finding on determined that the 25 contracts that the a position limit on such contracts might reduce Market Participants and Exchanges Commission proposes to include in its open interest on one side of the market, because a large trader would face the potential of being The Commission acknowledges that necessity finding are among the most capped out by a position limit. For this reason, the federal position limits proposed liquid physical commodity contracts, as among others, the contracts to which the federal herein could impose certain measured by open interest and/or position limits in existing § 150.2 apply include administrative, logistical, technological, trading volume, and therefore, imposing some of the most liquid physical-delivery futures contracts. and financial burdens on exchanges and 556 The Commission must also make this market participants, especially with 553 See supra Section III.F. (discussion of the determination in light of its limited available respect to developing or expanding necessity finding). resources and responsibility to allocate taxpayer 554 See supra Section III.F. (discussion of the resources in an efficient manner to meet the goals compliance systems and the adoption of necessity finding). of section 4a(a)(1), and the CEA generally. monitoring policies. However, the

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Commission preliminarily believes that levels are based on 25 percent, or lower, Third, the proposed position limits its approach to delaying the effective of the estimated deliverable supply framework would expand to cover (i) date by 365 days from publication of (‘‘EDS’’).560 For the existing single any cash-settled futures and related any final rule in the Federal Register month and all-months combined limit options contracts directly or indirectly should mitigate compliance costs by levels, the levels are set at 10 percent of linked to any of the 25 proposed permitting the update and build out of open interest for the first 25,000 physically-settled core referenced technological and compliance systems contracts of open interest, with a futures contracts as well as (ii) any more gradually. It may also reduce the marginal increase of 2.5 percent of open economically equivalent swaps. burdens on market participants not interest thereafter (the ‘‘10, 2.5 percent For spot month positions, the previously subject to position limits, formula’’). proposed position limits would apply who will have a longer period of time Proposed § 150.2 would revise and separately, net long or short, to cash- to determine whether they may qualify expand the current federal position settled contracts and to physically- for certain bona fide hedging limits framework as follows: First, for settled contracts in the same recognitions or other exemptions, and to spot month levels, proposed § 150.2 commodity. This would result in a possibly alter their trading or hedging would (i) cover 16 additional separate net long/short position for each strategies.557 Further, the delayed physically-settled futures and related category so that cash-settled contracts in effective date will reduce the burdens options contracts, based on the a particular commodity would be netted on exchanges, market participants, and Commission’s existing approach of with other cash-settled contracts in that the Commission by providing each with establishing limit levels at 25 percent or commodity, and physically-settled more time to resolve technological and lower of EDS, for a total of 25 core contracts in a given commodity would other challenges for compliance with referenced futures contracts subject to be netted with other physically-settled the new regulations. In turn, the federal spot month limits (i.e., the nine contracts in that commodity; a cash- Commission preliminarily anticipates legacy agricultural contracts plus the settled contract and a physically-settled that the extra time provided by the proposed 16 additional contracts); 561 contract would not net with one delayed effective date will result in and (ii) update the existing spot month another. Outside the spot month, cash more robust systems for market levels for the nine legacy agricultural and physically-settled contracts in the oversight, which should better facilitate contracts based on revised EDS.562 same commodity would be netted the implementation of the Commission’s Second, for non-spot month levels, together to determine a single net long/ position limits framework and avoid proposed § 150.2 would revise the 10, short position. unnecessary market disruptions while 2.5 percent formula so that (i) the Fourth, proposed § 150.2 would exchanges and market participants incremental 2.5 percent increase takes subject certain pre-existing positions to prepare for its implementation. effect after 50,000 contracts of open federal position limits during the spot However, the longer the proposed delay interest, rather than after 25,000 month but would grandfather certain in the proposal’s effective date, the contracts under the existing rule (the pre-existing positions outside the spot longer it will take to realize the benefits ‘‘marginal threshold level’’), and (ii) the month. identified above. limit levels will be calculated by In setting the federal position limit applying the updated 10, 2.5 percent levels, the Commission seeks to advance 3. Federal Position Limit Levels formula to open interest data for the the enumerated statutory objectives (Proposed § 150.2) periods from July 2017–June 2018 and with respect to position limits in CEA a. General Approach July 2018–June 2019 of the applicable section 4a(a)(3)(B).564 The Commission Existing § 150.2 establishes position futures and delta adjusted futures recognizes that relatively high limit 563 limit levels that apply net long or net options. levels may be more likely to support short to futures and futures-equivalent some of the statutory goals and less 560 See supra Section II.B.1—Existing § 150.2 likely to advance others. For instance, a options contracts on nine legacy (discussing that establishing spot month levels at 25 physically-settled agricultural percent or less of EDS is consistent with past relatively higher limit level may be contracts.558 The Commission has Commission practices). more likely to benefit market liquidity previously set separate federal position 561 The 16 proposed new products that would be for hedgers or ensure that the price limits for: (i) The spot month, and (ii) subject to federal spot month limits would include discovery of the underlying market is seven agricultural (CME Live Cattle (LC), CBOT the single month and all-months Rough Rice (RR), ICE Cocoa (CC), ICE Coffee C (KC), not disrupted, but may be less likely to combined limit levels (i.e., ‘‘non-spot ICE FCOJ–A (OJ), ICE U.S. Sugar No. 11 (SB), and benefit market integrity by being less months’’).559 For the existing spot ICE U.S. Sugar No. 16 (SF)), four energy (NYMEX effective at diminishing, eliminating, or month federal limit levels, the contract Light Sweet Crude Oil (CL), NYMEX NY Harbor preventing excessive speculation or at ULSD Heating Oil (HO), NYMEX NY Harbor RBOB Gasoline (RB), and NYMEX Henry Hub Natural Gas deterring and preventing market 557 Commenters on prior proposals have (NG)), and five metals (COMEX Gold (GC), COMEX manipulation, corners, and squeezes. In requested a sufficient phase-in period. See, e.g., Silver (SI), COMEX Copper (HG), NYMEX particular, setting relatively high federal 2016 Reproposal, 81 FR at 96815 (implementation Palladium (PA), and NYMEX Platinum (PL)) position limit levels may result in timeline). contracts. 558 The nine legacy agricultural contracts 562 The proposal would maintain the current spot excessively large speculative positions currently subject to federal spot and non-spot month limits on CBOT Oats (O). and/or increased volatility, especially month limits are: CBOT Corn (C), CBOT Oats (O), 563 As discussed below, for most of the legacy during speculative showdowns, which CBOT Soybeans (S), CBOT Wheat (W), CBOT agricultural commodities, this would result in a may cause some market participants to Soybean Oil (SO), CBOT Soybean Meal (SM), higher non-spot month limit. However, the retreat from the commodities markets MGEX Hard Red Spring Wheat (MWE), ICE Cotton Commission is not proposing to change the non- No. 2 (CT), and CBOT KC Hard Red Winter Wheat spot month limits for either CBOT Oats (O) or due to perceived decreases in market (KW). MGEX Hard Red Spring Wheat (MWE) based on the integrity. In turn, fewer market 559 For clarity, limits for single and all-months revised open interest since this would result in a participants may result in lower combined apply separately. However, the reduction of non-spot month limits from 2,000 to Commission previously has applied the same limit 700 contracts for CBOT Oats (O) and 12,000 to liquidity levels for hedgers and harm to levels to the single month and all-months 5,700 contracts for MGEX HRS Wheat (MWE). combined. Accordingly, the Commission will Similarly, the Commission also proposed to 564 See supra Section II.B.2.c. (for further discuss the single and all-months limits, i.e., the maintain the current non-spot month limit for discussion regarding the CEA’s statutory objectives non-spot month limits, together. CBOT KC Hard Red Winter Wheat (KW). for the federal position limits framework).

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the price discovery function in the b. Spot Month Levels proposed increase for most of the underlying markets. The Commission proposes to federal non-spot position limits is Conversely, setting a relatively lower maintain 25 percent of EDS as a ceiling predicated on the increase in open federal limit level may be more likely to for federal limits. Based on the interest and trading volume, as reflected diminish, eliminate, or prevent Commission’s experience overseeing in the revised data reviewed by the excessive speculation, but may also federal position limits for decades and Commission, the Commission limit the availability of certain hedging overseeing exchange-set position limits preliminarily believes that its proposal strategies, adversely affect levels of submitted to the Commission pursuant may enhance, or at least should liquidity, and increase transaction maintain, general liquidity, which the 565 to part 40 of the Commission’s costs. Additionally, setting federal regulations, none of the proposed levels Commission preliminarily believes may position limits too low may cause non- listed in Appendix E of part 150 of the benefit those with bona fide hedging excessive speculation to exit a market, Commission’s regulations appears to be positions, and commercial end users in which could reduce liquidity, cause general. On the other hand, the 566 so low as to reduce liquidity for bona ‘‘choppy’’ prices and reduced market fide hedgers or disrupt price discovery Commission understands that many efficiency, and increase option premia function of the underlying market, or so market participants, especially to compensate for the more volatile high as to invite excessive speculation, commercial end users, generally believe prices. The Commission in its discretion manipulation, corners, or squeezes that the existing non-spot month levels has nevertheless endeavored to set because, among other things, any for the nine legacy agricultural federal limit levels, to the maximum potential economic gains resulting from commodities function well, including extent practicable, to benefit the the manipulation may be insufficient to promoting liquidity and facilitating statutory goals identified by Congress. justify the potential costs, including the bona fide hedging in the respective As discussed above, the contracts that costs of acquiring, and ultimately markets. As a result, the Commission’s would be subject to the proposed federal offloading, the positions used to effect proposal may increase the risk of limits are currently subject to either the manipulation. excessive speculation without achieving federal- or exchange-set limits (or both). any concomitant benefits of increased To the extent that the proposed federal c. Levels Outside of the Spot Month liquidity for bona fide hedgers position limit levels are higher than the i. The 10, 2.5 Percent Formula compared to the status quo. existing federal position limit levels for The Commission also preliminarily either the spot or non-spot month, The Commission preliminarily has recognizes that there could be potential market participants currently trading determined that the existing 10, 2.5 costs to keeping the existing 10, 2.5 these contracts could engage in percent formula generally has percent formula (even if revised to additional trading under the proposed functioned well for the existing nine reflect current open interest levels) federal limits in proposed § 150.2 that legacy agricultural contracts and has compared to alternative formulae that otherwise would be prohibited under successfully benefited the markets by would result in even higher federal existing § 150.2.567 On the other hand, taking into account the competing goals position limit levels. First, while the 10, to the extent an exchange-set limit level of facilitating both liquidity formation 2.5 percent formula may have reflected would be lower than its proposed and price discovery while also ‘‘normal’’ observed market activity corresponding federal limit, the protecting the markets from harmful through 1999 when the Commission proposed federal limit would not affect market manipulation and excessive adopted it, it no longer reflects current market participants since market speculation. However, since the existing open interest figures. When adopting participants would be required to limit levels are based on open interest the 10, 2.5 percent formula in 1999, the comply with the lower exchange-set levels from 2009 (except for CBOT Oats Commission’s experience in these limit level (to the extent that the (O), CBOT Soybeans (S), and ICE Cotton markets reflected aggregate futures and exchanges maintain their current No. 2 (CT), for which existing levels are options open interest well below levels).568 based on the respective open interest 500,000 contracts, which no longer from 1999), the Commission is reflects market reality.570 As the nine 565 For example, relatively lower federal limits proposing to revise the levels based on legacy agricultural contracts (with the may adversely affect potential hedgers by reducing the periods from July 2017–June 2018 exception of CBOT Oats (O)) all have liquidity. In the case of reduced liquidity, a and July 2018–June 2019 to reflect the potential hedger may face unfavorable spreads and open interest well above 25,000 prices, in which case the hedger must choose either general increases in open interest and to delay implementing its hedging strategy and trading volume that have occurred over 12,000 to 5,700 contracts for MGEX HRS Wheat hope for more favorable spreads in the near future time in the nine legacy agricultural (MWE). Similarly, the Commission also proposed to or to choose immediate execution (to the extent contracts (other than CBOT Oats (O), maintain the current non-spot month limit for possible) at a less favorable price. CBOT KC HRW Wheat (KW). See supra Section 566 ‘‘Choppy’’ prices often refers to illiquidity in MGEX HRS Wheat (MWE), and CBOT 569 II.B.2.e. —Methodology for Setting Proposed Non- a market where transacted prices bounce between KC HRW Wheat (KW)). Since the Spot Month Limit Levels for further discussion. the bid and the ask prices. Market efficiency may 570 See 64 FR at 24038, 24039 (May 5, 1999). As be harmed in the sense that transacted prices might federal level for COMEX Copper (HG) would be discussed in the preamble, the data show that by need to be adjusted for the bid-ask bounce to below the existing exchange-set level. Accordingly, the 2015–2018 period, five of the nine legacy determine the fundamental value of the underlying market participants may have to change their agricultural contracts had maximum open interest contract. trading behavior with respect to COMEX Copper greater than 500,000 contracts. The contracts for 567 For the spot month, all the legacy agricultural (HG), which could impose compliance and CBOT Corn (C), CBOT Soybeans (S), and CBOT KC contracts other than CBOT Oats (O) would have transaction costs on these traders, to the extent their HRW Wheat (KW) saw increased maximum open higher federal levels. For the non-spot months, all existing trading would violate the proposed lower interest by a factor of four to five times the the legacy agricultural contracts other than CBOT federal limit levels. maximum open interest during the years leading up Oats (O), MGEX HRS Wheat (MWE), and CBOT KC 569 For most of the legacy agricultural to the Commission’s adoption of the 10, 2.5 percent HRW Wheat (KW), would have higher federal commodities, this would result in a higher non-spot formula in 1999. Similarly, the contracts for CBOT levels. month limit. However, the Commission is not Soybean Meal (SM), CBOT Soybean Oil (SO), CBOT 568 While the Commission proposes to generally proposing to change the non-spot month limits for Wheat (W), and MGEX HRS Wheat (MWE) saw either increase or maintain the federal position either CBOT Oats (O) or MGEX HRS Wheat (MWE) increased maximum open interest by a factor of limits for both the spot-months and non-spot based on the revised open interest since this would three to four times. See supra Section II.B.2.e. months compared to existing federal limits, where result in a reduction of non-spot month limits from —Methodology for Setting Proposed Non-Spot applicable, and exchange limits, the proposed 2,000 to 700 contracts for CBOT Oats (O) and Month Limit Levels for further discussion.

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contracts, and in some cases above providers that have entered the market the existing risk management exemption 500,000 contracts, the existing formula over time.571 Compared to when the holders may still be permitted under the may act as a negative constraint on Commission first adopted the 10, 2.5 Commission’s proposal, either as a liquidity formation relative to the higher percent formula, today there exist result of the proposed swap pass- proposed formula. Further, if open relatively more large non-commercial through provision or because of the interest continues to increase over time, traders, such as banks, managed money general increase in limits based on the the Commission anticipates that the traders, and swap dealers, which revised open interest levels.574 The existing 10, 2.5 percent formula could generally hold long positions and act as Commission also preliminarily impose even greater marginal costs on aggregators or market makers that recognizes an additional benefit to bona fide hedgers by potentially provide liquidity to short positions (e.g., market integrity of the current proposal constraining liquidity formation (i.e., as commercial hedgers).572 These dealers compared to a hypothetical alternative the open interest of a commodity also function in the swaps market and formula: While the Commission believes contract increase, a greater relative use the futures market to hedge their that the proposed pass-through swap proportion of the commodity’s open exposures. Accordingly, to the extent provision is narrowly-tailored to enable interest is subject to the 2.5 percent that larger non-commercial market liquidity providers to continue limit level rather than the initial 10 makers and liquidity providers have providing liquidity to bona fide hedgers, percent limit). In turn, this may increase entered the market—particularly to the in contrast, an alternative formula that costs to commercial firms, which may extent they are able to take offsetting would allow higher limit levels for all be passed to the public in the form of positions to commercial short market participants would also permit higher prices. interests—a hypothetical alternative increased excessive speculation and Further, to the extent there may be formula that would permit higher non- increase the probability of market certain liquidity constrains, the spot month limits might provide greater manipulation or harm the underlying Commission has determined that this market liquidity, and possibly increased price discovery function. potential concern could be mitigated, at market efficiency, by allowing for Additionally, some have voiced least in part, by the Commission’s greater market-making activities.573 general concern that permitting proposed change to increase the However, the Commission believes increased federal non-spot month limits marginal threshold level from 25,000 that any purported benefits related to a in the nine legacy agricultural contracts contracts to 50,000 contracts, which the hypothetical alternative formula that (at any level), especially in connection Commission preliminarily believes would allow for higher non-spot limits with commodity indices, could disrupt should provide a conservative increase would be minimal at best. Specifically, price discovery and result in a lack of in the non-spot month limits for most bona fide hedgers and end users convergence between futures and cash contracts to better reflect the general generally have not requested a revised prices, resulting in increased costs to increase observed in open interest formula to allow for significantly higher end users, which ultimately could be across futures markets. The Commission non-spot limits. Similarly, liquidity borne by the public. The Commission acknowledges that the marginal providers would still be able to has not seen data demonstrating this threshold level could be increased maintain, and possibly increase, market causal connection, but acknowledges above 50,000 contracts, but notes that making activities under the arguments to that effect.575 each increase of 25,000 contracts in the Commission’s proposal since the non- Third, if the Commission’s proposed marginal threshold level would only spot month limits will generally still non-spot position limits would be too increase the permitted non-spot month increase under the existing 10, 2.5 level by 1,875 contracts (i.e., (10% of percent formula to reflect the increase in 574 See supra Section II.A.1.c.v. (preamble 25,000 contracts)—(2.5% of 25,000 discussion of pass-through swap provision); see open interest. Further, to the extent that infra Section IV.A.4.b.i.(2). contracts) = 1,875 contracts). The the Commission’s proposal to eliminate 575 As discussed in preamble Section II.B.2.e.— Commission has observed based on the risk management exemption could Methodology for Setting Proposed Non-Spot Month current data that this proposed change theoretically force liquidity providers to Limit Levels, one of the concerns that prompted the could benefit several market reduce their trading activities, the 2008 moratorium on granting risk management exemptions was a lack of convergence between participants per legacy agricultural Commission preliminarily believes that futures and cash prices in wheat. Some at the time commodity who otherwise would bump certain liquidity-providing activity of hypothesized that perhaps commodity index up against the all-months and/or single trading was a contributing factor to the lack of convergence, and, some have argued that this could month limits with based on the status 571 See supra Section II.B.2.e.—Methodology for harm price discovery since traders holding these Setting Proposed Non-Spot Month Limit Levels for quo threshold of 25,000 contracts. As a positions may not react to market fundamentals, further discussion. result, the Commission preliminarily thereby exacerbating any problems with 572 has determined that changing the Id. convergence. However, the Commission has 573 marginal threshold level could result in For example, the Commission is aware of determined for various reasons that risk several market makers that either have left management exemptions did not lead to the lack of marginal benefits and costs for many of particular commodity markets, or reduced their convergence since the Commission understands the legacy agricultural commodities, but market making activities. See, e.g., McFarlane, that many commodity index traders vacate the Commission acknowledges the Sarah, Major Oil Traders Don’t See Banks Returning contracts before the spot month and therefore proposed change is relatively minor to the Commodity Markets They Left, The Wall would not influence converge between the spot and Street Journal (Mar. 28, 2017), available at https:// futures price at expiration of the contract. Further, compared to revising the existing 10, 2.5 www.wsj.com/articles/major-oil-traders-dont-see- the risk-management exemptions granted prior to percent formula based on updated open banks-returning-to-the-commodity-markets-they- 2008 remain in effect, yet the Commission is interest data. left-1490715761?mg=prod/com-wsj (describing how unaware of any significant convergence problems Second, the Commission ‘‘Morgan Stanley sold its oil trading and storage relating to commodity index traders at this time. preliminarily recognizes that an business . . . and J.P. Morgan unloaded its physical Additionally, there did not appear to be any commodities business . . . .’’); Decambre, Mark, convergence problems between the period when alternative formula that allows for Goldman Said to Plan Cuts to Commodity Trading Commission staff initially granted risk management higher non-spot limits, compared to the Desk: WSJ, MarketWatch website (Feb. 5, 2019), exemptions and 2007. Instead, the Commission existing 10, 2.5 percent formula, could https://www.marketwatch.com/story/goldman-said- believes that the convergence issues that started to to-plan-cuts-to-commodity-trading-desk-wsj-2019- occur around 2007 were due to the contract benefit liquidity and market efficiency 02-05 (describing how Goldman Sachs ‘‘plans on specification underpricing the option to store wheat by creating a framework that is more making cuts within its commodity trading for the long futures holder making the expiring conducive to the larger liquidity platform. . . .’’). futures price more valuable than spot wheat.

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high for a commodity, the proposal month speculative position limit levels d. Core Referenced Futures Contracts might be less effective in deterring for MGEX HRS Wheat (‘‘MWE’’) and and Linked Referenced Contracts; excessive speculation and market CBOT KC HRW Wheat (‘‘KW’’) core Netting manipulation for that commodity’s referenced futures contracts, the The definitions of the terms ‘‘core market. Conversely, if the Commission’s Commission is proposing to maintain referenced futures contract’’ and proposed position limit levels would be the proposed limit levels for MWE and ‘‘referenced contract’’ set the scope of too low for a commodity, the proposal KW at the existing level of 12,000 contracts to which federal position could unduly constrain liquidity for contracts rather than reducing them to limits apply. As discussed below, by bona fide hedgers or result in a the lower level that would result from applying the federal position limits to diminished price discovery function for applying the proposed updated 10, 2.5 ‘‘referenced contracts,’’ the that commodity’s underlying market. In percent formula. Maintaining the status Commission’s proposal would expand either case, the Commission would view quo for the MWE and KW non-spot the federal position limits beyond the these as costs imposed on market proposed 25 physically-settled ‘‘core participants. However, to the extent the month limit levels would result in partial wheat parity between those two referenced futures contracts’’ listed in Commission’s proposed non-spot limit proposed Appendix E to part 150 by levels could be too high, the wheat contracts, but not with CBOT Wheat (‘‘W’’), which would increase to also including any cash-settled Commission preliminarily believes ‘‘referenced contracts’’ linked thereto as 19,300 contracts. The Commission these costs could be mitigated because well as swaps that meet the proposed preliminarily believes that this will exchanges would be able to establish ‘‘economically equivalent swap’’ 576 lower non-spot month levels. benefit the MWE and KW markets since definition and thus qualify as Moreover, these concerns may be the two species of wheat are similar to ‘‘referenced contracts.’’ 577 mitigated further to the extent that one another; accordingly, decreasing the exchanges use other tools for protecting non-spot month levels for MWE could i. Referenced Contracts markets aside from position limits, such impose liquidity costs on the MWE The Commission preliminarily has as establishing accountability levels market and harm bona fide hedgers, determined that including futures below federal position limit levels or which could further harm liquidity or contracts and options thereon that are imposing liquidity and concentration bona fide hedgers in the KW market. On ‘‘directly’’ or ‘‘indirectly linked’’ to the surcharges to initial margin if vertically the other hand, the Commission has core referenced contracts, including integrated with a derivatives clearing determined not to raise the proposed cash-settled contracts, under the organization. Further, as discussed limit levels for either KW or MWE to the proposed definition of ‘‘referenced below, the Commission is proposing to limit level for W since the non-spot contract’’ would help prevent the maintain current non-spot limit levels month level appears to be evasion of federal position limits— for CBOT Oats (O), MGEX HRS Wheat extraordinarily large in comparison to especially during the spot month— (MWE), and CBOT KC HRW Wheat through the creation of a financially open interest in KW and MWE markets, (KW), which otherwise would be lower equivalent contract that references the and the limit level for the MWE contract based on current open interest levels for price of a core referenced futures these contracts. is already larger than the limit level contract. The Commission preliminarily would be based on the 10, 2.5 percent has determined that this will benefit ii. Exceptions to the Proposed 10, 2.5 formula. While W is a potential Percent Formula for CBOT Oats (O), market integrity and potentially reduce substitute for KW and MWE, it is not costs to market participants that MGEX Hard Red Spring Wheat (MWE), similar to the same extent that MWE and CBOT Kansas City Hard Red Winter otherwise could result from market and KW are to one another, and so the Wheat (KW) manipulation. Commission has preliminarily The Commission also recognizes that Based on the Commission’s determined that this is a reasonable including cash-settled contracts within experience since 2011 with non-spot compromise to maintain liquidity and the proposed federal position limits price discovery while not unnecessarily framework may impose additional 576 On the other hand, relying on exchanges may compliance costs on market participants have potential costs because exchanges may have inviting excessive speculation or conflicting interests and therefore may not establish potential market manipulation in the and exchanges. Further, the proposed position limit (or accountability) levels lower than MWE and KW markets. federal position limits—especially the proposed federal limits. For example, exchanges outside the spot month—may not may not be incentivized to lower their limits due Likewise, based on the Commission’s provide the benefits discussed above to competitive concerns with another exchange, or experience since 2011 with the non-spot due to influence from a large customer. Conversely, with respect to market integrity and exchange and Commission interests may be aligned month speculative position limit for manipulation because there is no to the extent that exchanges do have a CBOT Oats (O), the Commission is physical delivery outside the spot countervailing interest to protect their markets from proposing the limit level at the current manipulation and price distortion: If market month and therefore there is reduced participants lose confidence in the contract as a tool 2,000 contract level rather than reducing concern for corners and squeezes. for hedging, they will look for alternatives, possibly it to the lower level that would result However, to the extent that there is migrating to another product on a different from applying the updated 10, 2.5 manipulation of such non-spot, cash- exchange. The Commission is aware of at least one instance in which exchanges adopted spot-month formula based on current open interest. settled contracts, the Commission’s position limits and/or adopted a lower exchange-set The Commission has preliminarily authority to regulate and oversee futures limit for particular futures contracts as a result of determined that there is no evidence of and related options markets (other than excessive manipulation and potential market through establishing federal position manipulation. Similarly, exchanges remain subject potential market manipulation or to their core principle obligations to prevent excessive speculation, and so there manipulation, and the Commission conducts would be no perceived benefit to 577 As discussed in the preamble, the proposed general market oversight through its own position limits framework would also apply to surveillance program. Accordingly, the Commission reducing the non-spot month limit for physically-settled swaps that qualify as acknowledges such concerns about conflicting the CBOT Oats (O) contract, while economically equivalent swaps. However, the exchange incentives, but preliminarily believes that reducing the level could impose Commission preliminarily believes that physically- such concerns are mitigated for the foregoing settled economically equivalent swaps would be reasons. liquidity costs. few in number.

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limits) may also be effective in and because there are tools other than commodity underlying the referenced uncovering or preventing manipulation, federal position limits for preventing contract. Otherwise, absent the especially in the non-spot cash markets, and deterring other types of proposed exclusion, a market and may result in relatively lower manipulation, including banging the participant could increase its exposure compliance costs incurred by market close, such as exchange-set limits and in the commodity underlying the participants. Similarly, the Commission accountability and surveillance both at referenced contract by using the preliminarily acknowledges that the exchange and federal level. location basis contract to net down exchange oversight could provide the Moreover, prohibiting the netting of against its position in a referenced same benefit to market oversight and physical and cash positions during the contract, and then further increase its prevention of market manipulation, but spot month should benefit bona fide position in the referenced contract that with lower costs imposed on market hedgers as well as price discovery of the would otherwise by restricted by participants—given the exchanges’ deep underlying markets since market makers position limits. Similarly, the familiarity with their own markets and and speculators would not be able to Commission preliminarily believes that their ability to tailor a response to a maintain a relatively large position in this would reduce hedging costs for particular market disruption—compared the physical markets by netting it hedgers and commercial end-users, as to federal position limits. against its positions in the cash they would be able to more efficiently The proposed ‘‘referenced contract’’ markets.579 While this may increase hedge the cost of commodities at their definition would also include compliance and transaction costs for preferred location without the risk of ‘‘economically equivalent swaps,’’ and speculators, it might benefit some bona possibly hitting a position limits ceiling for the reasons discussed below would fide hedgers and end users. It might also or incur compliance costs related to include a narrower set of swaps impose costs on exchanges, including applying for a bona fide hedge related compared to the set of futures and increased surveillance and compliance to such position. options thereon that would be, under costs and lost fees related to the trading Excluding location basis contracts the proposed ‘‘referenced contract’’ that such market makers or speculators from the ‘‘referenced contract’’ definition, captured as either ‘‘directly’’ otherwise might engage in absent definition also could impose costs for or ‘‘indirectly linked’’ to a core federal position limits or with the market participants that wish to trade 578 referenced futures contract. ability to their net physical and cash location basis contracts since, as noted, ii. Netting positions. such contracts would not be subject to federal limits and thus could be more The Commission proposes to permit iii. Exclusions From the ‘‘Referenced easily subject to manipulation by a market participants to net positions Contract’’ Definition market participant that obtained an outside the spot month in linked First, while the proposed ‘‘referenced excessively large position. However, the physically-settled and cash-settled contract’’ definition would include Commission preliminarily believes such referenced contracts, but during the spot linked contracts, it would explicitly costs are mitigated because location month market participants would not be exclude location basis contracts, which basis contracts generally demonstrate able to net their positions in cash-settled are contracts that reflect the difference less volatility and are less liquid than referenced contracts against their between two delivery locations or the core referenced futures contracts, positions in physically-settled quality grades of the same meaning the Commission believes that it referenced contracts. The Commission 580 commodity. The Commission would be an inefficient method of preliminarily believes that its proposal preliminarily believes that excluding manipulation (i.e., too costly to would benefit liquidity formation and location basis contracts from the implement and therefore, the bona fide hedgers outside the spot ‘‘referenced contract’’ definition would Commission believes that the months since the proposed netting rules benefit market integrity by preventing a probability of manipulation is low). would facilitate the management of risk trader from obtaining an extraordinarily Further, excluding location basis on a portfolio basis for liquidity large speculative position in the contracts from the ‘‘referenced contract’’ providers and market makers. In turn, definition is consistent with existing improved liquidity may benefit bona 579 Otherwise, a participant could maintain large, market practice since the market treats fide hedgers and other end users by offsetting positions in excess of limits in both the a contract on one grade or delivery facilitating their hedging strategies and physically-settled and cash-settled contract, which might harm market integrity and price discovery location of a commodity as different reducing related transaction costs (e.g., and undermine the federal position limits from another grade or delivery location. improving execution timing and framework. For example, absent such a restriction Accordingly, to the extent that the reducing bid-ask spreads). On the other in the spot month, a trader could stand for over 100 proposal is consistent with current hand, the Commission recognizes that percent of deliverable supply during the spot month by holding a large long position in the physical- market practice, any benefits or costs allowing such netting could increase delivery contract along with an offsetting short already may have been realized. transaction costs and harm market position in a cash-settled contract, which effectively Second, the Commission integrity by allowing for a greater would corner the market. 580 preliminarily has concluded that possibility of market manipulation since The term ‘‘location basis contract’’ generally means a derivative that is cash-settled based on the excluding commodity indices from the market participants and speculators difference in price, directly or indirectly, of (1) a ‘‘referenced contract’’ definition would would be able to maintain larger gross core referenced futures contract; and (2) the same benefit market integrity by preventing positions outside the spot month. commodity underlying a particular core referenced speculators from using a commodity However, the Commission preliminarily futures contract at a different delivery location than that of the core referenced futures contract. For index contract to net down an outright has determined that such potential costs clarity, a core referenced futures contract may have position in a referenced contract that is may be mitigated since concerns about specifications that include multiple delivery points a component of the commodity index corners and squeezes generally are less or different grades (i.e., the delivery price may be contract, which would allow the acute outside the spot month given determined to be at par, a fixed discount to par, or a premium to par, depending on the grade or speculator to take on large outright there is no physical delivery involved, quality). The above discussion regarding location positions in the referenced contracts basis contracts is referring to delivery locations or 578 See infra Section IV.A.3.d.iv. (discussion of quality grades other than those contemplated by the and therefore result in increased economically equivalent swaps). applicable core referenced futures contract. speculation, undermining the federal

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position limits framework.581 However, which is otherwise excluded from the Specifically, under the Commission’s the Commission preliminarily believes ‘‘referenced contract’’ definition and proposed definition of ‘‘economically that its proposed exclusion could therefore from federal position limits, in equivalent swap’’ set forth in proposed impose costs on market participants that a manner that would allow the § 150.1, a swap would generally qualify trade commodity indices since, as participant to exceed limits of the as economically equivalent with respect noted, such contracts would not be applicable referenced contract (i.e., the to a particular referenced contract so subject to federal limits and thus could participant could be long outright in a long as the swap shares ‘‘identical be more easily subject to manipulation referenced contract, purchase a material’’ contract specifications, terms, by a market participant that obtained an commodity index contract that includes and conditions with the referenced excessively large position. The the applicable referenced contract as a contract, disregarding any differences Commission preliminarily believes such component, and short the remaining with respect to lot size or notional costs would be mitigated because the components of the index. The amount, delivery dates diverging by less commodities comprising the index Commission observes that these short than one calendar day (other than for would themselves be subject to limits, positions would be subject to the natural gas referenced contracts),584 or and because commodity index contracts proposed federal limits, so there would post-trade risk-management generally tend to exhibit low volatility be a ceiling on this strategy and, in arrangements.585 As discussed further since they are diversified across many addition, it would be costly to potential below, the Commission explains that different commodities. Further, the manipulators because margin would the definition of ‘‘economically Commission believes that it is possible have to be posted and exchanged to equivalent swaps’’ is relatively narrow, that excluding commodity indices from retain the positions. In this especially compared to the definition of the definition of ‘‘referenced contracts’’ circumstance, excluding commodity ‘‘referenced contract’’ as applied to could result in some trading shifting to indices from the ‘‘referenced contract’’ cash-settled look-alike contracts. commodity indices contracts, which definition could impose costs on market The Commission preliminarily may reduce liquidity in exchange-listed integrity. However, the Commission believes that the proposed definition of core referenced futures contracts, harm preliminarily believes any related costs ‘‘economically equivalent swaps’’ pre-trade transparency and the price should be mitigated because proposed would benefit (1) market integrity by discovery process in the futures § 150.2 would include anti-evasion protecting against excessive speculation markets, and further depress open language that would deem such and potential manipulation and (2) interest (as volumes shift to index commodity index contract to be a market liquidity by not favoring OTC or positions, which would not count referenced contract subject to federal foreign markets over domestic markets. toward open interest calculations). limits. Also, analogous costs could However, as discussed below, However, the Commission believes that apply to the discussion above regarding exchanges would be subject to delayed the probability of this occurring is low location basis contracts and such compliance with respect to the because the Commission preliminarily proposed anti-evasion provision would proposed § 150.5 requirements believes that using indices is an similarly cover location basis regarding exchange-set speculative inefficient means of obtaining exposure contracts.582 position limits on swaps until such time to a certain commodity. iv. Economically Equivalent Swaps that exchanges have access to sufficient Under certain circumstances, a data to monitor for limits on swaps participant that has reached the The existing federal position limits across exchanges; as a result, exchange- applicable position limit could use a framework does not include limit levels set limits would not need to include, commodity index to purchase and on swaps. The Dodd-Frank Act added nor would exchanges be required to weight a commodity index contract, CEA section 4a(a)(5), which requires oversee, compliance with exchange-set that when the Commission imposes position limits on swaps until such 581 Further, the Commission believes that position limits on futures and options time. prohibiting the netting of a commodity index on futures pursuant to CEA section position with a referenced contract is required by 4a(a)(2), the Commission also establish (1) Benefits and Costs Related to Market its interpretation of the Dodd-Frank Act’s amendments to the CEA’s definition of ‘‘bona fide limits simultaneously for ‘‘economically Integrity hedging transaction or position.’’ The Commission equivalent’’ swaps ‘‘as appropriate.’’ 583 The Commission preliminarily interprets the amended CEA definition to eliminate As the statute does not define the term believes that the proposed definition the Commission’s ability to recognize risk ‘‘economically equivalent,’’ the management positions as bona fide hedges or will benefit market integrity in two transactions. See infra Section IV.A.4.—Bona Fide Commission will apply its expertise in ways. First, the proposed definition Hedging and Spread and Other Exemptions from construing such term consistent with would protect against excessive Federal Position Limits (proposed §§ 150.1 and the policy goals articulated by Congress, speculation and potential market 150.3) for further discussion. In this regard, the including in CEA sections 4a(a)(2)(C) Commission has observed that it is common for manipulation by limiting the ability of swap dealers to enter into commodity index and 4a(a)(3) as discussed below. speculators to obtain excessive positions contracts with participants for which the contract through netting. For example, a more would not qualify as a bona fide hedging position 582 Similarly, the proposed anti-evasion provision inclusive ‘‘economically equivalent’’ (e.g., with a pension fund). Failing to exclude would also provide that a spread exemption would commodity index contracts from the ‘‘referenced no longer apply. definition that would encompass contract’’ definition could enable a swap dealer to 583 CEA section 4a(a)(5); 7 U.S.C. 6a(a)(5). In additional swaps (e.g., swaps that may use positions in commodity index contracts as a addition, CEA section 4a(a)(4) separately differ in their ‘‘material’’ terms or risk management hedge by netting down its authorizes, but does not require, the Commission to physical swaps with delivery dates that offsetting outright futures positions in the impose federal limits on swaps that meet certain components of the index. Permitting this type of statutory criteria qualifying them as ‘‘significant risk management hedge would subvert the statutory price discovery function’’ swaps. 7 U.S.C. 6a(a)(4). 584 As discussed below, the proposed definition pass-through swap language in CEA section The Commission reiterates, for the avoidance of of ‘‘economically equivalent swaps’’ with respect to 4a(c)(2)(B), which the Commission interprets as doubt, that the definitions of ‘‘economically natural gas referenced contracts would contain the prohibiting the recognition of positions entered into equivalent’’ in CEA section 4a(a)(5) and ‘‘significant same terms, except that it would include delivery for risk management purposes as bona fide hedges price discovery function’’ in CEA section 4a(a)(4) dates diverging by less than two calendar days. unless the swap dealer is entering into positions are separate concepts and that contracts can be 585 See supra Section II.A.4. (for further opposite a counterparty for which the swap economically equivalent without serving a discussion regarding the Commission’s proposed position is a bona fide hedge. significant price discovery function. definition of ‘‘economically equivalent swap’’).

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diverge by one day or more) could make proposed definition would benefit into such OTC swaps.587 While such it easier for market participants to market integrity by allowing exchanges swaps may not be perfectly correlated to inappropriately net down against their and the Commission to focus on the their corresponding referenced referenced contracts by allowing market most sensitive period of the spot month, contracts, market participants may find participants to structure swaps that do including with respect to the this risk acceptable in order to avoid not necessarily offer identical risk or Commission’s and exchanges’ various federal position limits. An increase in economic exposure or sensitivity. In surveillance and enforcement functions. OTC swaps at the expense of futures such a case, a market participant could To the extent market participants would and options contracts may impose costs enter into an OTC swap with a maturity be able to use swaps that would not be on market integrity due to lack of that differs by days or even weeks in covered by the proposed definition to exchange oversight. If liquidity were to order to net down this position against effect market manipulation, such move from futures exchanges to the its position in a referenced contract, potential costs would not differ from the OTC swaps markets, non-dealer enabling it to hold an even greater status quo since no swaps are currently commercial entities may face increased position in the referenced contract. covered by federal position limits. The transaction costs and widening spreads, Similarly, requiring ‘‘economically Commission however acknowledges as swap dealers gain market power in equivalent swaps’’ to share all material that its narrow definition may increase the OTC market relative to centralized terms with their corresponding this cost, as fewer swaps will be covered exchange trading. The Commission is referenced contracts benefits market under the limits. unable to quantify the costs of these integrity by preventing market Further, the proposal to delay potential harms. However, while the participants from escaping the position compliance with respect to exchange-set Commission acknowledges these limits framework merely by altering limits on swaps will benefit exchanges potential costs, such costs to those non-material terms, such as holiday by facilitating exchanges’ ability to contracts that already have limits on conventions. On the other hand, the establish surveillance and compliance them already may have been realized in Commission recognizes that such a systems. As noted above, exchanges the marketplace because swaps are not narrow definition could impose costs on currently lack sufficient data regarding subject to federal position limits under the marketplace by possibly permitting individual market participants’ open the status quo. excessive speculation since market swap positions, which means that Lastly, under this proposal, market participants would not be subject to requiring exchanges to establish participants would be able to determine federal position limits if they were to oversight over participants’ positions whether a particular swap satisfies the enter into swaps that may have different currently could impose substantial costs definition of ‘‘economically equivalent material terms (e.g., penultimate and also may be impractical to achieve. swap,’’ as long as market participants swaps) 586 but may nonetheless be As a result, the Commission has make a reasonable, good faith effort in sufficiently correlated to their preliminarily determined that allowing reaching their determination and are corresponding referenced contract. In exchanges delayed compliance with able to provide sufficient evidence, if this case, it is possible that there may be respect to swaps would reduce requested, to support a reasonable, good potential for excessive speculation, unnecessary costs. Nonetheless, the faith effort. The Commission market manipulation such as squeezes Commission’s preliminary preliminarily anticipates that this and corners, insufficient market determination to permit exchanges to flexibility will benefit market integrity liquidity for bona fide hedgers, or delay implementing federal position by providing a greater level of certainty disruption to the price discovery limits on swaps could incentivize to market participants in contrast to the function. Nonetheless, to the extent that market participants to leave the futures alternative in which market participants swaps currently are not subject to markets and instead transact in would be required to first submit swaps federal position limit levels, such economically-equivalent swaps, which to the Commission staff and wait for potential costs would remain could reduce liquidity in the futures feedback or approval. On the other unchanged compared to the status quo. and related options markets, although hand, the Commission also recognizes Second, the relatively narrow the Commission recognizes that this that not having the Commission proposed definition benefits market concern should be mitigated by the explicitly opine on whether a swap integrity, and reduces associated reality that the Commission would still would qualify as economically compliance and implementation costs, oversee and enforce federal position equivalent could cause market by permitting exchanges, market limits on economically equivalent participants to avoid entering into such participants, and the Commission to swaps. swaps. In turn, this could lead to less focus resources on those swaps that Additionally, while futures and efficient hedging strategies if the market pose the greatest threat for facilitating related options are subject to clearing participant is forced to turn to the corners and squeezes—that is, those and exchange oversight, economically futures markets (e.g., a market swaps with substantially identical equivalent swaps may be transacted participant may choose to transact in delivery dates and material economic bilaterally off-exchange (i.e., OTC the OTC swaps markets for various terms to futures and options on futures swaps). As a result, it is relatively easy reasons, including liquidity, margin subject to federal position limits. While to create customized OTC swaps that requirements, or simply better swaps that have different material terms may be highly correlated to a referenced familiarity with ISDA and swap than their corresponding referenced contract, which would allow the market processes over exchange-traded futures). contracts, including different delivery participant to create an exposure in the However, as noted below, the dates, may potentially be used for underlying commodity similar to the Commission reserves the right to declare engaging in market manipulation, the referenced contract’s exposure. Due to the relatively narrow proposed 587 In contrast, since futures and options on 586 Or, in the case of natural gas referenced ‘‘economically equivalent swap’’ futures contracts are created by exchanges and contracts, which would potentially include definition, the Commission submitted to the Commission for either self- penultimate swaps as economically equivalent certification or approval under part 40 of the swaps, a swap with a maturity of less than one day preliminarily believes that it would not Commission’s regulations, a market participant away from the penultimate swap. See infra Section be difficult for market participants to would not be able to customize an exchange-traded IV.A.3.d.iv.(3) (discussion of natural gas swaps). avoid federal position limits by entering futures or options on futures contract.

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whether a swap or class of swaps is or European Union (‘‘EU’’).588 are unique in several respects, including is not economically equivalent, and a Additionally, the Commission the fact that unlike with respect to other market participant could petition, or preliminarily believes that proposing a core referenced futures contracts, for request informally, that the Commission definition similar to that used by the EU natural gas relatively liquid spot-month make such a determination, although will benefit international comity.589 and penultimate cash-settled futures the Commission acknowledges that Further, since market participants exist. As a result, the Commission there could be costs associated with trading in both U.S. and EU markets believes that creating an exception to this, including delayed timing and would find the proposed definition to the proposed ‘‘economically equivalent monetary costs. be familiar, it may help reduce swap’’ definition for natural gas would Further, the Commission recognizes compliance costs for those market benefit market liquidity by not that requiring market participants to participants that already have systems unnecessarily favoring existing conduct reasonable due diligence and and personnel in place to identify and penultimate contracts over spot maintain related records also could monitor such swaps. contracts. The Commission is especially sensitive to potential market impose new compliance costs. (3) The Proposed Definition Could manipulation in the natural gas markets Additionally, the Commission Create Benefits or Costs Related to since market participants—to a recognizes that certain market Market Liquidity for the Natural Gas significantly greater extent compared to participants could assert that an OTC Market swap is (or is not) ‘‘economically the other core referenced futures equivalent’’ depending upon whether As discussed in greater detail in the contracts that are included in the such determination benefits the market preamble, the Commission recognizes proposal—regularly trade in both the participant. In such a case, market that the market dynamics in natural gas physically-settled core referenced participants could theoretically subvert futures contract and the cash-settled 588 In this regard, the proposed definition is look-alike referenced contracts. the intent of the federal position limits similar in certain ways to the EU definition for OTC framework, although the Commission contracts that are ‘‘economically equivalent’’ to Accordingly, the Commission preliminarily believes that such commodity derivatives traded on an EU trading preliminarily has concluded that a potential costs would be mitigated due venue. The applicable European regulations define slightly broader definition of an OTC derivative to be ‘‘economically equivalent’’ ‘‘economically equivalent swap’’ would to its surveillance functions and the when it has ‘‘identical contractual specifications, proposal to reserve the authority to terms and conditions, excluding different lot size uniquely benefit the natural gas markets declare that a particular swap or class of specifications, delivery dates diverging by less than by helping to deter and prevent swaps either would or would not one calendar day and different post trade risk manipulation of a physically-settled management arrangements.’’ While the qualify as economically equivalent. contract to benefit a related cash-settled Commission’s proposed definition is similar, the contract. (2) The Proposed Definition Could Commission’s proposed definition requires ‘‘identical material’’ terms rather than simply e. Pre-Existing Positions Increase Benefits or Costs Related to ‘‘identical’’ terms. Further, the Commission’s Market Liquidity proposed definition excludes different ‘‘lot size Proposed § 150.2(g) would impose specifications or notional amounts’’ rather than federal limits on ‘‘pre-existing First, the proposed definition could referencing only ‘‘lot size’’ since swaps terminology positions’’—other than pre-enactment benefit market liquidity by being, in usually refers to ‘‘notional amounts’’ rather than to swaps and transition period swaps— general, less disruptive to the swaps ‘‘lot sizes.’’ See EU Commission Delegated Regulation (EU) 2017/591, 2017 O.J. (L 87). during the spot month, while non-spot markets, which in turn may reduce the 589 Both the Commission’s definition and the month pre-existing positions would not potential for disruption for the price applicable EU regulation are intended to prevent be subject to position limits as long as discovery function compared to an harmful netting. See European Securities and (i) the position was acquired in good alternative in which the Commission Markets Authority, Draft Regulatory Technical faith consistent with the ‘‘pre-existing would proposed a broader definition. Standards on Methodology for Calculation and the Application of Position Limits for Commodity position’’ definition in proposed For example, if the Commission were to Derivatives Traded on Trading Venues and § 150.1; 590 and (ii) such position would adopt an alternative to its proposed Economically Equivalent OTC Contracts, ESMA/ be attributed to the person if the ‘‘economically equivalent swap’’ 2016/668 at 10 (May 2, 2016), available at https:// position increases after the limit’s definition that encompassed a broader www.esma.europa.eu/sites/default/files/library/ 2016-668_opinion_on_draft_rts_21.pdf (‘‘[D]rafting effective date. range of swaps by including, for the [economically equivalent OTC swap] definition The Commission believes that this example, delivery dates that diverge by in too wide a fashion carries an even higher risk of approach would benefit market integrity one or more calendar days—perhaps by enabling circumvention of position limits by creating an ability to net off positions taken in on- since pre-existing positions (other than several days or weeks—a speculator venue contracts against only roughly similar OTC pre-enactment and transition period with a large portfolio of swaps could positions.’’) swaps) that exceed spot-month limits more easily bump up against the The applicable EU regulator, the European could result in market or price Securities and Markets Authority (‘‘ESMA’’), applicable position limits and therefore disruptions as positions are rolled into would have a strong incentive either to recently released a ‘‘consultation paper’’ discussing the status of the existing EU position limits regime the spot month.591 However, the reduce its swaps activity or move its and specific comments received from market Commission acknowledges that the swaps activity to foreign jurisdictions. If participants. According to ESMA, no commenter, proposed ‘‘good-faith’’ standard also with one exception, supported changing the there were many similarly situated could impose certain costs on market speculators, the market for such swaps definition of an economically equivalent swap (referred to as an ‘‘economically equivalent OTC integrity since an inherently subjective could become less liquid, which in turn contract’’ or ‘‘EEOTC’’). ESMA further noted that for ‘‘good faith’’ standard could result in could harm liquidity for bona fide some respondents, ‘‘the mere fact that very few disparate treatment of traders by a hedgers as large liquidity providers EEOTC contracts have been identified is no could move to other markets. evidence that the regime is overly restrictive.’’ See European Securities and Markets Authority, 590 Proposed § 150.1 would define ‘‘pre-existing Second, the proposed definition could Consultation Paper MiFID Review Report on position’’ to mean ‘‘any position in a commodity benefit market liquidity by being Position Limits and Position Management Draft derivative contract acquired in good faith prior to sufficiently narrow to reduce incentives Technical Advice on Weekly Position Reports, the effective date’’ of any applicable position limit. ESMA70–156–1484 at 46, Question 15 (Nov. 5, 591 The Commission is particularly concerned for liquidity providers to move to 2019), available at https://www.esma.europa.eu/ about protecting the spot month in physical- foreign jurisdictions, such as the document/consultation-paper-position-limits. delivery futures from corners and squeezes.

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particular exchange or across exchanges b. Bona Fide Hedging Definition; entity may measure risk on a net or seeking a competitive advantage with Enumerated Bona Fide Hedges; and gross basis for purposes of determining one another and could impose trading Guidance on Measuring Risk its bona fide hedge positions. The Commission expects these costs on those traders given less The Commission is proposing several proposed modifications will provide advantageous treatment. For example, amendments related to bona fide market participants with the ability to the Commission acknowledges that hedges. First, the Commission is hedge, and exchanges with the ability to since it has given discretion to an proposing to include a revised recognize hedges, in a manner that is exchange in interpreting this ‘‘good definition of ‘‘bona fide hedging consistent with common commercial faith’’ standard, an exchange may be transactions or positions’’ in § 150.1 to hedging practices, reducing compliance more liberal with concluding that a conform to the statutory bona fide hedge costs and increase the benefits definition in CEA section 4a(c) as large trader or influential exchange associated with sound risk management Congress amended it in the Dodd-Frank member obtained a position in ‘‘good practices. faith.’’ As a result, the proposal could Act. As discussed in greater detail in the potentially harm market integrity and/or preamble, the Commission proposes to i. Bona Fide Hedging Definition increase transaction costs if an exchange (1) revise the temporary substitute test, (1) Elimination of Risk Management were to benefit certain market consistent with the Commission’s Exemptions; Addition of the Proposed participants compared to other market understanding of the Dodd-Frank Act’s Pass-Through Swap Exemption participants that receive relatively less amendments to section 4a of the CEA, to no longer recognize as bona fide First, the Commission has advantageous treatment. However, the preliminarily determined that Commission believes the risk of any hedges certain risk management positions; (2) revise the economically eliminating the risk-management unscrupulous trader or exchange is appropriate test to make explicit that the exemption in physical commodity mitigated since exchanges continue to position must be economically derivatives subject to federal speculative be subject to Commission oversight and appropriate to the reduction of ‘‘price position limits, unless the position to DCM Core Principles 4 (‘‘prevention risk’’; and (3) eliminate the incidental satisfies the pass-through/swap offset of market disruption’’) and 12 test and orderly trading requirement, requirements in section 4a(c)(2)(B) of (‘‘protection of markets and market which Dodd-Frank removed from the CEA discussed further below, is participants’’), among others, and since section 4a of the CEA. The Commission consistent with Congressional and proposed § 150.2(g)(2) also would preliminarily believes that these statutory intent, as evidenced by the require that exchanges must attribute changes include non-discretionary Dodd-Frank Act’s amendments to the the position to the trader if its position bona fide hedging definition in CEA changes that are required by Congress’s 594 increases after the position limit’s amendments to section 4a of the CEA. section 4a(c)(2). Accordingly, once effective date. The Commission also proposes to revise the proposed federal limit levels go into the bona fide hedge definition to effect, market participants with 4. Bona Fide Hedging and Spread and conform to the CEA’s statutory positions that do not otherwise satisfy Other Exemptions From Federal definition, which permits certain pass- 594 Position Limits (Proposed §§ 150.1 and through offsets.593 See supra Section II.A.1.c.ii.(1). The existing 150.3) bona fide hedging definition in § 1.3 requires that Second, the Commission would a position must ‘‘normally’’ represent a substitute a. Background maintain the distinction between for transactions or positions made at a later time in enumerated and non-enumerated bona a physical marketing channel (i.e., the ‘‘temporary The proposal provides for several substitute test’’). The Dodd-Frank Act amended the fide hedges but would (1) move the temporary substitute language that previously exemptions that, subject to certain currently-enumerated hedges in the appeared in the statute by removing the word conditions, would permit a trader to existing definition of ‘‘bona fide hedging ‘‘normally’’ from the phrase normally represents a exceed the applicable federal position transactions and positions’’ currently substitute for transactions made or to be made or positions taken or to be taken at a later time in a limit set forth under proposed § 150.2. found in Commission regulation § 1.3 to physical marketing channel.’’ 7 U.S.C. 6a(c)(2)(A). Specifically, proposed § 150.3 would proposed Appendix A in part 150 that The Commission preliminarily interprets this generally maintain, with certain will serve as examples of positions that change as reflecting Congressional direction that a modifications discussed below, the two would comply with the proposed bona bona fide hedging position in physical commodities must always (and not just ‘‘normally’’) be in existing federal exemptions for bona fide hedging definition; and (2) propose connection with the production, sale, or use of a fide hedging positions and spread to make all existing enumerated bona physical cash-market commodity. positions, and would include new fide hedges as well as additional Previously, the Commission stated that, among federal exemptions for certain enumerated hedges to be self- other things, the inclusion of the word ‘‘normally’’ effectuating for federal position limit in connection with the pre-Dodd-Frank version of conditional spot month positions in the temporary substitute language indicated that the natural gas, certain financial distress purposes, without the need for prior bona fide hedging definition should not be positions, and pre-enactment and Commission approval. In contrast, the construed to apply only to firms using futures to existing enumerated anticipatory bona reduce their exposures to risks in the cash market, transition period swaps. Proposed fide hedges are not currently self- and that to qualify as a bona fide hedge, a § 150.1 would set forth the proposed transaction in the futures market did not need to be effectuating and require market definitions for ‘‘bona fide hedging a temporary substitute for a later transaction in the participants to apply to the Commission cash market. See Clarification of Certain Aspects of transactions or positions’’ and for the Hedging Definition, 52 FR at 27195, 27196 (Jul. 592 for recognition. ‘‘spread transactions.’’ Third, the Commission is proposing 20, 1987). In other words, that 1987 interpretation took the view that a futures position could still guidance with respect to whether an qualify as a bona fide hedging position even if it was not in connection with the production, sale, or 593 As discussed in Section II.A.—§ 150.1— use of a physical commodity. Accordingly, based on 592 This discussion sometimes refers to the ‘‘bona Definitions of the preamble, the existing definition the Commission’s preliminary interpretation of the fide hedging transactions or positions’’ definition as of ‘‘bona fide hedging transactions and positions’’ revised statutory definition of bona fide hedging in ‘‘bona fide hedges,’’ ‘‘bona fide hedging,’’ or ‘‘bona currently appears in § 1.3 of the Commission’s CEA section 4a(c)(2), risk-management hedges fide hedge positions.’’ For the purpose of this regulations; the proposal would move the revised would not be recognized under the Commission’s discussion, the terms have the same meaning. definition to proposed § 150.1. proposed bona fide hedging definition.

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the proposed bona fide hedging management exemption holders could counterparties. Moreover, market definition or qualify for an exemption continue to benefit from an exemption, participants are not precluded from would no longer be able to rely on and potential counterparties could using swaps that are not ‘‘economically recognition of such risk-reducing benefit from the liquidity they provide, equivalent swap’’ for such risk techniques as bona fide hedges. Absent as long as the position being offset management purposes since swaps that other factors, market participants who qualifies as a bona fide hedge for the are not deemed to be ‘‘economically have, or have requested, a risk counterparty. equivalent’’ to a referenced contract management exemption under the The Commission preliminarily has would not be subject to the existing definition may resort to less determined that any resulting costs or Commission’s proposed position limits effective hedging strategies resulting in, benefits related to the proposed pass- framework. for example, increased costs for through swap exemption are a result of The Commission preliminarily liquidity providers due to increased Congress’s amendments to CEA section observes that market participants may basis risk and/or decreased market 4a(c) rather than the Commission’s not need to rely on the proposed pass- efficiency due to higher transaction (i.e., discretionary action. On the other hand, through swap provision to the extent hedging) costs. Moreover, absent other the Commission’s discretionary action such parties employ swaps that qualify factors, by excluding risk management to require the pass-through swap as ‘‘economically equivalent swaps,’’ positions from the bona fide hedge counterparty to create and maintain since such market participants may be definition (other than those positions records to demonstrate the bona fides of able to net such swaps against the that would meet the pass-through/swap the pass-through swap would cause the corresponding futures or options on offset requirement in the proposed bona swap counterparty to incur marginal futures. As a result, the Commission fide hedge definition, discussed further recordkeeping costs.597 preliminarily anticipates that the below), the proposed definition may The proposed pass-through swap proposed pass-through swap provision affect the overall level of liquidity in the provision, consistent with the Dodd- would benefit those bona fide hedgers market since dealers who approach or Frank Act’s changes to CEA section and pass-through swap counterparties exceed the federal position limit may 4a(c)(2), also would address a situation that use swaps that would not qualify as decide to pull back on providing where a participant who qualifies as a economically equivalent under the liquidity, including to bona fide bona fide hedging swap counterparty Commission’s proposal. To the extent hedgers. (i.e., a participant with a position in a market participants use swaps that On the other hand, the Commission previously-entered into swap that would qualify as economically believes that these potential costs could qualified, at the time the swap was equivalent swaps, or could shift their be mitigated for several reasons. First, entered into, as a bona fide hedging trading strategies to use such swaps the proposed bona fide hedging position under the proposed definition) without incurring additional costs, the definition, consistent with the Dodd- seeks, at some later time, to offset that Commission preliminarily believes that Frank Act’s changes to CEA section swap position.598 Such step might be the elimination of the risk management 4a(c)(2), would permit the recognition taken, for example, to respond to a position would not necessarily result in as bona fide hedges of futures and change in the participant’s risk exposure market participants incurring costs or options on futures positions that offset in the underlying commodity. As a limiting their trading since they would pass-through swaps entered into by result, a participant could use futures or be able to net the positions in dealers and other liquidity providers options on futures in excess of federal economically equivalent swaps with (the ‘‘pass-through swap position limits to offset the price risk of their futures and options on futures counterparty’’) 595 opposite bona fide a previously-entered into swap, which positions, or with other economically hedging swap counterparties (the ‘‘bona would allow the participant to exceed equivalent swaps. fide hedge counterparty’’), as long as: (1) federal limits using either new futures Second, for the nine legacy The pass-through swap counterparty or options on futures or swap positions agricultural contracts, the proposal can demonstrate, upon request from the that reduce the risk of the original swap. would generally set federal non-spot Commission and/or from an exchange, The Commission expects the pass- month limit levels higher than existing that the pass-through swap qualifies as through swap provision to facilitate non-spot limits, which may enable a bona fide hedge for the bona fide dynamic hedging by market additional dealer activity described 599 hedge counterparty; and (2) the pass- participants. The Commission above. The remaining 16 core through swap counterparty enters into a recognizes that a significant number of referenced futures contracts would be futures or option on a futures position market participants use dynamic subject to existing exchange-set limits or or a swap position, in each case in the hedging to more effectively manage accountability outside of the spot same physical commodity as the pass- their portfolio risks. Therefore, this month, which does not represent a through swap to offset and reduce the provision may increase operational change from the status quo under price risk attendant to the pass-through efficiency. In addition, by permitting existing or proposed § 150.5. The swap.596 Accordingly, a subset of risk dynamic hedging, a greater number of proposed higher levels with respect to dealers should be better able to provide the nine legacy agricultural contracts 595 Such pass-through swap counterparties are liquidity to the market, as these dealers and the exchanges’ flexible typically swap dealers providing liquidity to bona will be able to more effectively manage accountability regimes with respect to fide hedgers. their risks by entering into pass-through the proposes new 16 core referenced 596 See paragraph (2)(i) of the proposed bona fide swaps with bona fide hedgers as futures contract should mitigate at least hedging definition. Of course, if the pass-through swap qualifies as an ‘‘economically appropriate some potential costs related to the swap,’’ then the pass-through swap counterparty 597 To the extent that the pass-through swap would not need to rely on the proposed pass- counterparty is a swap dealer or major swap 599 Proposed § 150.2 generally would increase through swap provision since it may be able to participant, they already may be subject to similar position limits for non-spot months for contracts offset its long (or short) position in the recordkeeping requirements under § 1.31 and part that currently are subject to the federal position economically equivalent swap with the 23 of the Commission’s regulations. As a result, limits framework other than for CBOT Oats (O), corresponding short (or long) position in the futures such costs may already have been realized. CBOT KC HRW Wheat (KW), and MGEX HRS or option on futures position or on the opposite side 598 See paragraph (2)(ii) of the proposed bona fide Wheat (MWE), for which the Commission would of another economically equivalent swap. hedging transactions or positions definition. maintain existing levels.

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prohibition on recognizing risk hold large positions in such ii. Proposed Enumerated Bona Fide management positions as bona fide commodities. Hedges hedges. (2) Limiting ‘‘Risk’’ to ‘‘Price’’ Risk; The Commission proposes Third, the proposal may improve enumerated bona fide hedges in market competitiveness and reduce Elimination of the Incidental Test and Orderly Trading Requirement Appendix A to part 150 of the transaction costs. As noted above, Commission’s regulations to provide a As discussed in the preamble, the existing holders of the risk management list bona fide hedges that would proposed bona fide hedging definition’s exemption, and the levels permitted include: (i) The existing enumerated ‘‘economically appropriate test’’ would thereunder, are currently confidential, hedges; and (ii) additional enumerated clarify that only hedges that offset price and the Commission is no longer bona fide hedges. The Commission risks could be recognized as bona fide granting new risk management reinforces that hedging practices not exemptions to potential new liquidity hedging transactions or positions. The otherwise listed may still be deemed, on providers. Accordingly, by eliminating Commission does not believe that this a case-by-case basis, to comply with the the risk management exemption, the clarification would impose any new proposed bona fide hedging definition Commission’s proposal would benefit costs or benefits, as it is consistent with (i.e., non-enumerated bona fide hedges). the public and strengthen market both the existing bona fide hedging As discussed further below, the integrity by improving market definition 600 as well as the proposed enumerated bona fide hedges transparency since certain dealers Commission’s longstanding policy.601 in Appendix A would be ‘‘self- would no longer be able to maintain the Nonetheless, the Commission realizes effectuating’’ for purposes of federal grandfathered risk management that hedging occurs for more types of position limits levels, which are exemption while other dealer lack this risks than price (e.g., volumetric expected to reduce delays and ability under the status quo. While the hedging). Therefore, the Commission compliance costs associated with Commission believes that the risk recognizes that by expressly limiting the management exemption may allow requesting an exemption. bona fide hedge exemption to hedging Additionally, as part of the dealers to more effectively provide only price risk, certain market Commission’s proposal, the exchanges market making activities, which benefits participants may not be able to receive would have discretion to determine, for market liquidity and ultimately leads to a bona fide hedging recognition, and for purposes of their own exchange-granted lower prices for end-users, as noted certain dealers, this may limit their bona fide hedges, whether any of the above, the potential costs resulting from ability to provide liquidity to the market proposed enumerated bona fide hedges removing the risk management because without being able to rely on exemption may be mitigated by the in proposed Appendix A to part 150 of bona fide hedging status, their trading the Commission’s regulations would be revised position limit levels that reflect activity would cause them to otherwise current EDS for spot month levels and permitted to be maintained during the exceed federal limits. lesser of the last five days of trading or current open interest and trading The Commission further would volume for non-spot month levels. the time period for the spot month in implement Congress’s Dodd-Frank Act such contract (the ‘‘five-day rule’’), and Therefore, the Commission believes that amendments that eliminated the existing risk management exemption the Commission’s proposal otherwise statutory bona fide hedge definition’s would not require any of the holders should be able to continue incidental test and orderly trading providing liquidity to bona fide hedgers, enumerated bona fide hedges to be requirement by proposing to make the subject to the five-day rule for purposes but acknowledges that some may not to same changes to the Commission’s the same degree as under the of federal position limits. Instead, the regulations. As discussed in the Commission expects exchanges to make exemption; however, the Commission preamble, the Commission preliminarily believes that any potential harm to their own determinations with respect believes that these proposed changes do to exchange-set limits as to whether it liquidity should be mitigated. not represent a change in policy or Further, the proposed spot month and is appropriate to apply the five-day rule regulatory requirement. As a result, the for a particular bona fide hedge type and non-spot month levels, which generally Commission does not identify any costs will be higher than the status quo, commodity contract. The Commission or benefits related to these proposed has preliminarily determined that together with the elimination of the risk changes. management exemptions that benefit exchanges are well-informed with respect to their respective markets and only certain dealers, might enable new 600 The existing bona fide hedging definition in liquidity providers to enter the markets § 1.3 provides that no transactions or positions shall well-positioned to make a determination on a level playing field with the existing be classified as bona fide hedging unless their with respect to imposing the five-day risk management exemption holders. purpose is to offset price risks incidental to rule in connection with recognizing commercial cash or spot operations. (emphasis bona fide hedges for their respective With the possibility of additional added). Accordingly, the proposed definition would liquidity providers, the proposed merely move this requirement to the proposed commodity contracts. In general, the framework may strengthen market definition’s revised ‘‘economically appropriate test’’ Commission believes that, on the one integrity by decreasing concentration requirement. hand, limiting a trader’s ability to risk potentially posed by too few market 601 For example, in promulgating existing § 1.3, establish a position in this manner by the Commission explained that a bona fide hedging makers. However, the benefits to market position must, among other things, ‘‘be requiring the five-day rule could result liquidity the Commission describes economically appropriate to risk reduction, such in increased costs related to operational above may be muted since this analysis risks must arise from operation of a commercial inefficiencies, as a trader may believe is predicated, in part, on the enterprise, and the price fluctuations of the futures that this is the most opportune time to contracts used in the transaction must be understanding that dealers are the substantially related to fluctuations of the cash hedge. On the other hand, the predominant large traders. Data in the market value of the assets, liabilities or services Commission believes that price Commission’s Supplementary COT and being hedged.’’ Bona Fide Hedging Transactions or convergence may be particularly its underlying data indicate that risk- Positions, 42 FR at 14832, 14833 (Mar. 16, 1977). sensitive to potential market Dodd-Frank added CEA section 4a(c)(2), which management exemption holders are not copied the ‘‘economically appropriate test’’ from manipulation or excessive speculation the only large participants in these the Commission’s definition in § 1.3. See also 2013 during this period. Accordingly, the markets—large commercial firms also Proposal, 78 FR at 75702, 75703. Commission preliminarily believes that

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the proposal to not impose the five-day would be subject to federal position potentially improve price discovery as rule with respect to any of the limits for the first time under this well as provide market participants with enumerated bona fide hedges for federal proposal and for which net hedging the ability to use strategies involving purposes but instead rely on exchange’s could impose significant costs or be spread positions, which may reduce determination with respect to exchange- operationally unfeasible. hedging costs. granted exemptions would help to better As in the intermarket wheat example c. Spread Exemptions optimize these considerations. The discussed below, the proposed spread Commission notes a potential cost for Under existing § 150.3, certain spread relief not limited to the same crop year market integrity if exchanges fail to exemptions are self-effectuating. month may better link prices between implement a five-day rule in order to Specifically, existing § 150.3 allows for two markets (e.g., the price of MGEX encourage additional trading in order to ‘‘spread or arbitrage positions’’ that are wheat futures and the price of CBOT increase profit, which could harm price ‘‘between single months of a futures wheat futures). Put another way, convergence. However, the Commission contract and/or, on a futures-equivalent permitting spread exemptions outside believes this concern is mitigated since basis, options thereon, outside of the the same crop year may enable pricing exchanges also have an economic spot month, in the same crop year; in two different but related markets for incentive to ensure that price provided, however, that such spread or substitute goods to be more highly convergence occurs with their arbitrage positions, when combined correlated, which, in this example, respective contracts since commercial with any other net positions in the benefits market participants with a price end-users would be less willing to use single month, do not exceed the all- exposure to the underlying protein such contracts for hedging purposes if months limit set forth in § 150.2.’’ 604 content in wheat generally, rather than price convergence would fail to occur in Proposed §§ 150.1 and 150.3 would that of a particular commodity. such contracts as they may generally amend the existing spread position However, the Commission also desire to hedge cash market prices with exemption for federal limits by (i) listing recognizes certain potential costs to futures contracts. specific spread transactions that may be permitting spread exemptions during granted; and (ii) other than for the listed the spot month, particularly to extend iii. Guidance for Measuring Risk on a spread positions, which would be self- into the last five days of trading. This Gross or Net Basis effectuating, requiring a person to apply feature could raise the risk of allowing The Commission proposes guidance for spread exemptions directly with the participants in the market at a time in in paragraph (a) of Appendix B to part Commission pursuant to proposed the contract where only those interested 150 on whether positions may be § 150.3.605 In addition, the proposed in making or taking delivery should be hedged on either a gross or net basis. rule would permit spread exemptions present. When a contract goes into Under the proposed guidance, among outside the same crop year and/or expiration, open interest and trading other things, a trader may measure risk during the spot month.606 volume naturally decrease as traders not on a gross basis if it would be consistent In connection with the spread interested in making or taking delivery with the trader’s historical practice and exemption provisions, the Commission roll their positions into deferred is not intended to evade applicable is relaxing the prohibition for contracts calendar months. The presence of large limits. The key cost associated with during the same crop year and/or the spread positions so close to the allowing gross hedging is that it may spot month so that exchanges are able expiration of a futures contract, which provide opportunity for hidden to exempt spreads outside the same crop positions are normally tied to large speculative trading.602 year and/or during the spot month. liquidity providers, may actually lead to Such risk is mitigated to a certain There may be benefits that result from disruptions in the price discovery extent by the guidance’s provisos that permitting these types of spread function of the contract by disrupting the trader does not switch between net exemptions. For example, the the futures/cash price convergence. This hedging and gross hedging in order to Commission believes that permitting could lead to increased transaction costs evade limits and that the DCM spread exemptions not in the same crop and harm the hedging utility for end- documents justifications for allowing year or during the spot month may users of the futures contract, which gross hedging and maintains any could lead to higher costs passed on to relevant records in accordance with 604 17 CFR 150.3. CEA section 4a(a)(1) provides consumers. However, the Commission proposed § 150.9(d).603 However, the the Commission with authority to exempt from position limits transactions ‘‘normally known to the preliminarily believes that these Commission also recognizes that there trade’’ as ‘‘spreads’’ or ‘‘straddles’’ or ‘‘arbitrage’’ or concerns would be mitigated as are myriad of ways in which to fix limits for such transactions or positions exchanges would continue to apply organizations are structured and engage different from limits fixed for other transactions or their expertise in overseeing and positions. in commercial hedging practices, maintaining the integrity of their including the use of multi-line business 605 The proposed ‘‘spread transactions’’ definition would list the most common types of spread markets. For example, an exchange strategies in certain industries that positions, including: Calendar spreads, could refuse to grant a spread intercommodity spreads, quality differential exemption if the exchange believed it 602 For example, using gross hedging, a market spreads, processing spreads (such as energy ‘‘crack’’ would harm its markets, require a participant could potentially point to a large long or soybean ‘‘crush’’ spreads), product or by-product cash position as justification for a bona fide hedge, differential spreads, and futures-options spreads. participant to reduce its positions, or even though the participant, or an entity with Proposed § 150.3(b) also would permit market implement a five-day-rule for spread which the participant is required to aggregate, has participants to apply to the Commission for other exemptions, as discussed above.607 an equally large short cash position that would spread transactions. Generally, the Commission result in the participant having no net price risk to 606 As discussed under proposed § 150.3, spread hedge as the participant had no price risk exposure exemptions identified in the proposed ‘‘spread preliminarily finds that, by allowing to the commodity prior to establishing such transaction’’ definition in proposed § 150.1 would speculators to execute intermarket and derivative position. Instead, the participant created be self-effectuating similar to the status quo and intramarket spreads as proposed, price risk exposure to the commodity by would not represent a change to the status quo speculators would be able to hold a establishing the derivative position. baseline. The related costs and benefits, particularly 603 Under proposed § 150.3(b)(2) and (e) and with respect to requesting exemptions with respect greater amount of open interest in proposed § 150.9(e)(5), and (g), the Commission to spreads other than those identified in the would have access to any information related to the proposed ‘‘spread transaction’’ definition, are 607 See supra Section IV.A.4.b.ii. (discussion of applicable exemption request. discussed under the respective sections below. the five-day rule).

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underlying contract(s), and therefore, shorting a MGEX wheat futures. There, size. By proposing to include the bona fide hedgers may benefit from any however, may be no hedger, such as a conditional exemption for purposes of increase in market liquidity. Spread mill, that is immediately available to federal limits on natural gas contracts, exemptions may also lead to better price trade at a desirable price for the farmer. the Commission reduces the incentive continuity and price discovery if market There may be a speculator willing to and ability for a market participant to participants who seek to provide offer liquidity to the hedger; however, manipulate a large physically-settled liquidity (for example, through entry of the speculator may wish to reduce the position to benefit a linked cash-settled resting orders for spread trades between risk of an outright long position in position. different contracts) receive a spread MGEX wheat futures through Further, the Commission has heeded exemption, and thus would not establishing a short position in CBOT natural gas traders’ concerns about otherwise be constrained by a position wheat futures (soft wheat). Such a disrupting market practices and limit. speculator, who otherwise would have harming liquidity in the cash-settled For clarity, the Commission has been constrained by a position limit at contract, which could increase the cost identified the following two examples of MGEX and/or CBOT, may seek of hedging and possibly prevent spread positions that could benefit from exemptions from MGEX and CBOT for convergence between the physical the proposed spread exemption: an intermarket spread, that is, for a long delivery futures and cash markets.609 • Reverse crush spread in soybeans position in MGEX wheat futures and a While a trader with a position in the on the CBOT subject to an intermarket short position in CBOT wheat futures of physical-delivery natural gas contract spread exemption. In the case where the same maturity. As a result of the may incur costs associated with soybeans are processed into two exchanges granting an intermarket liquidating that position in order to different products, soybean meal and spread exemption to such a speculator, meet the conditions of the federal soybean oil, the crush spread is the who otherwise may be constrained by exemption, such costs are incurred difference between the combined value limits, the farmer might be able to outside of the proposal, as the trader of the products and the value of transact at a higher price for hard wheat would have to do so as a condition of soybeans. There are two actors in this than might have existed absent the the exchange-level exemption under 610 scenario: the speculator and the soybean intermarket spread exemptions. Under current exchange rules. processor. The spread’s value this example, the speculator is accepting e. Financial Distress Exemption approximates the profit margin from basis risk between hard wheat and soft Proposed § 150.3(a)(3) would provide actually crushing (or mashing) soybeans wheat, reducing the risk of a position on an exemption for certain financial into meal and oil. The soybean one exchange by establishing a position distress circumstances, including the processor may want to lock in the on another exchange, and potentially default of a customer, affiliate, or spread value as part of its hedging providing liquidity to a hedger. Further, strategy, establishing a long position in acquisition target of the requesting spread transactions may aid in price soybean futures and short positions in entity that may require the requesting discovery regarding the relative protein soybean oil futures and soybean meal entity to take on, in short order, the content for each of the hard and soft futures, as substitutes for the processor’s positions of another entity. In codifying wheat contracts. expected cash market transactions (the the Commission’s historical practice, long position hedges the purchase of the d. Conditional Spot Month Exemption the proposed rule accommodates anticipated inputs for processing and Positions in Natural Gas transfers of positions from financially distressed firms to financially secure the short position hedges the sale of the Proposed § 150.3(a)(4) would provide firms. The disorderly liquidation of a anticipated soybean meal and oil a new federal conditional spot month position threatens price impacts that products). On the other side of the limit exemption position for cash- processor’s crush spread, a speculator may harm the efficiency and price settled natural gas contracts that would takes a short position in soybean futures discovery function of markets, and the permit traders to acquire positions up to against long positions in soybean meal proposal would make it less likely that 10,000 NYMEX Henry Hub Natural Gas futures and soybean oil futures. The positions will be prematurely or (NG) equivalent-size contracts (the soybean processor may be able to lock needlessly liquidated. The Commission federal spot month limit in proposed in a higher crush spread because of has determined that costs related to § 150.2 for NYMEX Henry Hub Natural liquidity provided by such a speculator filing and recordkeeping are likely to be Gas (NG) referenced contracts is who may need to rely upon a spread minimal. The Commission cannot otherwise 2,000 contracts in the exemption. In this example, the accurately estimate how often this aggregate across all one’s net positions) speculator is accepting basis risk exemption may be invoked because represented by the crush spread, and the per exchange that lists the relevant emergency or distressed market speculator is providing liquidity to the natural gas cash-settled referenced situations are unpredictable and soybean processor. The crush spread contracts, along with an additional dependent on a variety of firm and positions may result in greater futures-adjusted 10,000 contracts of market-specific factors as well as correlation between the futures prices of cash-settled economically equivalent general macroeconomic indicators.611 soybeans on the one hand and those of swaps, as long as such person does not The Commission, nevertheless, believes soybean oil and soybean meal on the also hold positions in the physically- that emergency or distressed market other hand, which means that prices for settled natural gas referenced situations that might trigger the need for 608 all three products may move up or contract. NYMEX, ICE, Nasdaq this exemption will be infrequent, and down together in a more correlated Futures, and Nodal currently have rules that codifying this historical practice manner. in place establishing a conditional spot • Wheat spread subject to intermarket month limit exemption equivalent to up 609 See 2016 Reproposal, 81 FR at 96862, 96863. spread exemptions. There are two actors to 5,000 contracts in NYMEX-equivalent 610 See ICE Rule 6.20(c) and NYMEX Rule 559.F. in this scenario: the speculator and the See, e.g., NASDAQ Futures Rule ch. v, section 608 The NYMEX Henry Hub Natural Gas (NG) 13(a)(ii) and Nodal Exchange Rulebook Appendix C wheat farmer. In this example, a farmer contract is the only natural gas contract included as (equivalent rules of NASDAQ and Nodal growing hard wheat would like to a core referenced futures contract under this exchanges). reduce the price risk of her crop by proposal. 611 See 2016 Reproposal, 81 FR at 96862, 96863.

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will add transparency to the certain bona fide hedges for purposes of Second, for recognition of any non- Commission’s oversight responsibilities. federal limits, and existing § 150.3 sets enumerated bona fide hedge in forth a list of spread exemptions a connection with any referenced f. Pre-Enactment and Transition Period person can rely on for purposes of contract, market participants would be Swaps Exemption federal limits. However, under existing required to apply either directly to the Proposed § 150.3(a)(5) would also Commission practices, spread Commission under proposed § 150.3 or provide an exemption from position exemptions and certain enumerated through an exchange that adheres to limits for positions acquired in good bona fide hedges are generally self- certain requirements under proposed faith in any ‘‘pre-enactment swap,’’ or in effectuating and do not require market § 150.9. The Commission notes that any ‘‘transition period swap,’’ in either participants to apply to the Commission existing regulations require market case as defined in proposed § 150.1. A for purposes of federal position limits, participants to apply to the Commission person relying on this exemption may although market participants are for recognition of non-enumerated bona net such positions with post-effective required to file Form 204 monthly fide hedges, and so the Commission’s date commodity derivative contracts for reports 612 to justify certain position proposal does not represent a change to the purpose of complying with any non- limit overages. Further, for those bona the status quo in this respect for the spot-month speculative positions limits, fide hedges for which market nine legacy agricultural contracts. but may not net against spot month participants are required to apply to the Third, proposed § 150.3 would positions. This exemption would be Commission, existing regulations and maintain the status quo by providing self-effectuating, and the Commission market practice require market that the most common spread preliminarily believes that proposed participants to apply both to the exemptions for the nine legacy § 150.3(a)(5) would benefit both Commission for purposes of federal agricultural contracts would remain individual market participants by limits and also to the relevant exchanges self-effectuating. Similarly, these lessening the impact of the proposed for purposes of exchange-set limits. The common spread exemptions also would federal limits, and market liquidity in Commission has preliminarily be self-effectuating for the proposed general as liquidity providers initially determined that this dual application additional 16 contracts that would be would not be forced to reduce or exit process creates inefficiencies for market newly subject to federal position limits. their positions. participants. These common spread exemptions The proposal would benefit price Proposed §§ 150.3 and 150.9, taken would be listed in the proposed ‘‘spread discovery and convergence by together, would make several changes to transaction’’ definition under proposed prohibiting large traders seeking to roll the process of acquiring bona fide hedge § 150.1.615 their positions into the spot month from recognitions and spread exemptions for Fourth, for any spread exemption not netting down positions in the spot- federal position limits purposes. listed in the proposed ‘‘spread month against their pre-enactment swap transaction’’ definition, market or transition period swap. The Proposed §§ 150.3 and 150.9 would maintain certain elements of the status participants would be required to apply Commission acknowledges that, on its directly to the Commission under face, including a ‘‘good-faith’’ quo while also adopting certain changes to facilitate the exemption process.613 proposed § 150.3. There would be no requirement in the proposed exception for the nine legacy § 150.3(a)(5) could hypothetically First, with respect to the proposed enumerated bona fide hedges, proposed agricultural products nor would market diminish market integrity since participants be permitted to apply determining whether a trader has acted § 150.3 would maintain the status quo by providing that those enumerated through an exchange under proposed in ‘‘good faith’’ is inherently subjective § 150.9 for these types of spread and could result in disparate treatment bona fide hedges that currently are self- effectuating for the nine legacy exemptions.616 among traders, where certain traders The Commission anticipates that may assert a more aggressive position in agricultural contracts would remain self-effectuating for the nine legacy most—if not all—market participants order to seek a competitive advantage would utilize the exchange-centric over others. The Commission believes agricultural contracts for purposes of federal position limits.614 Similarly, the process set forth in proposed § 150.9 the risk of any such unscrupulous trader with respect to applying for recognition or exchange is mitigated since enumerated bona fide hedges for the proposed additional 16 contracts that of non-enumerated bona fide hedges exchanges would still be subject to rather than apply directly to the Commission oversight and to DCM Core would be newly subject to federal position limits (i.e., those contracts Commission under proposed § 150.3 Principles 4 (‘‘prevention of market because market participants are likely disruption’’) and 12 (‘‘protection of other than the nine legacy agricultural contracts) also would be self- already familiar with the proposed markets and market participants’’), processes set forth in § 150.9, which is among others. The Commission has effectuating for purposes of federal position limits. intended to leverage the processes determined that market participants currently in place at the exchanges for who voluntarily employ this exemption 612 In the case of cotton, market participants addressing requests bona fide hedge also will incur negligible recordkeeping currently file the relevant portions of Form 304. recognitions from exchange-set limits. costs. 613 In this section the Commission discusses the In the sections below, the Commission 5. Process for the Commission or costs and benefits related to the application process will discuss the costs and benefits for these exemptions and bona fide hedge Exchanges To Grant Exemptions and recognitions. For a discussion of the costs and related to both processes. Bona Fide Hedge Recognitions for benefits related to the scope of the exemptions and Purposes of Federal Limits (Proposed bona fide hedge recognitions, see supra Section 615 The proposed ‘‘spread transaction’’ definition §§ 150.3 and 150.9) and Related IV.A.5.a.iv. would include a calendar spread, intercommodity 614 Under the status quo, market participants spread, quality differential spread, processing Changes to Part 19 of the Commission’s must apply to the Commission for recognition of spread (such as energy ‘‘crack’’ or soybean ‘‘crush’’ Regulations certain enumerated anticipatory bona fide hedges. spreads), product or by-product differential spread, The Commission’s proposal also would make these or futures-option spread. Existing §§ 1.47 and 1.48 set forth the enumerated anticipatory bona fide hedges self- 616 As discussed below, the proposal would also process for market participants to apply effectuating for the nine legacy agricultural eliminate the Form 204 and the equivalent portions to the Commission for recognition of contracts. of the Form 304.

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a. Process for Requesting Exemptions i. Existing Bona Fide Hedges That Commission 10 days prior to entering and Bona Fide Hedge Recognitions Currently Require Prior Submission to into the bona fide hedge that would Directly From the Commission the Commission Under Existing §§ 1.47 cause the hedger to exceed federal (Proposed § 150.3) and 1.48 for the Nine Legacy position limits.620 Under existing § 1.48, Under existing §§ 1.47 and 1.48, and Agricultural Contracts market participants could proceed with existing § 150.3, the processes for Under the proposal, the Commission their proposed bona fide hedges if the obtaining a recognition of a bona fide would maintain the distinction between Commission does not notify a market hedge or for relying on a spread enumerated bona fide hedges and non- participants otherwise within the exemption, are similar in some respects enumerated bona fide hedges under specific 10-day period. Because bona and different in other respects than the proposed § 150.3: (1) Enumerated bona fide hedgers could implement proposed approach. Existing §§ 1.47 and fide hedges would continue to be self- enumerated anticipatory bona fide 1.48 require market participants seeking effectuating; (2) enumerated hedges without waiting the requisite 10 recognition of non-enumerated bona anticipatory bona fide hedges would days, they may be able to implement fide hedges and enumerated become self-effectuating so market their hedging strategy more efficiently anticipatory bona fide hedges, participants would no longer need to with reduced cost and risk. The respectively, for federal position limits apply to the Commission; and (3) non- Commission acknowledges that making to apply directly to the Commission for enumerated bona fide hedges would such bona fide hedges easier to obtain prior approval. still require market participants to apply could increase the possibility of excess In contrast, existing non-anticipatory for recognition. Market participants that speculation since anticipatory enumerated bona fide hedges and choose to apply directly to the exemptions are theoretically more spread exemptions are self-effectuating, Commission for a bona fide hedge difficult to substantiate compared to the which means that market participants recognition (i.e., for non-enumerated other existing enumerated bona fide are not required to submit any bona fide hedges) would be subject to an hedges. However, the Commission has information to the Commission for prior application process that generally is gained significant experience over the approval, although such market similar to what the Commission years with bona fide hedging practices participants must subsequently file currently administers for the non- in general and with enumerated Form 204 or Form 304 each month in enumerated bona fide hedges and the anticipatory bona fide hedging practices order to describe their cash market enumerated anticipatory bona fide in particular, and the Commission preliminarily has determined that positions and justify their bona fide hedges.618 With respect to enumerated making such hedges self-effectuating hedge position. There currently is no anticipatory bona fide hedges for the should not increase the risk of excessive codified federal process related to nine legacy contracts, for which market speculation or market manipulation financial distress exemptions or natural participants currently are required to apply to the Commission for recognition compared to the status quo. gas conditional spot month exemptions. For non-enumerated bona fide hedges, For those market participants that for federal position limit purposes, the existing § 1.47 requires market would choose to apply directly to the Commission preliminarily anticipates participants to submit (i) initial Commission for recognition of non- that the proposal would benefit market applications to the Commission 30 days enumerated bona fide hedges or spread participants by making such hedges self- prior to the date the market participant exemptions not included in the effectuating.619 As a result, market participants will no longer be required would exceed the applicable position proposed ‘‘spread transaction’’ limits and (ii) supplemental definition, which in each case would to spend time and resources applying to the Commission. Further, for these applications (i.e., applications for a not be self-effectuating under the market participant that desire to exceed proposal, proposed § 150.3 would enumerated anticipatory hedges, existing § 1.48 requires market the bona fide hedge amount provided in provide a process for the Commission to the person’s previous Commission review and approve requests. Under participants to submit either an initial or supplemental application to the filing) 10 days prior for Commission proposed § 150.3, any person seeking approval, and market participants can Commission recognition of these types proceed with their proposed bona fide of bona fide hedges or a spread may help the Commission determine whether the position meets the applicable requirements for a hedges if the Commission does not exemptions (as opposed to applying to bona fide hedge position or spread transaction. intervene within the specific time (e.g., using the exchange-centric process 618 As noted above, under the existing framework either 10 days or 30 days). under proposed § 150.9 described market participants are not required to apply for Proposed § 150.3 would similarly below) would be required to submit a any type of bona fide hedge recognition or spread exemption from the Commission for any of the require market participants seeking request directly to the Commission and proposed additional 16 contracts that would be recognition of a non-enumerated bona to provide information similar to what newly subject to federal position limits (i.e., those fide hedge for any of the proposed 25 is currently required under existing contracts other than the nine legacy agricultural core referenced futures contracts to §§ 1.47 and 1.48.617 contracts); rather, under the existing framework, such market participants must apply to the apply to the Commission prior to exchanges for bona fide hedge recognitions or exceeding federal position limits, but 617 For bona fide hedges and spread exemptions, exemptions for purposes of exchange-set position proposed § 150.3 would not prescribe a this information would include: (i) A description of limits. Accordingly, to the extent that market the position in the commodity derivative contract participants would not need to apply to the certain time period by which a bona fide for which the application is submitted, including Commission in connection with any of the hedger must apply or by which the the name of the underlying commodity and the proposed additional 16 contracts, the Commission’s position size; (ii) information to demonstrate why proposal would not impose additional costs or 620 Under the Commission’s existing regulations, the position meets the applicable requirements for benefits compared to the status quo. non-anticipatory enumerated bona fide hedges are a bona fide hedge or spread transaction; (iii) a 619 As noted above, since market participants do self-effectuating, and market participants do not statement concerning the maximum size of all gross not need to apply to the Commission for bona fide have to file any applications for recognition under positions in derivative contracts for which the hedge recognition for any of the proposed existing Commission regulations. However, bona application is submitted; (iv) for bona fide hedges, additional 16 contracts that would be newly subject fide hedgers must file with the Commission information regarding the applicant’s activity in the to federal position limits, the Commission’s monthly Form 204 (or Form 304 in connection with cash markets and swaps markets for the commodity proposal would not result in any additional costs ICE Cotton No. 2 (CT)) reports discussing their underlying the position for which the application or benefits to the extent such bona fide hedge underlying cash positions in order to substantiate is submitted; and (v) any other information that recognitions would be self-effectuating. their bona fide hedge positions.

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Commission must respond. The they otherwise would or cause the bona continue to require any non-enumerated Commission preliminarily anticipates fide hedger to delay entering into its bona fide hedge in one of the nine that the proposal would benefit bona hedge, in either case potentially causing legacy agricultural products to receive fide hedgers by enabling them in many bona fide hedgers to incur increased prior approval, and similarly would cases to generally implement their hedging costs. require prior approval for such non- hedging strategies sooner than the However, the Commission enumerated bona fide hedges for the existing 30-day or 10-day waiting preliminarily believes this concern is proposed additional 16 contracts that period, in which case the Commission partially mitigated since proposed would be newly subject to federal believes hedging-related costs would § 150.3 would require the purported position limits.623 The Commission decrease. However, the Commission bona fide hedger to exit its position in anticipates that there will be no change a ‘‘commercially reasonable time,’’ believes that there could also be to the status quo baseline with respect which the Commission believes should circumstances in which the overall to the most common spread exemptions process could take longer than the partially mitigate any costs incurred by since these exemptions would be self- existing timelines under § 1.47, which the market participant compared to effecting for purposes of federal position could increase hedging related costs if a either an alternative that would require bona fide hedger is compelled to wait the bona fide hedger to exit its position limits. longer, compared to existing immediately, or the status quo where To the extent market participants Commission practices, before executing the market participant either is unable would be required to obtain prior its hedging strategy. to enter into a hedge at all without approval for a non-enumerated bona On the other hand, the Commission Commission prior approval. fide hedge or spread exemption for any also recognizes that there could be of the additional 16 contracts that potential costs to bona fide hedgers if ii. Spread Exemptions and Non- Enumerated Bona Fide Hedges would be newly subject to federal under the proposal they are forced position limits, the Commission either to enter into less effective bona Proposed § 150.3 would impose a new recognizes that proposed § 150.3 would fide hedges or to wait to implement requirement for market participants to impose costs on market participants their hedging strategy, as a result of the (1) apply either directly to the who will now be required to spend time potential uncertainty that could result Commission pursuant to proposed and resources submitting applications to from proposed § 150.3 not requiring the § 150.3 or to an exchange pursuant to the Commission (for certain spread proposed § 150.9 for any non- Commission to respond within a certain exemptions) or to either the amount of time. The Commission enumerated bona fide hedge; and (2) to Commission or an exchange (for non- believes this concern is mitigated to the apply directly to the Commission enumerated bona fide hedges) for prior extent market participants utilize the pursuant to proposed § 150.3 for any proposed § 150.3 process that would approval for federal position limit spread exemptions not identified in the 624 permit a market participant that proposed ‘‘spread transaction’’ purposes. Further, compared to the demonstrates a ‘‘sudden or unforeseen’’ definition for any of the proposed 25 status quo in which the proposed new increase in its bona fide hedging needs core referenced futures contracts.621 As 16 contracts are not subject to federal to enter into a bona fide hedge without noted above, common spread position limits, the proposed process first obtaining the Commission’s prior exemptions (i.e., those identified in the could increase uncertainty since market approval, as long as the market proposed definition of ‘‘spread participants would be required to seek participant submits a retroactive transaction’’ in proposed § 150.1) would prior approval and wait up to 10 days. application to the Commission within remain self-effectuating for the nine As a result, such uncertainty could five business days of exceeding the legacy agricultural products and also cause market participants to either enter applicable position limit. The would be self-effectuating for the 16 into smaller spread or bona fide hedging Commission preliminarily believes this proposed core referenced futures positions or do so at a later time. In ‘‘five-business day retroactive contracts.622 Unlike non-enumerated either case, this could cause market exemption’’ would benefit bona fide bona fide hedges, for which market participants to incur additional costs hedgers compared to existing §§ 1.47 participants could apply directly to the and/or implement less efficient hedging and 1.48, which requires Commission Commission under proposed § 150.3 or strategies. However, the Commission prior approval, since hedgers that would through an exchange under proposed preliminarily believes that proposed qualify to exercise the five-business day § 150.9, for spread exemptions not § 150.3’s framework would be familiar retroactive exemption are also likely identified in the proposed ‘‘spread to market participants that currently facing more acute hedging needs—with transaction’’ definition, market apply to the Commission for bona fide potentially commensurate costs if participants would be required to apply exemptions for the nine legacy required to wait. This provision would directly to the Commission under agricultural products, which should also leverage, for federal position limit proposed § 150.3. serve to reduce costs for some market purposes, existing exchange practices As noted above, proposed § 150.3 also participants associated with obtaining for granting retroactive exemptions from would maintain the status quo and recognition of a bona fide hedge or exchange-set limits. spread exemption from the Commission On the other hand, the proposed five- 621 As discussed below, for spread exemptions for federal limits for those market business day retroactive exemption not identified in the proposed ‘‘spread transaction’’ could harm market liquidity and bona definition in proposed § 150.3, market participants fide hedgers if the applicable exchange would be required to apply directly to the 623 The Commission discusses the costs and Commission under proposed § 150.3 and would not benefits related to the proposed process for non- or the Commission were to not approve be able to apply under proposed § 150.9. enumerated bona fide hedge recognitions with of the retroactive request, and the 622 Existing § 150.3(a)(2) does not specify a formal respect to the nine legacy agricultural products in Commission subsequently required process for granting either spread exemptions or the above section. liquidation of the position in question. non-anticipatory enumerated bona fide hedges that 624 The Commission’s Paperwork Reduction Act are consistent with CEA section 4a(a)(1), so in analysis identifies some of these information As a result, such possibility could cause practice spread exemptions and non-anticipatory collection burdens in greater specificity. See supra market participants to either enter into enumerated bona fide hedges have been self- Section IV.A.4.c. (discussing in greater detail the smaller bona fide hedge positions than effectuating. cost and benefits related to spread exemptions).

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participants.625 The Commission also market participants by providing market applicable requirements. The preliminarily believes that this analysis participants the option to choose the Commission does not expect these also would apply to the nine legacy process for applying for a non- requirements to impose significant new agricultural contracts for spread enumerated bona fide hedge (i.e., either costs on market participants, as these exemptions that are not listed in the directly with the Commission or, requirements are in line with existing proposed ‘‘spread transaction’’ alternatively, through the exchange- Commission and exchange-level definition and therefore also would centric process discussed under recordkeeping obligations. require market participants to apply to proposed § 150.9 below) for the iv. Exemption Renewals the Commission for these types of additional 16 contracts that would be spread exemptions for the first time for newly subject to federal position limits Consistent with existing §§ 1.47 and the nine legacy agricultural products. that would be more efficient given the 1.48, with respect to any Commission- However, because the Commission market participants unique facts, recognized bona fide hedge or preliminarily has determined that most circumstances, and experience.626 If a Commission-granted spread exemption spread transactions would be self- market participant chooses to apply pursuant to proposed § 150.3, the effectuating (especially for the nine through an exchange for federal position Commission would not require a market legacy agricultural contracts based on limits pursuant to proposed § 150.9, the participant to reapply annually for bona the Commission’s experience), the market participant would also receive fide hedges.627 The Commission Commission believes that the proposal the added benefit of not being required preliminarily believes that this will would impose only small costs with to also submit another application reduce burdens on market participants respect to spread exemptions for both directly to the Commission. The but also recognizes that not requiring the nine legacy agricultural contracts as Commission anticipates that most market participants to annually reapply well as the proposed additional 16 market participants would apply ostensibly could harm market integrity contracts that would be newly subject to directly to exchanges for non- since the Commission would not federal position limits. enumerated bona fide hedges, pursuant directly receive updated information While the Commission has years of to the proposed streamlined process with respect to particular bona fide experience granting and monitoring § 150.9, as explained below, in which hedgers or exemption holders prior to spread exemptions and enumerated and case the Commission believes that most the trader excessing the applicable non-enumerated bona fide hedges for market participants would incur the federal limits. the nine legacy agricultural contracts, as costs and benefits discussed thereunder. However, the Commission well as overseeing exchange processes The Commission also preliminarily preliminarily believes that any potential for administering exemptions from believes that this analysis also would harm would be mitigated since the exchange-set limits on such apply with respect to non-enumerated Commission, unlike exchanges, has commodities, the Commission does not bona fide hedges for the nine legacy access to aggregate market data, have the same level of experience or agricultural contracts. including positions held by individual comfort administering bona fide hedge market participants. Further, proposed iii. Exemption-Related Recordkeeping recognitions and spread exemptions for § 150.3 would require a market the additional 16 contracts that would Proposed § 150.3(d) would require participant to submit a new application be subject to the proposed federal persons who avail themselves of any of if any information changes, or upon the position limits and the new proposed the foregoing exemptions to maintain Commission’s request. On the other exemption processes for the first time. complete books and records relating to hand, market participants would benefit Accordingly, the Commission the subject position, and to make such by not being required to annually preliminarily recognizes that permitting records available to the Commission submit new applications, which the enumerated bona fide hedges and upon request under proposed § 150.3(e). Commission preliminarily believes will spread recognitions identified in the These requirements would benefit reduce compliance costs. proposed ‘‘spread transaction’’ market integrity by providing the definition for these additional 16 Commission with the necessary v. Exemptions for Financial Distress and contracts might not provide the information to monitor the use of Conditional Natural Gas Positions purported benefits, or could result in exemptions from speculative position Proposed § 150.3 would codify the increased costs, compared to the limits and help to ensure that any Commission’s existing informal practice Commission’s experience with the nine person who claims any exemption with respect to exemptions for financial legacy agricultural products. permitted by proposed § 150.3 can distress and conditional spot month The Commission also preliminarily demonstrate compliance with the limit exemption positions in natural gas. believes that the proposal will benefit The same costs and benefits described 626 As noted above, market participants seeking above with respect to applications for 625 The Commission preliminarily anticipates that spread exemptions not listed in the proposed bona fide hedge recognitions and spread the proposed application process in § 150.3(b) ‘‘spread transaction’’ definition in proposed § 150.1 could slightly reduce compliance-related costs, would be required to apply directly with the exemptions would also apply. However, compared to the status quo application process to Commission under proposed § 150.3 and would not to the extent the Commission currently the Commission under existing §§ 1.47 and 1.48, be permitted to apply under proposed § 150.9. The allows exemptions related to financial because proposed § 150.3 would provide a single, Commission preliminarily recognizes that these distress, the Commission preliminarily standardized process for all bona fide hedge and types of spread exemptions are difficult to analyze spread exemption requests that is slightly less compared to either the spread exemptions has determined that the costs and complex—and more clearly laid out in the proposed identified in proposed § 150.1 or bona fide hedges benefits with respect to the related regulations—than the Commission’s existing in general. Accordingly, the Commission application process already may be application processes. Nonetheless, since the preliminarily has determined to require market recognized by market participants. Commission anticipates that most market participants to apply directly to the Commission. participants would apply directly to exchanges for Further, compared to the spread exemptions bona fide hedges and spread exemptions when identified in proposed § 150.1, the Commission 627 As discussed below, with respect to exchange- provided the option under proposed § 150.9, the anticipates relatively few requests, and so does not set limits under proposed § 150.5 or the exchange Commission believes that most market participants believe the proposed application requirement will process for federal limits under proposed § 150.9, would incur the costs and benefits discussed impose a large aggregate burden across market market participants would be required to annually thereunder. participants. reapply to exchanges.

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b. Process for Market Participants To processing of applications with the enumerated.629 The Commission Apply to an Exchange for Non- Commission under proposed § 150.9 preliminarily expects this to benefit Enumerated Bona Fide Hedge would be required to expend resources market participants by providing a more Recognitions for Purposes of Federal to establish a process consistent with efficient and less complex process that Limits (Proposed § 150.9) and Related the Commission’s proposal. However, to is consistent with existing practices at Changes to Part 19 of the Commission’s the extent exchanges have similar the exchange-level. Regulations procedures, such benefits and costs may On the other hand, the Commission Proposed § 150.9 would provide a already have been realized by market recognizes proposed § 150.9 would framework whereby a market participants and exchanges. impose new costs related to non- enumerated bona fide hedges for the participant could avoid the existing The Commission preliminarily dual application process described additional 16 contracts that would be believes that there are significant above and, instead, file one application newly subject to federal position limits. benefits to the proposed § 150.9 process with an exchange to receive a non- Under the proposal, market participants enumerated bona fide hedging that would be largely realized by market would now be required to submit recognition, which as discussed participants. The Commission applications to receive prior approval previously would not be self- preliminarily has determined that the for federal position limits purposes. effectuating for purposes of federal use of a single application to process However, since the Commission position limits. Under this process, a both exchange and federal position preliminarily understands that person would be allowed to exceed the limits will benefit market participants exchanges already require market federal limit levels following an and exchanges by simplifying and participants to submit applications and exchange’s review and approval of an streamlining the process. For applicants receive prior approval under exchange- application for a bona fide hedge seeking recognition of a non- set limits for all types of bona fide recognition or spread exemption, enumerated bona fide hedge, proposed hedges, the Commission does not provided that the Commission during its § 150.9 should reduce duplicative believe proposed § 150.9 would impose review does not notify the exchange efforts because applicants would be any additional incremental costs on otherwise within a certain period of saved the expense of applying in market participants beyond those time thereafter. Market participants who parallel to both an exchange and the already incurred under exchanges’ do not elect to use the process in Commission for relief from exchange-set existing processes. Accordingly, the proposed § 150.9 for purposes of federal position limits and federal position Commission preliminarily believes that any costs already may have been position limits would be required to limits, respectively. Because many request relief both directly from the realized by market participants. exchanges already possess similar Further, the Commission Commission under proposed § 150.3, as application processes with which discussed above, and also apply to the preliminarily believes that employing a market participants are likely relevant exchange, consistent with concurrent process with exchanges to accustomed, compliance costs should be existing practices.628 oversee the non-enumerated bona fide decreased in the form of reduced hedges that would not be self- i. Proposed § 150.9—Establishment of application-production time by market effectuating for federal position limits General Exchange Process participants and reduced response time purposes would benefit market integrity Pursuant to proposed § 150.9, by exchanges. by ensuring that market participants are exchanges that elect to process these As discussed above, in connection appropriately relying on such bona fide applications would be required to file with the recognition of bona fide hedges hedges and not entering into such new rules or rule amendments with the for federal position limit purposes, positions in order to attempt to Commission under § 40.5 of the current practices set forth in existing manipulate the market or evade position Commission’s regulations and obtain §§ 1.47 and 1.48 require market limits. However, to the extent that from applicants all information to participants to differentiate between (i) exchange oversight, consistent with enable the exchange to determine, and enumerated non-anticipatory bona fide Commission standards and DCM core the Commission to verify, that the facts principles, already exists, such benefits hedges that are self-effectuating, and (ii) and circumstances support a non- may already be realized. enumerated anticipatory bona fide enumerated bona fide hedge hedges and non-enumerated bona fide ii. Proposed § 150.9—Exchange recognition. The Commission initially Expertise, Market Integrity, and believes that exchanges’ existing hedges for which market participants Commission Oversight practices generally are consistent with must apply to the Commission for prior the requirements of proposed § 150.9, approval. Under the proposal, the For non-enumerated bona fide hedge and therefore exchanges would only Commission would no longer recognitions that would require the incur marginal costs, if any, to modify distinguish among different types of Commission’s prior approval, the their existing practices to comply. enumerated bona fide hedges (e.g., proposal would provide a framework Similarly, the Commission preliminarily anticipatory versus non-anticipatory that utilizes existing exchange resources anticipates that establishing uniform, enumerated bona fide hedges), and and expertise so that fair access and standardized exemption processes therefore, would not require exchanges liquidity are promoted at the same time across exchanges would benefit market to have separate processes for market manipulations, squeezes, participants by reducing compliance enumerated anticipatory positions corners, and any other conduct that costs. On the other hand, the under proposed § 150.9 for the nine would disrupt markets are deterred and Commission recognizes that exchanges legacy agricultural contracts. The prevented. Proposed § 150.9 would that wish to participate in the Commission’s proposal would also build on existing exchange processes, eliminate the requirement for bona fide which the Commission preliminarily 628 As noted above, the Commission preliminarily hedgers to file Form 204 or Form 304, anticipates that most, if not all, market participants as applicable, with respect to any bona 629 See infra Section II.H.3. (discussion of will use proposed § 150.9, rather than proposed proposed changes to part 19 eliminating Form 204 § 150.3, where permitted. fide hedge, whether enumerated or non- and portions of Form 304).

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believes would strengthen the ability of allow certain market participants to to enter into a bona fide hedge without the Commission and exchanges to utilize non-enumerated bona fide hedge first obtaining the Commission’s prior monitor markets and trading strategies recognitions to engage in excessive approval, as long as the market while reducing burdens on both the speculation or to manipulate market participant submits a retroactive exchanges, which would administer the prices. If an exchange engaged in such application to the Commission within process, and market participants, who activity, other market participants five business days of exceeding the would utilize the process. For example, would likely face greater costs through applicable position limit. In turn, the exchanges are familiar with their market increased transaction fees, including Commission would only have two participants’ commercial needs, forgoing trading opportunities resulting business days (as opposed to the default practices, and trading strategies, and from market prices moving against 10 business days) to complete its review already evaluate hedging strategies in market participants and/or preventing for federal purposes. The Commission connection with setting and enforcing the market participant from executing at preliminarily believes this ‘‘five- exchange-set position limits; its desired prices, which may also business day retroactive exemption’’ accordingly, exchanges should be able further lead to inefficient hedging. would benefit bona fide hedgers to readily identify bona fide hedges.630 However, the Commission preliminarily compared to existing § 1.47, which For these reasons, the Commission believes that these hypothetical costs requires Commission prior approval, has preliminarily determined that are unfounded since under proposed since hedgers that would qualify to allowing market participants to apply § 150.9 the Commission would review exercise the five-business day through an exchange under proposed the applications submitted by market retroactive exemption are also likely § 150.9, rather than directly to the participants for bona fide hedge facing more acute hedging needs—with Commission as required under existing recognitions and spread exemptions; the potentially commensurate costs if § 1.47, is likely to be more efficient than Commission emphasizes that proposed required to wait. This provision would if the Commission itself initially had to § 150.9 is not providing exchanges with also leverage, for federal position limit review and approve all applications. an ability to recognize a bona fide hedge purposes, existing exchange practices The Commission preliminarily or grant an exemption for federal for granting retroactive exemptions from considers the increased efficiency in position limit purposes in lieu of a exchange-set limits. processing applications under proposed Commission review. Rather, proposed On the other hand, the proposed five- § 150.9 as a benefit to bona fide hedgers § 150.9(e) and (f) would require an business day retroactive exemption and liquidity providers. By having the exchange to provide the Commission could harm market liquidity and bona availability of the exchange’s analysis with notice of the disposition of any fide hedgers since the Commission and view of the markets, the application for purposes of exchange would be able to require a market Commission would be better informed limits concurrently with the notice the participant to exit its position if the in its review of the market participant exchange would provide to the exchange or the Commission does not and its application, which in turn may applicant, and the Commission would approve of the retroactive request, and further benefit market participants in have 10 business days to make its such uncertainty could cause market the form of administrative efficiency determination for federal position limits participants to either enter into smaller and regulatory consistency. However, purposes (although, in connection with bona fide hedge positions than it the Commission recognizes additional ‘‘sudden or unforeseen increases’’ in otherwise would or could cause the bona fide hedger to delay entering into costs for exchanges required to create bona fide hedging needs, as discussed in its hedge, in either case potentially and submit these real-time notices. To connection with proposed § 150.3, causing bona fide hedgers to incur the extent exchanges already provide proposed § 150.9 would require the increased hedging costs. However, the similar notice to the Commission or to Commission to make its determination Commission preliminarily believes this market participants, or otherwise are within two business days). required to notify the Commission concern is partially mitigated since under certain circumstances, such On the other hand, the Commission proposed § 150.9 would require the benefits and costs already may have also recognizes that there could be purported bona fide hedger to exit its been realized. potential costs to bona fide hedgers if position in a ‘‘commercially reasonable On the other hand, to the extent under the proposal they are forced to time,’’ which the Commission believes exchanges would become more involved wait up to 10 business days for the should partially mitigate any costs with respect to review and oversight of Commission to complete its review after incurred by the market participant market participants’ bona fide hedges the exchange’s initial review— compared to either an alternative that and spread exemptions, exchanges especially compared to the status quo would require the bona fide hedger to could incur additional costs. However, for the 16 commodities that would be exit its position immediately, or the as noted, the Commission believes most subject to federal limits for the first time status quo where the market participant of the costs have been realized by under this release and currently are not either is unable to enter into a hedge at exchanges under current market required to receive the Commission’s all without Commission approval. practice. prior approval. As a result, the While existing § 1.47 does not require At the same time, the Commission Commission preliminarily recognizes market participants to annually reapply also preliminarily recognizes that this that a market participant could incur for certain bona fide hedges, proposed aspect of the proposal could potentially costs by waiting during the 10 business § 150.9 would require market harm market integrity. Absent other day period or be required to enter into participants to reapply at least annually provisions, since exchanges profit from a less efficient hedge, which would with exchanges for purposes of federal increased activity, an exchange could harm liquidity. However, the position limits. The Commission hypothetically seek a competitive Commission believes this concern is recognizes that requiring market advantage by offering excessively mitigated since proposed § 150.9, participants to reapply annually could permissive exemptions, which could similar to proposed § 150.3, would impose additional costs on those that permit a market participant that are not currently required to do so. 630 For a discussion on the history of exemptions, demonstrates a ‘‘sudden or unforeseen’’ However, the Commission believes that see 2013 Proposal, 78 FR at 75703–75706. increase in its bona fide hedging needs this is consistent with industry practice

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with respect to exchange-set limits and the processing and disposition of any recognizes that this proposed that market participants are familiar applications, including applicants’ prohibition could alter trading strategies with exchanges’ exemption processes, submission materials, exchange notes, that currently use commodity index which should reduce related costs.631 and determination documents.633 The contracts as part of an entity’s risk Further, the Commission preliminarily Commission preliminarily believes that management program. Although there believes that market integrity would be this will benefit market integrity and likely would be a cost to change risk strengthened by ensuring that exchanges Commission oversight by ensuring that management strategies for entities that receive updated trader information that pertinent records will be readily currently rely on a bona fide hedge may be relevant to the exchange’s accessible, as needed by the recognition for positions in commodity oversight.632 However, to the extent any Commission. However, the Commission index contracts, as discussed above, the of these benefits and costs reflect acknowledges that such requirements Commission believes that such financial current market practice, they already would impose costs on exchanges. products are not substitutes for may have been realized by exchanges Nonetheless, to the extent that positions in a physical market and and market participants. exchanges are already required to therefore do not satisfy the statutory In addition, the proposed exchange- maintain similar records, such costs and requirement for a bona fide hedge under to-Commission monthly report in benefits already may be realized.634 section 4a(c)(2) of the Act.635 In proposed § 150.5(a)(4) would further iv. Proposed § 150.9 (g)—Commission addition, the Commission further posits detail the exchange’s disposition of a that this cost may be reduced or market participant’s application for Revocation of Previously-Approved Applications mitigated by the proposed increased in recognition of a bona fide hedge federal position limit levels set forth in position or spread exemption as well as The Commission preliminarily proposed § 150.2 or by the the related position(s) in the underlying acknowledges that there may be costs to implementation of the pass-through cash markets and swaps markets. The market participants if the Commission swap provision of the proposed bona Commission believes that such reports revokes the hedge recognition for fide hedge definition.636 would provide greater transparency by federal purposes under proposed facilitating the tracking of these § 150.9(f). Specifically, market c. Request for Comment positions by the Commission and would participants could incur costs to (48) The Commission requests further assist the Commission in unwind trades or reduce positions if the comment on its considerations of the ensuring that a market participant’s Commission required the market benefits and costs of proposed § 150.3 activities conform to the exchange’s participant to do so under proposed and § 150.9. Are there additional rules and to the CEA. The combination § 150.9(f)(2). benefits or costs that the Commission However, the potential cost to market of the ‘‘real-time’’ exchange notification should consider? Has the Commission participants would be mitigated under and exchanges’ provision of monthly misidentified any benefits or costs? proposed § 150.9(f) since the reports to the Commission under Commenters are encouraged to include Commission would provide a proposed §§ 150.9(e)(1) and 150.5(a)(4), both quantitative and qualitative commercially reasonable time for a respectively, would provide the assessments of these benefits and costs, person to come back into compliance Commission with enhanced as well as data or other information to with the federal position limits, which surveillance tools on both a ‘‘real-time’’ support such assessments. and a monthly basis to ensure the Commission believes should mitigate transaction costs to exit the (49) The Commission requests compliance with the requirements of comment on whether a Commission- this proposal. The Commission position and allow a market participant the opportunity to potentially execute administered process, such as the anticipates additional costs for process in proposed § 150.3, would exchanges required to create and submit other hedging strategies. promote more consistent and efficient monthly reports because the proposed v. Proposed § 150.9—Commodity decision-making. Commenters are rules would require exchanges to Indexes and Risk Management encouraged to include both quantitative compile the necessary information in Exemptions and qualitative assessments, as well as the form and manner required by the data or other information to support Commission. However, to the extent Proposed § 150.9(b) would prohibit such assessments. exchanges already provide similar exchanges from recognizing as a bona notice to the Commission, or otherwise fide hedge with respect to commodity (50) The Commission recognizes there are required to notify the Commission index contracts. The Commission exist alternatives to proposed § 150.9. under certain circumstances, such These include such alternatives as: (1) benefits and costs already may have 633 Moreover, consistent with existing § 1.31, the Not permitting exchanges to administer Commission expects that these records would be been realized any process to recognize bona fide readily accessible until the termination, maturity, or hedging transactions or positions or iii. Proposed 150.9(d)—Recordkeeping expiration date of the bona fide hedge recognition or exempt spread position and during the first two grant exempt spread positions for Proposed § 150.9(d) would require years of the subsequent, five-year retention period. purposes of federal limits; or (2) exchanges to maintain complete books 634 The Commission believes that exchanges that maintaining the status quo. The and records of all activities relating to process applications for recognition of bona fide Commission requests comment on hedging transactions or positions and/or spread exemptions currently maintain records of such whether an alternative to what is 631 See infra Section IV.A.6. (discussing proposed applications as required pursuant to other existing proposed would result in a superior § 150.5). Commission regulations, including existing § 1.31. cost-benefit profile, with support for any 632 In contrast, the Commission, unlike The Commission, however, also believes that such position. exchanges, has access to aggregate market data, proposed § 150.9(d) may impose additional including positions held by individual market recordkeeping obligations on such exchanges. The participants, and so the Commission has Commission estimates that each exchange electing 635 See supra Section III.F.6. (discussion of preliminarily determined that requiring market to administer the proposed process would likely commodity indices); see supra Section participants to apply annually under proposed incur a de minimis cost annually to retain records IV.A.4.b.i.(1). (discussion of elimination of the risk § 150.3, absent any changes to their application, for each proposed process compared to the status management exemption). would not benefit market integrity to the same quo. See generally Section IV.B. (discussing the 636 See supra Section IV.A.4.b.i.(1). (discussion of extent. Commission’s PRA determinations). the pass-through swap exemption).

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d. Related Changes to Part 19 of the The proposed cash-market and swap- requirements are a monthly, recurring Commission’s Regulations Regarding market reporting elements of §§ 150.5 reporting burden for market the Provision of Information by Market and 150.9 discussed above are largely participants. Participants consistent with current market practices 6. Exchange-Set Position Limits with respect to exchange-set limits and Under existing regulations, the (Proposed § 150.5) Commission relies on Form 204 637 and thus should not result in any new costs. Form 304,638 known collectively as the The proposed elimination of Form 204 a. Introduction ‘‘series ‘04’’ reports, to monitor for and the cash-market reporting segments Existing § 150.5 addresses exchange- compliance with federal position limits. of the Form 304 would eliminate a set position limits on contracts not Under existing part 19, market reporting burden and the costs subject to federal limits under existing participants that hold bona fide hedging associated thereto for market § 150.2, and sets forth different positions in excess of federal limits for participants. Instead, market standards for DCMs to apply in setting the nine legacy agricultural contracts participants would realize significant limit levels depending on whether the currently subject to federal limits under benefits by being able to submit cash DCM is establishing limit levels: (1) On existing § 150.2 must justify such market reporting to one entity—the an initial or subsequent basis; (2) for overages by filing the applicable report exchanges—instead of having to comply cash-settled or physically-settled (Form 304 for cotton and Form 204 for with duplicative reporting requirements contracts; and (3) during or outside the the other eight legacy commodities) between the Commission and applicable spot month. each month.639 The Commission uses exchange, or implement new In contrast, for physical commodity these reports to determine whether a Commission processes for reporting derivatives, proposed § 150.5(a) and (b) trader has sufficient cash positions that cash market data for market participants would (1) expand existing § 150.5’s justify futures and options on futures who will be newly subject to position 641 framework to also cover contracts positions above the speculative limits. limits. Further, market participants subject to federal limits under § 150.2; As discussed above, with respect to are generally already familiar with (2) simplify the existing standards that exchange processes for reporting and bona fide hedging positions, the DCMs apply when establishing recognizing bona fide hedging Commission is proposing a streamlined exchange-set position limits; and (3) exemptions, which is an added benefit, approach under proposed § 150.9 to provide non-exclusive acceptable especially for market participants that cash-market reporting that reduces practices for compliance with those would be newly subject to federal duplication between the Commission standards.644 Additionally, proposed position limits. and the exchanges. Generally, the § 150.5(d) would require DCMs to adopt Commission is proposing amendments Further, the proposed changes would not impact the Commission’s existing aggregation rules that conform to to part 19 and related provisions in part existing § 150.4.645 15 that would: (i) Eliminate Form 204; provisions for gathering information and (ii) amend the Form 304, in each through special calls relating to b. Physical Commodity Derivative case to remove any cash-market positions exceeding limits and/or to Contracts Subject to Federal Position reporting requirements. Under this reportable positions. Accordingly, as Limits Under § 150.5 (Proposed proposal, the Commission would discussed above, the Commission § 150.5(a)) instead rely on cash-market reporting proposes that all persons exceeding the proposed limits set forth in proposed i. Exchange-Set Position Limits and submitted directly to the exchanges, Related Exemption Process pursuant to proposed §§ 150.5 and § 150.2, as well as all persons holding or controlling reportable positions For contracts subject to federal limits 150.9,640 or request cash-market pursuant to existing § 15.00(p)(1), must under § 150.2, proposed § 150.5(a)(1) information through a special call. file any pertinent information as would require DCMs to establish 642 exchange-set limits no higher than the 637 CFTC Form 204: Statement of Cash Positions instructed in a special call. This in Grains, Soybeans, Soybean Oil, and Soybean proposed provision is similar to existing level set by the Commission. This is not Meal, U.S. Commodity Futures Trading § 19.00(a)(3), but would require any a new requirement, and merely restates Commission website, available at https:// such person to file the information as the applicable requirement in DCM Core www.cftc.gov/sites/default/files/idc/groups/public/ Principle 5.646 @forms/documents/file/cftcform204.pdf (existing instructed in the special call, rather than Form 204). to file a series ’04 report.643 The Proposed § 150.5(a)(2) would 638 CFTC Form 304: Statement of Cash Positions Commission preliminarily believes that authorize DCMs to grant exemptions in Cotton, U.S. Commodity Futures Trading relying on its special call authority is from such limits and is generally Commission website, available at http:// less burdensome for market participants consistent with current industry www.cftc.gov/ucm/groups/public/@forms/ documents/file/cftcform304.pdf (existing Form than the existing Forms 204 and 304 practice. The Commission has 204). Parts I and II of Form 304 address fixed-price reporting costs, as special calls are cash positions used to justify cotton positions in discretionary requests for information 644 See 17 CFR 150.2. Existing § 150.5 addresses excess of federal limits. As described below, Part III whereas the series ‘04 reporting only contracts not subject to federal limits under of Form 304 addresses unfixed price cotton ‘‘on- existing § 150.2 (aside from certain major foreign call’’ information, which is not used to justify currency contracts). To avoid confusion created by cotton positions in excess of limits, but rather to market reporting regime discussed in this section of the parallel federal and exchange-set position limit allow the Commission to prepare its weekly cotton the release only pertains to bona fide hedges, not frameworks, the Commission clarifies that proposed on-call report. to spread exemptions, because the Commission has § 150.5 deals solely with exchange-set position 639 17 CFR 19.01. not traditionally relied on cash-market information limits and exemptions therefrom, whereas proposed 640 See supra Section II.G.3. (discussion of when reviewing requests for spread exemptions. § 150.9 deals solely with the process for purposes proposed § 150.9). As discussed above, leveraging 641 The Commission has noted that certain of federal limits. existing exchange application processes should commodity markets will be subject to federal 645 See 17 CFR 150.4. avoid duplicative Commission and exchange position limits for the first time. In addition, the 646 See Commission regulation § 38.300 (restating procedures and increase the speed by which existing Form 204 would be inadequate for DCMs’ statutory obligations under the CEA position limit exemption applications are reporting of cash-market positions relating to § 5(d)(5), 7 U.S.C. 7(d)(5)). Accordingly, the addressed. While the Commission would recognize certain energy contracts that would be subject to Commission will not discuss any costs or benefits spread exemptions based on exchanges’ application federal limits for the first time under this proposal. related to this proposed change since it merely processes that satisfy the requirements in proposed 642 See proposed § 19.00(b). reflects an existing regulatory and statutory § 150.9, for purposes of federal limits, the cash- 643 17 CFR 19.00(a)(3). obligation.

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preliminarily determined that codifying the Commission to ensure that the should request an exemption prior to such practice would establish proposed exemption type would be taking on its position, proposed important, minimum standards needed consistent with applicable § 150.5(a)(2), in contrast, would for DCMs to administer—and the requirements, including with the explicitly authorize (but not require) Commission to oversee—an effective requirement that any resulting positions DCMs to permit traders to file a and efficient program for granting would be ‘‘in accord with sound retroactive exemption request due to exemptions to exchange-set limits in a commercial practices’’ and may be ‘‘demonstrated sudden or unforeseen manner that does not undermine the ‘‘established and liquidated in an increases in its bona fide hedging federal limits framework.647 In orderly fashion.’’ needs,’’ but only within five business particular, proposed § 150.5(a)(2) would Proposed § 150.5(a)(2) additionally days after the trade and as long as the protect market integrity and prevent would require traders to re-apply to the trader provides a supporting exchange-granted exemptions from exchange at least annually for the explanation.650 As noted above, these undermining the federal limits exchange-level exemption. The provisions are largely consistent with framework by requiring DCMs to either Commission recognizes that requiring existing market practice, and to this conform their exemptions to the type traders to re-apply annually could extent, the benefits and costs already the Commission would grant under impose additional costs on traders that may have been realized by DCMs and proposed §§ 150.3 or 150.9, or to cap the are not currently required to do so. market participants. exemption at the applicable federal However, the Commission believes this ii. Pre-Existing Positions limit level and to assess whether an is industry practice among existing exemption request would result in a market participants, who are likely Proposed § 150.5(a)(3) would require position that is ‘‘not in accord with already familiar with DCMs’ exemption DCMs to impose exchange-set position sound commercial practices’’ or would processes.648 This familiarity should limits on ‘‘pre-existing positions,’’ other ‘‘exceed an amount that may be reduce related costs, and the proposal than pre-enactment swaps and established or liquidated in an orderly should strengthen market integrity by transition period swaps, during the spot fashion in that market.’’ ensuring that DCMs receive updated month, but not outside of the spot Absent other factors, this element of information related to a particular month, as long as any position outside the proposal could potentially increase exemption. of the spot month: (i) Was acquired in compliance costs for traders since each Proposed § 150.5(a)(2) also would good faith consistent with the ‘‘pre- DCM could establish different require a DCM to provide the existing position’’ definition in exemption-related rules and practices. Commission with certain monthly proposed § 150.1; 651 and (ii) would be However, to the extent that rules and reports regarding the disposition of any attributed to the person if the position procedures currently differ across exemption application, including the increases after the limit’s effective date. exchanges, any compliance-related costs recognition of any position as a bona The Commission believes that this and benefits for traders may already be fide hedge, the exemption of any spread approach would benefit market integrity realized. Similarly, absent other transaction or other position, the since pre-existing positions that exceed provisions, a DCM could hypothetically revocation or modification or previously spot-month limits could result in market seek a competitive advantage by offering granted recognitions or exemptions, or or price disruptions as positions are excessively permissive exemptions, the rejection of any application, as well rolled into the spot month.652 However, which could allow certain market as certain related information similar to the Commission acknowledges that, on participants to utilize exemptions in the information that applicants must its face, including a ‘‘good-faith’’ establishing sufficiently large positions provide the Commission under requirement in the proposed ‘‘pre- to engage in excessive speculation and proposed § 150.3 or an exchange under existing position’’ definition could to manipulate market prices. However, proposed § 150.9, including underlying hypothetically diminish market proposed § 150.5(a)(2) would mitigate cash-market and swap-market integrity since determining whether a these risks by requiring that exemptions information related to bona fide hedge trader has acted in ‘‘good faith’’ is that do not conform to the types the positions. The Commission generally inherently subjective and could result in Commission may grant under proposed recognizes that this monthly reporting disparate treatment of traders by a § 150.3 could not exceed proposed requirement could impose additional particular exchange or across exchanges § 150.2’s applicable federal limit unless costs on exchanges, although the seeking a competitive advantage with the Commission has first approved such Commission also preliminarily has one another. For example, with respect exemption. Moreover, before a DCM determined that it would assist with its to a particular large or influential could permit a new exemption category, oversight functions and therefore benefit exchange member, an exchange could, proposed § 150.5(e) would require a market integrity. The Commission in order to maintain the business DCM to submit rules to the Commission discusses this proposed requirement in relationship, be incentivized to be more allowing for such exemptions, allowing greater detail in its discussion of liberal with its conclusion that the proposed § 150.9.649 member obtained its position in ‘‘good 647 This proposed standard is substantively Further, while existing § 150.5(d) does faith,’’ or could be more liberal in consistent with current market practice. See, e.g., not explicitly address whether traders CME Rule 559 (providing that CME will consider, 650 among other things, the ‘‘applicant’s business needs Certain exchanges currently allow for the and financial status, as well as whether the 648 As noted above, the Commission believes this submission of exemption requests up to five positions can be established and liquidated in an requirement is consistent with current market business days after the trader established the orderly manner . . .’’) and ICE Rule 6.29 (requiring practice. See, e.g., CME Rule 559 and ICE Rule 6.29. position that exceeded a limit in certain a statement that the applicant’s ‘‘positions will be While ICE Rule 6.29 merely requires a trader to circumstances. See, e.g., CME Rule 559 and ICE’s initiated and liquidated in an orderly manner . . .’’). ‘‘submit to [ICE Exchange] a written request’’ ‘‘Guidance on Position Limits’’ (Mar. 2018). This proposed standard is also substantively similar without specifying how often a trader must reapply, 651 Proposed § 150.1 would define ‘‘pre-existing to existing § 150.5’s standard and is not intended the Commission understands from informal position’’ to mean ‘‘any position in a commodity to be materially different. See existing § 150.5(d)(1) discussions between Commission staff and ICE that derivative contract acquired in good faith prior to (an exemption may be limited if it would not be ‘‘in traders must generally submit annual updates. the effective date’’ of any applicable position limit. accord with sound commercial practices or exceed 649 See supra Section IV.A.5.b.ii. (discussion of 652 The Commission is particularly concerned an amount which may be established and monthly exchange-to-Commission report in about protecting the spot month in physical- liquidated in orderly fashion.’’) 17 CFR 150.5(d)(1). proposed § 150.5(a)). delivery futures from corners and squeezes.

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general in order to gain a competitive 150.5(b)(1), rather than a one-size-fits-all ii. Non-Spot Month Limits/ advantage. The Commission believes the regulation, to both cash-settled and Accountability Levels and Related risk of any such unscrupulous trader or physically-settled contracts during the Acceptable Practices exchange is mitigated since exchanges spot month is expected to enhance Existing § 150.5 provides one-size-fits- would still be subject to Commission market integrity by permitting a DCM to all levels for non-spot month contracts oversight and to DCM Core Principles 4 establish a more tailored, product- and allows for position accountability (‘‘prevention of market disruption’’) and specific approach by applying other after a contract’s initial listing only for 12 (‘‘protection of markets and market parameters that may take into account those contracts that satisfy certain participants’’), among others, and since the unique liquidity and other trading thresholds.655 In contrast, for proposed § 150.5(a)(3) also would characteristics of the particular market contracts outside the spot-month, require that exchanges must attribute and contract, which is not possible proposed § 150.5(b)(2) would require the position to the trader if its position under the one-size-fits-all 25 percent DCMs to establish either position limits increases after the position limit’s EDS parameter set forth in existing or position accountability levels that effective date. § 150.5. While the Commission satisfy the same proposed qualitative c. Physical Commodity Derivative recognizes that the existing 25 percent standard discussed above for spot- Contracts Not Yet Subject to Federal EDS parameter has generally worked month contracts.656 For DCMs that Position Limits Under § 150.2 (Proposed well, the Commission also recognizes establish position limits, the § 150.5(b)) that there may be circumstances where Commission proposes related acceptable other parameters may be preferable and practices that would provide non- i. Spot Month Limits and Related just as effective, if not more, including, exclusive parameters that are generally Acceptable Practices for example, if the contract is cash- consistent with existing § 150.5’s For cash-settled contracts during the settled or does not have a reasonably parameters for non-spot month spot month, existing § 150.5 sets forth accurate measurable deliverable supply, contracts.657 For DCMs that establish the following qualitative standard: or if the DCM can demonstrate that a exchange-set limits should be ‘‘no different parameter would better 655 As noted above, in establishing the specific greater than necessary to minimize the promote market integrity or efficiency metric, existing § 150.5 distinguishes between potential for market manipulation or ‘‘levels at designation’’ and ‘‘adjustments to for a particular contract or market. [subsequent] levels.’’ Proposed § 150.5(b)(2) would distortion of the contract’s or underling On the other hand, the Commission eliminate this distinction and apply the qualitative commodity’s price.’’ However, for standard for all non-spot month position limit and physically-settled contracts, existing recognizes that proposed § 150.5(b)(1) accountability levels. § 150.5 provides a one-size-fits-all could adversely affect market integrity 656 DCM Core Principle 5 requires DCMs to parameter that exchange limits must be by theoretically allowing DCMs to establish either position limits or accountability for establish excessively high position speculators. See Commission regulation § 38.300 no greater than 25 percent of EDS. (restating DCMs’ statutory obligations under the In contrast, the proposed standard for limits in order to gain a competitive CEA § 5(d)(5)). Accordingly, inasmuch as proposed setting spot month limit levels for advantage, which also could harm the § 150.5(b)(2) would require DCMs to establish physical commodity derivative integrity of other markets that offer position limits or accountability, the proposal does similar products.654 However, the not represent a change to the status quo baseline contracts not subject to federal position requirements. limits set forth in proposed § 150.5(b)(1) Commission believes these potential 657 Specifically, the acceptable practices proposed would not distinguish between cash- risks would be mitigated since (i) in Appendix F to part 150 would provide that settled and physically-settled contracts, proposed § 150.5(e) would require DCMs would be deemed to comply with the DCMs to submit proposed position proposed § 150.5(b)(2)(i) qualitative standard if they and instead would require DCMs to establish non-spot limit levels no greater than any apply the existing § 150.5 qualitative limits to the Commission, which would one of the following: (1) Based on the average of standard to both.653 The Commission review those rules for compliance with historical positions sizes held by speculative traders also proposes a related, non-exclusive § 150.5(b), including to ensure that the in the contract as a percentage of open interest in proposed limits are ‘‘in accord with that contract; (2) the spot month limit level for that acceptable practice that would deem contract; (3) 5,000 contracts (scaled up exchange-set position limits for both sound commercial practices’’ and that proportionally to the ratio of the notional quantity cash-settled and physically-settled they may be ‘‘established and liquidated per contract to the typical cash market transaction contracts subject to proposed § 150.5(b) in an orderly fashion’’; and (ii) proposed if the notional quantity per contract is smaller than § 150.5(b)(3) would require DCMs to the typical cash market transaction, or scaled down to be in compliance if the limits are no proportionally if the notional quantity per contract higher than 25 percent of the spot- adopt position limits for any new is larger than the typical cash market transaction); month EDS. contract at a ‘‘comparable’’ level to or (4) 10 percent of open interest in that contract Applying the existing § 150.5 existing contracts that are substantially for the most recent calendar year up to 50,000 similar (i.e., ‘‘look-alike contracts’’) on contracts, with a marginal increase of 2.5 percent qualitative standard and non-exclusive of open interest thereafter. acceptable practice in proposed other exchanges unless the Commission These proposed parameters have largely appeared approves otherwise. Moreover, this in existing § 150.5 for many years in connection 653 Proposed § 150.5(b)(1) would require DCMs to latter requirement also may reduce the with non-spot month limits, either for levels at establish position limits for spot-month contracts at amount of time and effort needed for the designation, or for subsequent levels, with certain a level that is ‘‘necessary and appropriate to reduce revisions. For example, while existing § 150.5(b)(3) the potential threat of market manipulation or price DCM and Commission staff to assess has provided a limit of 5,000 contracts for energy distortion of the contract’s or the underlying proposed limits for any new contract products, existing § 150.5(b)(2) provides a limit of commodity’s price or index.’’ Existing § 150.5 also that competes with another DCM’s 1,000 contracts for physical commodities other than distinguishes between ‘‘levels at designation’’ and existing contract. energy products. The proposed acceptable practice ‘‘adjustments to levels,’’ although each category parameters would create a uniform standard of similarly incorporates the qualitative standard for 5,000 contracts for all physical commodities. The cash-settled contracts and the 25-percent metric for 654 Since the existing § 150.5 framework already Commission expects that the 5,000 contract physically-settled contracts. Proposed § 150.5(b) applies the proposed qualitative standard to cash- acceptable practice, for example, would be a useful would eliminate this distinction. The Commission settled spot-month contracts, any new risks rule of thumb for exchanges because it would allow intends the proposed § 150.5(b)(1) standard to be resulting from the proposed standard would occur them to establish limits and demonstrate substantively the same as the existing § 150.5 only with respect to physically-settled contracts, compliance with Commission regulations in a standard for cash-settled contracts, except that which are currently subject to the one-size-fits-all relatively efficient manner, particularly for new under proposed § 150.5(b)(1), the standard would 25-percent EDS parameter under the existing contracts that have yet to establish open interest. apply to physically-settled contracts. framework. The spot month limit level under item (2) above

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position accountability, § 150.1’s where open interest have increased, the equivalent swaps. The proposed proposed definition of ‘‘position exchange would be able to raise its delayed compliance would benefit the accountability’’ would provide that a limits to facilitate liquidity consistent swaps markets by permitting SEFs and trader must reduce its position upon a with an orderly market. However, the DCMs that list economically equivalent DCM’s request, which is generally Commission reiterates that the specific swaps more time to establish consistent with existing § 150.5’s parameters in the proposed acceptable surveillance and compliance systems; as framework, but would not distinguish practices are merely non-exclusive noted in the preamble, such exchanges between trading volume or contract examples, and an exchange would be currently lack sufficient data regarding type, like existing § 150.5. While DCMs able to establish higher (or lower) limits, individual market participants’ open would be provided the ability to decide provided the exchange submits its swap positions, which means that whether to use limit levels or proposed limits to the Commission requiring exchanges to establish accountability levels for any such under proposed § 150.5(e) and explains oversight over participants’ positions contract, under either approach, the how its proposed limits satisfy the currently would impose substantial DCM would have to set a level that is proposed qualitative standard and are costs and would be currently ‘‘necessary and appropriate to reduce otherwise consistent with all applicable impracticable. the potential threat of market requirements. Nonetheless, the Commission’s The Commission, however, recognizes manipulation or price distortion of the preliminary determination to permit that proposed § 150.5(b)(2) could contract’s or the underlying exchanges to delay implementing adversely affect market integrity by commodity’s price or index.’’ federal position limits on swaps could Proposed § 150.5(b)(2) would benefit potentially allowing DCMs to establish incentivize market participants to leave market efficiency by authorizing DCMs position accountability levels rather the futures markets and instead transact to determine whether position limits or than position limits, regardless of in economically equivalent swaps, accountability would be best-suited whether the contract exceeds the which could reduce liquidity in the outside of the spot month based on the volume-based thresholds provided in DCM’s knowledge of its markets. For existing § 150.5. However, proposed futures and related options markets, example, position accountability could § 150.5(e) would require DCMs to which could also increase transaction improve liquidity compared to position submit any proposed position and hedging costs. Delaying position limits since liquidity providers may be accountability rules to the Commission limits on swaps therefore could harm more willing or able to participate in for review, and the Commission would market participants, especially end- markets that do not have hard limits. As determine on a case-by-case basis users that do not transact in swaps, if discussed above, DCMs are well- whether such rules satisfy regulatory many participants were to shift trading positioned to understand their requirements, including the proposed from the futures to the swaps markets. respective markets, and best practices in qualitative standard. Similarly, in order In turn, end-users could pass on some one market may differ in another to gain a competitive advantage, DCMs of these increased costs to the public at 658 market, including due to different could theoretically set excessively high large. However, the Commission market participants or liquidity accountability (or position limit) levels, believes that these concerns would be characteristics of the underlying which also could potentially adversely mitigated to the extent the Commission commodities. For DCMs that choose to affect markets with similar products. would still oversee and enforce federal establish position limits, the However, the Commission believes position limits even if the exchanges Commission believes that applying the these risks would be mitigated since (i) would not be required to do so. proposed § 150.5 qualitative standard to proposed § 150.5(e) would require d. Position Aggregation contracts outside the spot-month would DCMs to submit proposed position benefit market integrity by permitting a accountability (or limits) to the Proposed § 150.5(d) would require all DCM to establish a more tailored, Commission, which would review those DCMs that list physical commodity product-specific approach by applying rules for compliance with § 150.5(b), derivative contracts to apply aggregation other tools that may take into account including to ensure that the exchange’s rules that conform to existing § 150.4, the unique liquidity and other proposed accountability levels (or regardless of whether the contract is characteristics of the particular market limits) are ‘‘necessary and appropriate subject to federal position limits under and contract, which is not possible to reduce the potential threat of market § 150.2.659 The Commission believes under the existing § 150.5 specific manipulation or price distortion’’ of the parameters for non-spot month contract or underlying commodity; and 658 On the other hand, the Commission has not contracts. While the Commission (ii) proposed § 150.5(b)(3) would require seen any shifting of liquidity to the swaps recognizes that the existing parameters DCMs to adopt position limits for any markets—or general attempts at market manipulation or evasion of federal position limits— may have been well-suited to market new contract at a ‘‘comparable’’ level to with respect to the nine legacy core referenced dynamics when initially promulgated, existing contracts that are substantially futures contracts, even though swaps currently are the Commission also recognizes that similar on other exchanges unless the not subject to federal or exchange position limits. open interest may have changed for Commission approves otherwise. 659 The Commission adopted final aggregation certain contracts subject to proposed rules in 2016 under existing § 150.4, which applies iii. Exchange-Set Limits on to contracts subject to federal limits under § 150.2. § 150.5(b), and open interest will likely Economically Equivalent Swaps See Final Aggregation Rulemaking, 81 FR at 91454. continue to change in the future (e.g., as Under the Final Aggregation Rulemaking, unless an new contracts may be introduced and as As discussed above, swaps that would exemption applies, a person’s positions must be qualify as ‘‘economically equivalent aggregated with positions for which the person supply and/or demand may change for controls trading or for which the person holds a 10 underlying commodities). In cases swaps’’ would become subject to the percent or greater ownership interest. The Division where open interest has not increased, federal position limits framework. of Market Oversight has issued time-limited no- the exchange may not need to change However, the Commission is proposing action relief from some of the aggregation to allow exchanges to delay requirements contained in that rulemaking. See existing limit levels. But, for contracts CFTC Letter No. 19–19 (July 31, 2019), available at compliance—including enforcing https://www.cftc.gov/csl/19-19/download. would be a new parameter for non-spot month position limits—with respect to Commission regulation § 150.4(b) sets forth several contracts. exchange-set limits on economically permissible exemptions from aggregation.

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proposed § 150.5(d) would benefit integrity of derivatives markets for the establish a leveraged position in cash- market integrity in several ways. First, benefit of commercial interests, settled derivative contracts, diminishing a harmonized approach to aggregation producers, and other end- users that use that trader’s incentive to manipulate the across exchanges that list physical these markets to hedge risk and of cash settlement price. As the commodity derivative contracts would consumers that consume the underlying Commission has determined in the prevent confusion that could result from commodities. The Commission preamble, the Commission has divergent standards between federal preliminarily believes that the proposed concluded that excessive speculation or limits under § 150.2 and exchange-set position limits regime would operate to manipulation may cause sudden or limits under § 150.5(b). As a result, deter excessive speculation and unreasonable fluctuations or proposed § 150.5(d) would provide manipulation, such as squeezes and unwarranted changes in the price of the uniformity, consistency, and reduced corners, which might impair the commodities underlying these administrative burdens for traders who contract’s price discovery function and contracts.662 In this way, the are active on multiple trading venues liquidity for hedgers—and ultimately, Commission preliminarily believes that and/or trade similar physical contracts, would protect the integrity and utility of the proposed limits would benefit regardless of whether the contracts are the commodity markets for the benefit market participants that seek to hedge subject to § 150.2’s federal position of both producers and consumers. the spot price of a commodity at limits. Second, a harmonized At this time, the Commission is expiration, and benefit consumers who aggregation policy eliminates the proposing to include the proposed 25 would be able to purchase underlying potential for DCMs to use excessively core referenced futures contracts within commodities for which prices are permissive aggregation policies as a the proposed federal position limit determined by fundamentals of supply competitive advantage, which would framework. In selecting the proposed 25 and demand, rather than influenced by impair the effectiveness of the core referenced contracts, the excessive speculation, manipulation, or Commission’s aggregation policy and Commission, in accordance with its other undue and unnecessary burdens limits framework. Third, since, for necessity analysis, considered the on interstate commerce. contracts subject to federal limits, effects that these contracts have on the The Commission preliminarily proposed § 150.5(a) would require underlying commodity, especially with believes that the proposed Commission DCMs to set position limits at a level not respect to price discovery; the fact that and exchange-centric processes for higher than that set by the Commission they require physical delivery of the granting exemptions from federal limits, under proposed § 150.2, differing underlying commodity; and, in some including non-enumerated bona fide aggregation standards could effectively cases, the potentially acute economic hedging recognitions, would help lead to an exchange-set limit that is burdens on interstate commerce that ensure the hedging utility of the futures higher than that set by the Commission. could arise from excessive speculation market for commercial end-users. First, Accordingly, harmonizing aggregation in these contracts causing sudden or the proposal to allow exchanges to standards reinforces the efficacy and unreasonable fluctuations or leverage existing processes and their intended purpose of proposed §§ 150.2 unwarranted changes in the price of the knowledge of their own markets, and 150.5 and existing § 150.4 by commodities underlying these including participant positions and eliminating DCMs’ ability to circumvent contracts.661 activities, along with their knowledge of the applicable federal aggregation and Of particular importance are the the underlying commodity cash market, position limits rules. proposed position limits during the spot should allow for more timely review of exemption applications than if the To the extent a DCM currently is not month period because the Commission Commission were to conduct such applying the federal aggregation rules in preliminarily believes that deterring and initial application reviews. This benefits existing § 150.4, or similar exchange- preventing manipulative behaviors, the public by allowing producers and based rules, proposed § 150.5(d) could such as corners and squeezes, is more end-users of a commodity to more impose costs with respect to market urgent during this period. The proposed efficiently and predictably hedge their participants trading referenced contracts spot month position limits are designed, price risks, thus controlling costs that for the proposed new 16 commodities among other things, to deter and prevent might be passed on to the public. that would become subject to federal corners and squeezes as well as promote Second, exchanges may be better-suited position limits for the first time. Market a more orderly liquidation process at than the Commission to leverage their participants would be required to expiration. By restricting derivatives knowledge of their own markets, update their trading and compliance positions to a proportion of the including participant positions and systems to ensure they comply with the deliverable supply of the commodity, activities, along with their knowledge of new aggregation rules. the spot month position limits reduce the underlying commodity cash market, the possibility that a market participant e. Request for Comment in order to recognize whether an can use derivatives, including applicant qualifies for an exemption and (51) The Commission requests referenced contracts, to affect the price what the level for that exemption comment on all aspects of the of the cash commodity (and vice versa). should be. This benefits market Commission’s cost-benefit discussion of Limiting a speculative position based on participants and the public by helping the proposal. a percentage of deliverable supply also assure that exemption levels are set in 660 restricts a speculative trader’s ability to 7. Section 15(a) Factors a manner that meets the risk management needs of the applicant a. Protection of Market Participants and the public; (ii) efficiency, competitiveness, and the Public financial integrity of futures markets; (iii) price without negatively impacting the discovery; (iv) sound risk management practices; futures and cash market for that A chief purpose of speculative and (v) other public interest considerations. For commodity. Third, allowing for position limits is to preserve the proposed amendments that are not specifically exchange-granted spread exemptions addressed, the Commission has not identified any 660 The discussion here covers the proposed effects. could improve liquidity in all months amendments that the Commission has identified as 661 See supra Section III.F.2. (discussion of the being relevant to the areas set out in section 15(a) necessity findings as to the 25 core referenced 662 See supra Section III.F. (discussion of the of the CEA: (i) Protection of market participants and futures contacts). necessity finding).

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for a listed contract or across that may unduly influence prices at the recognizing certain risk management commodities, benefitting hedgers by expense of the efficiency and integrity positions as bona fide hedges, coupled providing tighter bid-ask spreads for of markets. The proposed expansion of with the proposed increased non-spot out-right trades. Furthermore, traders the federal position limits regime to 25 month limit levels for the nine legacy using spreads can arbitrage price core referenced futures contracts (e.g., agricultural contracts, will foster discrepancies between calendar months the existing nine legacy agricultural competition among swap dealers by within the same commodity contract or contracts and the 16 proposed new subjecting all market participants, price discrepancies between contracts) enhances the buffer against including all swap dealers, to the same commodities, helping ensure that excessive speculation historically non-spot month limit rather than to an futures prices more accurately reflect afforded to the nine legacy agricultural inconsistent patchwork of staff-granted the underlying market fundamentals for contracts exclusively, improving the exemptions. Accommodating risk a commodity. Lastly, the Commission financial integrity of those markets. management activity by additional would review each application for bona Moreover, the proposed limits in entities with higher limit levels may fide hedge recognitions or spread proposed § 150.2 may promote market also help lessen the concentration risk exemptions (other than those bona fide competitiveness by preventing a trader potentially posed by a few commodity hedges and spread exemptions that from gaining too much market power in index traders holding exemptions that would be self-effectuating under the the respective markets. are not available to competing market Commission’s proposal), but the Also, in the absence of position limits, participants. proposal would allow the Commission market participants may be deterred to also leverage the exchange’s from participating in a futures market if c. Price Discovery knowledge and experience of its own they perceive that there is a participant Market manipulation or excessive markets and market participants with an unusually large speculative speculation may result in artificial discussed above. position exerting what they believe is prices. Position limits may help to The Commission also understands unreasonable market power. A lack of prevent the price discovery function of that there are costs to market participation may harm liquidity, and the underlying commodity markets from participants and the public to setting the consequently, may harm market being disrupted. Also, in the absence of levels that are too high or too low. If the efficiency. position limits, market participants levels are set too high, there’s greater On the other hand, traders who find might elect to trade less as a result of a risk of excessive speculation, which position limits overly constraining may perception that the market pricing is may harm market participants and the seek to trade in substitute instruments— unfair as a consequence of what they public. Further, to the extent that the such as futures contracts or swaps that perceive is the exercise of too much proposed limits are set at such a level are similar to or correlated with (but not market power by a larger speculator. otherwise deemed to be a referenced that even without these proposed Reduced liquidity may have a negative contract), forward contracts, or trade exemptions, the probability of nearing impact on price discovery. or breaching such levels may be options—in order to meet their demand On the other hand, imposing position negligible for most market participants, for speculative instruments. These limits raises the concerns that liquidity benefits associated with such traders may also decide to not trade and price discovery may be diminished, exemptions may be reduced. beyond the federal speculative position Conversely, if the limits are set too limit. Trading in substitute instruments because certain market segments, i.e., low, transaction costs for market may be less effective than trading in speculative traders, are restricted. For participants who are near or above the referenced contracts and, thus, may certain commodities, the Commission limit would rise as they transact in other raise the transaction costs for such proposes to set the levels of position instruments with higher transaction traders. In these circumstances, futures limits at increased levels, to avoid costs to obtain their desired level of prices might not fully reflect all the harming liquidity that may be provided speculative positions. Additionally, speculative demand to hold the futures by speculators that would establish limits that are too low could incentivize contract, because substitute instruments large positions, while restricting speculators to leave the market and not may not fully influence prices the same speculators from establishing be available to provide liquidity for way that trading directly in the futures extraordinarily large positions. The hedgers, resulting in ‘‘choppy’’ prices. It contract does. Thus, market efficiency Commission further preliminarily is also possible for limits that are set too might be harmed. believes that the bona fide hedging low to harm market efficiency because The Commission preliminarily recognition and exemption processes the views of some speculators might not believes that focusing on the proposed will foster liquidity and potentially be reflected fully in the price formation 25 core referenced futures contracts, improve price discovery by making it process. which generally have high levels of easier for market participants to have In setting the proposed limit levels, open interest and trading volume and/ their bona fide hedging recognitions and the Commission considered these or have been subject to existing federal spread exemptions granted. factors in order to implement to the position limits for many years, should In addition, position limits serve as a maximum extent practicable, as it finds in general be less disruptive for the prophylactic measure that reduces necessary in its discretion, to apply the derivatives markets that it regulates, market volatility due to a participant position limits framework articulated in which in turn may reduce the potential otherwise engaging in large trades that CEA section 4a(a) to set federal position for disruption for the price discovery induce price impacts that interrupt limits to protect market integrity and function of the underlying commodity price discovery. In particular, spot price discovery, thereby benefiting markets as compared to including less month position limits make it more market participants and the public. liquid contracts (of course, only to the difficult to mark the close of a futures extent that the Commission would be contract to possibly benefit other b. Efficiency, Competitiveness, and able to make the requisite necessity contracts that settle on the closing Financial Integrity of Futures Markets finding for such contracts). futures price. Marking the close harms Position limits help to prevent market Finally, the Commission preliminarily markets by spoiling convergence manipulation or excessive speculation believes that the proposal to cease between futures prices and spot prices

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at expiration and damaging price e. Other Public Interest requirements are consolidated under 665 discovery. The Commission has not identified one OMB control number. First, the Commission would transfer collections d. Sound Risk Management Practices any additional public interest considerations related to the costs and of information under part 19 (Reports by Proposed exemptions for bona fide benefits of this 2020 Proposal. Persons Holding Bona Fide Hedge hedges help to ensure that market Positions and By Merchants and Dealers participants with positions that are f. Request for Comment in Cotton) related to position limit hedging legitimate commercial needs (52) The Commission requests requirements from OMB control number are recognized as hedgers under the comment on all aspects of the 3038–0009 to OMB control number Commission’s speculative position Commission’s discussion of the 15(a) 3038–0013. Second, the modified OMB limits regime. This promotes sound risk factors for this proposal. control number 3038–0013 would be management practices. In addition, the renamed as ‘‘Position Limits.’’ This Commission has crafted the proposed B. Paperwork Reduction Act renaming change is non-substantive and rules to ensure sufficient market 1. Overview would allow for all collections of liquidity for bona fide hedgers to the information related to the federal Certain provisions of the proposed maximum extent practicable, e.g., position limits requirements, including rule on position limits for derivatives through the proposals to: (1) Create a exemptions from speculative position would amend or impose new bona fide hedging definition that is limits and related large trader reporting, ‘‘collection of information’’ broad enough to accommodate common to be housed in one collection. requirements as that term is defined commercial hedging practices, One collection would make it easier under the Paperwork Reduction Act including anticipatory hedging, for a for market participants to know where (‘‘PRA’’).663 An agency may not conduct variety of commodity types; (2) to find the relevant position limits PRA or sponsor, and a person is not required maintain the status quo with respect to burdens. If the proposed rule is to respond to, a collection of existing bona fide hedge recognitions finalized, the remaining collections of information unless it displays a valid and spread exemptions that would information under OMB control number control number from the Office of remain self-effectuating and make 3038–0009 would cover reports by Management and Budget (‘‘OMB’’). The additional bona fide hedges self- various entities under parts 15, 17, and proposed rule would modify the 666 effectuating (i.e., certain anticipatory 21 of the Commission’s regulations, following existing collections of hedging); (3) provide additional ability while OMB control number 3038–0013 information previously approved by for a streamlined process where market would hold collections of information OMB and for which the Commodity participants can make a single arising from parts 19 and 150. Futures Trading Commission As discussed in section 3 below, this submission to an exchange in which the (‘‘Commission’’) has received control non-substantive reorganization would exchange and Commission would each numbers: (i) OMB control number 3038– result in: (i) A decreased burden review applications for non-enumerated 0009 (Large Trader Reports), which estimate under control number 3038– bona fide hedge recognitions for generally covers Commission 0009 due to the transfer of the collection purposes of federal and exchange-set regulations in parts 15 through 21; (ii) of information arising from obligations limits that are in line with commercial OMB control number 3038–0013 in part 19, and (ii) a corresponding hedging practices; and (4) to allow for (Aggregation of Positions), which covers increase of the amended part 19 burdens a conditional spot month limit Commission regulations in part 150; 664 under control number 3038–0013. exemption in natural gas. and (iii) OMB control number 3038– However, as discussed further below, To the extent that monitoring for 0093 (Provisions Common to Registered the collection of information and position limits requires market Entities), which covers Commission burden hours arising from proposed part participants to create internal risk limits regulations in part 40. 19 that would be transferred to OMB and evaluate position size in relation to Certain provisions of the proposed control number 3038–0013 would be the market, position limits may also rule would impose new collection of less than the existing burden estimate provide an incentive for market information requirements under the under OMB control number 3038–0009 participants to engage in sound risk PRA. As a result, the Commission is since the Commission’s proposal would management practices. Further, sound proposing to revise OMB control amend existing part 19 by eliminating risk management practices would be numbers 3038–0009, 3038–0013, and existing Form 204 and certain parts of promoted by the proposal to allow for 3038–0093 and is submitting this Form 304 and the reporting burdens market participants to measure risk in proposal to OMB for review in related thereto. As a result, market the manner most suitable for their accordance with 44 U.S.C. 3507(d) and participants would see a net reduction business (i.e., net versus gross hedging 5 CFR 1320.11. of collections of information and burden practices), rather than having to hours under revised part 19. conform their hedging programs to a 2. Commission Reorganization of OMB one-size-fits-all standard that may not Control Numbers 3038–0009 and 3038– 665 The Commission notes that certain collections be suitable for their risk management 0013 of information under OMB control number 3038– needs. Finally, the proposal to increase 0093 relate to several Commission regulations in The Commission is proposing two addition to the Commission’s proposed position non-spot month limit levels for the nine non-substantive changes so that all limits framework. As a result, the collections of legacy agricultural contracts to levels collections of information related solely information discussed herein under this OMB that reflect observed levels of trading to the Commission’s position limit control number 3038–0093 will not be consolidated activity, based on recent data reviewed under OMB control number 3038–0013. 666 As noted above, OMB control number 3038– by the Commission, should allow swap 663 44 U.S.C. 3501 et seq. 0009 generally covers Commission regulations in dealers, liquidity providers, market 664 Currently, OMB control number 3038–0013 is parts 15 through 21. However, it does not cover makers, and others who have risk titled ‘‘Aggregation of Positions.’’ The Commission §§ 16.02, 17.01, 18.04, or 18.05, which are under management needs, but who are not proposes to rename the OMB control number OMB control number 3038–0103. Final Rule. 78 FR ‘‘Position Limits’’ to better reflect the nature of the 69178 at 69200 (Nov. 18, 2013) (transferring hedging a physical commercial, to information collections covered by that OMB §§ 16.02, 17.01, 18.04, and 18.05 to OMB Control soundly manage their risks. control number. Number 3038–0103).

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3. Collections of Information ‘‘exchanges’’). Finally, the proposed rule III of Form 304, which requests The proposed rule would amend would also amend part 40 to incorporate information on unfixed-price ‘‘on call’’ existing regulations, and create new a new reporting obligation into the purchases and sales of cotton and which regulations, concerning speculative definition of ‘‘terms and conditions’’ in the Commission utilizes to prepare its 669 position limits. Among other § 40.1(j) and result in a revised existing weekly cotton on-call report. The amendments, the Commission’s collection of information covered by Commission would also maintain its proposed rule would include: (1) New OMB control number 3038–0093. existing special call authority under part and amended federal spot month limits a. OMB Control Number 3038–0009— 19. for the proposed 25 physical commodity Large Trader Reports; Part 19—Reports The supporting statement for the derivatives; (2) amended federal non- by Persons Holding Bona Fide Hedge current active information collection spot limits for the nine legacy request for part 19 under OMB control Positions and by Merchants and Dealers 670 agricultural commodities contracts in Cotton number 3038–0009 states that in 2014: (i) 135 reportable traders filed the currently subject to federal position Under OMB control number 3038– limits; (3) amended rules governing Series ‘04 reports (i.e., Form 204 and 0009, the Commission currently Form 304 in the aggregate), (ii) totaling exchange-set limit levels and grants of estimates that the collections of exemptions therefrom; (4) an amended 3,105 Series ‘04 reports, for a total of information related to existing part 19, 671 process for requesting certain spread (iii) 1,553 burden hours. However, including Form 204 and Form 304, based on more current and recent 2019 exemptions and non-enumerated bona collectively known as the ‘‘Series ’04’’ fide hedge recognitions for purposes of submission data, the Commission is reports, have a combined annual burden revising its existing estimates slightly federal position limits directly from the hours of 1,553 hours. Under existing Commission; (5) a new exchange- higher for the Series ’04 reports under part 19, market participants that hold part 19: administered process for recognizing bona fide hedging positions in excess of • non-enumerated bona fide hedge Form 204: 50 monthly reports, for position limits for the nine legacy an annual total of 600 reports (50 positions from federal limit agricultural commodity contracts × requirements; and (6) amendments to monthly reports 12 months = 600 total currently subject to federal limits must annual reports) and 300 annual burden part 19 and related provisions that file a monthly report on Form 204 (or would eliminate certain reporting hours (600 annual Form 204s submitted Parts I and II of Form 304 for cotton). × 0.5 hours per report = 300 aggregate obligations that require traders to These reports show a snapshot of submit a Form 204 and Parts I and II of annual burden hours for all Form 204s). traders’ cash positions on one given day • Form 304: 55 weekly reports, for an Form 304. each month, and are used by the Specifically, this proposal would annual total of 2,860 reports (55 weekly Commission to determine whether a reports × 52 weeks = 2,860 total annual amend parts 15, 17, 19, 40, and 150 of trader has sufficient cash positions to the Commission’s regulations to reports) and 1,430 annual burden hours justify futures and options on futures (2,860 annual Form 304s submitted × implement the proposed federal positions above the applicable federal position limits framework. The proposal 0.5 hours per report = 1,430 aggregate position limits in existing § 150.2. annual burden hours for all Form 304s). would also transfer an amended version The Commission’s proposal would Accordingly, based on the above of the ‘‘bona fide hedging transactions amend part 19 to remove these reporting revised estimates the Commission or positions’’ definition from existing obligations associated with Form 204 would revise its estimate of the current § 1.3 to proposed § 150.1, and remove and Parts I and II of Form 304. As collections of information under §§ 1.47, 1.48, and 140.97. The discussed under proposed § 150.9 existing part 19 to reflect that Commission’s proposal would revise below, the Commission preliminarily 672 existing collections of information has determined that it may eliminate approximately 105 reportable traders covered by OMB control number 3038– these forms and still receive adequate file a total of 3,460 responses annually 673 resulting in an aggregate 0009 by amending part 19, along with information to carry out its market and 674 675 conforming changes to part 15, in order financial surveillance programs since its annual burden of 1,730 hours. The

to narrow the scope of who is required proposed amendments to §§ 150.5 and 669 667 The Commission is proposing a technical to report under part 19. 150.9 would also enable the change to Part III of Form 304 to require traders to Furthermore, the proposed rule’s Commission to obtain the necessary identify themselves on the Form 304 using their amendments to part 150 would revise information from the exchanges. To Public Trader Identification Number, in lieu of the existing collections of information effect these changes to traders’ reporting CFTC Code Number required on previous versions of the Form 304. However, the Commission covered by OMB control number 3038– obligations, the Commission would preliminarily has determined that this would not 0013, including new reporting and eliminate (i) existing § 19.00(a)(1), result in any change to its existing PRA estimates recordkeeping requirements related to which requires the applicable persons to with respect to the collections of information the application and request for relief file a Form 204; and (ii) existing § 19.01, related to Part III of Form 304. from federal position limit requirements which among other things, sets forth the 670 See ICR Reference No: 201906–3038–008. 671 3,105 Series ’04 submissions × 0.5 hours per submitted to designated contract cash-market information required to be submission = 1,553 aggregate burden hours for all markets (‘‘DCMs’’) and swap execution submitted on the Forms 204 and 304.668 submissions. The Commission notes that it has facilities (‘‘SEFs’’) (collectively, The Commission would maintain Part preliminarily estimated that it takes approximately 20 minutes to complete a Form 204 or 304. However, in order to err conservatively, the 667 As noted above, the Commission would 668 As noted above, the proposed amendments to Commission now uses a figure of 30 minutes. accomplish this by eliminating existing From 204 part 19 affect certain provisions of part 15 and 672 and Parts I and II of Form 304. Additionally, § 17.00. Based on the proposed elimination of Form 55 Form 304 reports + 50 Form 205 reports = proposed changes to part 17, covered by OMB 204 and Parts I and II of Form 304, the Commission 105 reportable traders. control number 3038–0009, would make proposes conforming technical changes to remove 673 2,860 Form 304s + 600 Form 204s = 3,460 total conforming amendments to remove certain related reporting provisions from (i) the ‘‘reportable annual Series ’04 reports. duplicative provisions and associated information position’’ definition in § 15.00(p); (ii) the list of 674 3,460 Series ’04 reports × 0.5 hours per report collections related to aggregation of positions, ‘‘persons required to report’’ in § 15.01; and (iii) the = 1,730 annual aggregate burden hours. which are in current § 150.4. These conforming list of reporting forms in § 15.02. These proposed 675 These revised estimates result in an increased changes would not impact the burden estimates of conforming amendments to part 15 would not estimate under existing part 19 of 355 Series ’04 OMB control number 3038–0009. impact the existing burden estimates. Continued

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Commission’s proposal would reduce Commission preliminarily estimates participants would not need to apply to the current OMB control number 3038– that it would take approximately 5 the Commission for purposes of federal 0009 by these revised burden estimates hours to respond to a special call. The position limits, although market under part 19 as they would be Commission therefore estimates that participants would still need to apply to transferred to OMB control number industry would incur a total of 20 an exchange for recognition of bona fide 3038–0013. aggregate annual burden hours.681 hedge positions for purposes of With respect to the overall collections exchange-set position limits. The of information that would be transferred b. OMB Control Number 3038–0013— Commission forms this expectation on to OMB control number 3038–0013 Aggregation of Positions (To Be the fact that all the contracts that will based on the Commission’s revised part Renamed ‘‘Position Limits’’) now be subject to federal position limits 19 estimate, the Commission estimates i. Introduction; Bona Fide Hedge are already subject to exchange-set that the Commission’s proposal would Recognition and Exemption Process limits. Thus, most market participants reduce the collections of information in The Commission is proposing to are likely to already be familiar with an part 19 by 600 reports 676 and by 300 amend the existing process for market exchange-administered process, as is annual aggregate burden hours since the participants to apply to obtain an being proposed under § 150.9. Commission’s proposal would eliminate exemption or recognition of a bona fide Familiarity with an exchange- Form 204, as discussed above.677 The hedge position. Currently, the ‘‘bona administered process will result in Commission does not expect a change in fide hedging transaction or position’’ operational efficiencies, such as the number of reportable traders that definition appears in existing § 1.3. completing one application for non- would be required to file Part III of Form Under existing §§ 1.47 and 1.48, a enumerated bona fide hedge requests for 304.678 Thus, the Commission continues both federal and exchange-set limits and market participant must apply directly to expect approximately 55 weekly thus a reduced burden on market to the Commission to obtain a bona fide Form 304 reports, for an annual total of participants. hedge recognition in accordance with 2,860 reports 679 for an aggregate total of As previously discussed, the proposal 1,430 burden hours, which information § 1.3 for federal position limit purposes. would move the ‘‘bona fide hedge Proposed §§ 150.3 and 150.9 would collection burdens would be transferred transaction or position’’ definition to establish an amended process for to OMB control number 3038–0013.680 proposed § 150.1, and amend the obtaining a bona fide hedge exemption In addition, the Commission would definition to, among other things, maintain its authority to issue special or recognition, which includes: (i) A remove the distinction between calls for information to any person new bona fide hedging definition in different types of enumerated bona fide claiming an exemption from speculative § 150.1, (ii) a new process administered hedge positions so that anticipatory federal position limits. While the by the exchanges in proposed § 150.9 for enumerated bona fide hedges would be position limits framework will expand recognizing non-enumerated bona fide self-effectuating like other non- to traders in the proposed twenty-five hedging positions for federal limit anticipatory enumerated bona fide commodities (an increase from the requirements, and (iii) an amended hedges. The proposal would maintain existing nine legacy agricultural process to apply directly to the the distinction between enumerated and products), the position limit levels Commission for certain spread non-enumerated bona fide hedges, and themselves will also be higher. The exemptions or for recognition of non- market participants would be required higher position limit levels would result enumerated bona fide hedging to apply for recognition of non- in a smaller universe of traders who positions. Proposed § 150.3 also would enumerated bona fide hedge positions may exceed the position limits and thus include new exemption types not either directly from the Commission be subject to a special call for explicitly listed in existing § 150.3. pursuant to proposed § 150.3 or information on their large position(s). The Commission has previously indirectly through an exchange-centric Taking into account the higher limits estimated the combined annual burden process under § 150.9.683 The and smaller universe of traders who hours for submitting applications under Commission does not preliminarily 682 would likely exceed the position limits, both §§ 1.47 and 1.48 to be 42 hours. believe that this amendment will have the Commission estimates that it is The Commission’s proposal would any PRA impacts since it is maintaining likely to issue a special call for maintain the existing process where the status quo in which most information to 4 reportable traders. The market participants may apply directly enumerated bona fide hedges are self- to the Commission, although the effectuating while requiring traders to reports submitted by traders (3,460 estimated Series Commission expects market participants apply to the Commission for recognition ’04 reports¥3,105 submissions from the to predominantly rely on the exchange- Commission’s previous estimate = an increase of administered process to obtain 683 355 response difference); an increase of 177 Currently, in order to determine whether a aggregate burden hours across all respondents recognition of their non-enumerated futures, an option on a futures, or a swap position (1,730 aggregate burden hours¥1,553 aggregate bona fide hedging positions for qualifies as a bona fide hedge, either (1) the position burden hours from the Commission’s previous in question must qualify as an enumerated bona purposes of federal position limit fide hedge, as defined in existing § 1.3, or (2) the estimate = an increase of 177 aggregate burden requirements. Enumerated bona fide hours); and a decrease of 30 respondent traders (105 trader must file a statement with the Commission, respondents¥135 respondents from the hedge positions would remain self- pursuant to existing § 1.47 (for non-enumerated Commission’s previous estimate = a decrease of 30 effectuating, which means that market bona fide hedges) and/or existing § 1.48 (for respondents). enumerated anticipatory bona fide hedges). The revised definition would be accompanied by an 676 50 monthly Form 204 reports × 12 months = 681 × 4 possible reportable traders 5 hours each = expanded list of enumerated bona fide hedges that 600 total annual reports. 20 aggregate annual burden hours. would appear in acceptable practices, rather than in 677 × 600 Form 204 reports 0.5 burden hours per 682 The supporting statement for a previous the definition. The Commission additionally report = 300 aggregate annual burden hours. information collection request, ICR Reference No: proposes to include an additional enumerated bona 678 Since the Commission’s proposal would 201808–3038–003, for OMB control number 3038– fide hedge for anticipatory merchandizing, which eliminate Parts I and II of Form 304, proposed Form 0013, estimated that seven respondents would file would be self-effectuating like the other enumerated 304 would only refer to existing Part III of that form. the §§ 1.47 and 1.48 submissions, and that each hedges. Under the existing framework, anticipatory 679 55 weekly Form 304 reports × 52 weeks = respondent would file two submissions for a total merchandizing is considered to be a non- 2,860 total annual Form 304 reports. of 14 annual submissions, requiring 3 hours per enumerated bona fide hedge. The Commission 680 2,860 Form 304 reports × 0.5 burden hours per response, for a total of 42 burden hours for all preliminarily does not expect this change to have report = 1,430 aggregate annual burden hours. respondents. any PRA impacts.

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of non-enumerated bona fide hedge recognition of certain bona fide hedges familiar to market participants that have positions. under the process set forth in existing requested certain bona fide hedging §§ 1.47 and 1.48. There is no existing recognitions from the Commission ii. § 150.2 Speculative Limits process that is codified under the under existing regulations. Under proposed § 150.2(f), upon Commission’s regulations for spread The Commission estimates that very request from the Commission, DCMs exemptions or other exemptions few or no traders would request listing a core referenced futures contract included under proposed § 150.3. recognition of a non-enumerated bona would be required to supply to the Proposed § 150.3 would specify the fide hedge, and those traders that do Commission deliverable supply circumstances in which a trader could would likely prefer the exchange- estimates for each core referenced exceed federal position limits.686 With administered process in proposed futures contract listed at that DCM. respect to non-enumerated bona fide § 150.9 (discussed further below) rather DCMs would only be required to submit hedge recognitions and spread than apply directly to the Commission estimates if requested to do so by the exemptions not identified in the under proposed § 150.3(b). Similarly, Commission on an as-needed basis. proposed ‘‘spread transaction’’ the Commission estimates that very few When submitting estimates, DCMs definition in proposed § 150.1, proposed or no traders would submit a request for would be required to provide a § 150.3(b) would provide a process for a spread exemption since the description of the methodology used to market participants to request such bona Commission preliminarily has derive the estimate, as well as any fide hedge recognitions or spread determined that the most common statistical data supporting the estimate. exemptions directly from the spread exemptions are included in the Appendix C to part 38 sets forth Commission (as previously noted, both proposed ‘‘spread transaction’’ guidance regarding estimating enumerated bona fide hedges and definition and therefore would be self- deliverable supply. spread exemptions identified in the effectuating and would not need Submitting deliverable supply proposed ‘‘spread transaction’’ approval for purposes of federal estimates upon demand from the definition would be self-effectuating position limits. The Commission Commission for contracts subject to and would not require a market expects that traders are likely to rely on federal limits would be a new reporting participant to submit a request). the § 150.3(b) process when dealing obligation for DCMs. The Commission Proposed § 150.3(b), (d), and (e) set forth with a spread transaction or non- estimates that six DCMs would be exemption-related reporting and enumerated bona fide hedge position required to submit initial deliverable recordkeeping requirements that impact that poses a novel or complex question the current burden estimates in OMB supply estimates. The Commission under the Commission’s rules. control number 3038–0013.687 The estimates that it would request each Particularly when the exchanges have proposed collection of information is DCM that lists a core referenced futures not recognized that type of practice as necessary for the Commission to contract to file one initial report for each a non-enumerated bona fide hedge determine whether to recognize a core reference futures contract it lists on previously, the Commission expects trader’s position as a bona fide hedge its market. Such requests from the market participants to seek more exempted from position limit Commission would result in one initial regulatory clarity under proposed submission for each of the proposed requirements. Proposed § 150.3(b) establishes § 150.3(b). In the event a trader submits twenty-five core referenced futures such request under proposed § 150.3, contracts.684 The Commission further application filing requirements and recordkeeping and reporting the Commission estimates that traders estimates that it will take 20 hours to would file one request per year for a complete and file each report for a total requirements that are similar to existing requirements for bona fide hedge total of one annual request for all annual burden of 500 hours for all respondents. The Commission further 685 recognitions under existing §§ 1.47 and respondents. Accordingly, the estimates that in such situation, it proposed changes to § 150.2(f) would 1.48. Although these requirements in proposed § 150.3 would be new for would take 20 hours to complete and result in an initial, one-time increase to file each report, for a total of 20 the current burden estimates of OMB market participants seeking spread exemptions (which are currently self- aggregate annual burden hours for all control number 3038–0013 by an traders. increase of 25 submissions across six effectuating), the proposed filing, Proposed § 150.3(d) establishes respondent DCMs for the initial number recordkeeping, and reporting recordkeeping requirements for persons of submissions for the twenty-five core requirements in § 150.3(b) are otherwise who claim any exemptions or relief referenced futures contracts and an 686 under proposed § 150.3. Proposed initial, one-time burden of 500 hours. Proposed § 150.3(b) would include (1) recognitions of bona fide hedges under proposed § 150.3(d) should help to ensure that if iii. § 150.3 Exemptions From Federal § 150.3(b); (2) spread exemptions under proposed any person claims any exemption § 150.3(b); (3) financial distress positions a person Position Limit Requirements could request from the Commission under § 140.99; permitted under proposed § 150.3 such Market participants may currently and (4) exemptions for certain natural gas positions exemption holder can demonstrate apply directly to the Commission for held during the spot month. Proposed § 150.3(b) compliance with the applicable would also exempt pre-enactment and transition requirements as follows: period swaps. The enumerated bona fide hedge 684 In 2018, the DCMs submitted deliverable recognitions and spread exemptions identified in First, under proposed § 150.3(d)(1), supply estimates for all the commodities that would the proposed ‘‘spread transaction’’ definition in any person claiming an exemption be subject to federal position limits. Thus, the proposed § 150.1 would be self-effectuating. would be required to keep and maintain Commission expects that the exchanges would be 687 Proposed § 150.3(f) clarifies the implications able to leverage these recent estimates to minimize complete books and records concerning on entities required to aggregate accounts under 688 the burden of the initial submission under the § 150.4, and § 150.3(g) provides for delegation of certain details. Proposed § 150.3(d)(1) Commission’s proposal. certain authorities to the Director of the Division of 685 20 initial hours × 25 core referenced futures Market Oversight. The proposed changes to 688 The requirement would include all details of contracts = 500 one-time, aggregate burden hours. §§ 150.3(f) and 150.3(g) do not impact the current related cash, forward, futures, options, and swap While there is an initial annual submission, the estimates for these OMB control numbers. Also, the positions and transactions, including anticipated Commission does not expect to require the proposal reminds persons of the relief provisions in requirements, production and royalties, contracts exchanges to resubmit the supply estimates on an § 140.99, covered by OMB control number 3038– for services, cash commodity products and by- annual basis. 0049, which does not impact the burden estimates. Continued

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would establish recordkeeping demonstrate compliance with the (§ 150.5(b)), and excluded commodity requirements for any person relying on applicable requirements. The contracts (§ 150.5(c)).693 In compliance an exemption granted directly from the Commission’s existing collection under with part 40 of the Commission’s Commission. The Commission estimates existing § 150.3 estimated that the regulations, exchanges currently have that very few or no traders would claim Commission issues two special calls per policies and procedures in place to an exemption directly from the year for information related to address exemptions from exchange set Commission. In the event a trader exemptions, and that each response to a limits through their rulebooks. If the requests an exemption, the Commission special call for information takes 3 proposal is adopted, the Commission estimates that the trader would create burden hours to complete. This includes expects that the exchanges would one record per exemption per year for two burden hours to fulfill reporting accordingly update their rulebooks, both a total of one annual record for all requirements and 1 burden hour related to conform to proposed new respondents. The Commission further to recordkeeping for an aggregate total requirements and to incorporate the estimates that it will take one hour to for all respondents of six annual burden comply with the recordkeeping hours, broken down into four aggregate additional contracts that will be subject requirement of § 150.3(d)(1) for a total of annual burden hours for reporting and to federal position limits into their one aggregate annual burden hour for all two aggregate annual burden hours for process for setting exchange-level limits traders. recordkeeping.690 and exemptions therefrom. Second, under proposed § 150.3(d)(2), The Commission estimates that The collections of information related a pass-through swap counterparty, as proposed § 150.3(e) would impose to amended rulebooks under part 40 are defined by proposed § 150.1, that relies information collection burdens related covered by OMB control number 3038– on a representation received from a to special calls by the Commission on 0093. Separately, the collections of bona fide hedging swap counterparty approximately 18 additional information related to applications for that the swap qualifies in good faith as respondents, for an estimated 20 special exemptions from exchange-set limits are a ‘‘bona fide hedging position or 691 calls per year. The Commission covered by OMB control number 3038– transaction,’’ as defined under proposed estimates that these 20 market 0013. § 150.1, would be required to: (i) participants would provide one Maintain any written representation for submission per year to respond to the Under proposed § 150.5(a)(1), for any at least two years following the special call for a total of 20 annual contract subject to a federal limit, DCMs expiration of the swap; and (ii) furnish submissions for all respondents. The and, ultimately, SEFs, would be the representation to the Commission Commission estimates it would take a required to establish exchange-set limits upon demand. Proposed § 150.3(d)(2) market participant approximately 10 for such contracts. Under proposed would create a new recordkeeping hours to complete a response to a § 150.5(a)(2), exchanges that wish to obligation for certain persons relying on special call. Therefore, the Commission grant exemptions from exchange-set the proposed pass-through swap estimates responses to special calls for limits on commodity derivative representations, and the Commission information will take an aggregate total contracts subject to federal limits would estimates that 425 traders would be of 200 burden hours for all traders.692 have to require traders to file an requested to maintain the required The Commission notes that it is also application to show a request for a bona records. The Commission estimates that maintaining its special call authority for fide hedge recognition or exemption each trader would maintain one record reporting requirements under proposed conforms to a type that may be granted per year for a total of 425 aggregate part 19 discussed above. under proposed § 150.3(a)(1)–(4). annual records for all respondents. The iv. § 150.5 Exchange Set Limits and Exchanges would have to require that Commission further estimates that it such exchange-set limit exemption will take one hour to comply with the Exemptions applications be filed in advance of the recordkeeping requirement of § 150.3(d) Amendments to § 150.5 would refine date such position would be in excess for a total of one annual burden hour for the process, and establish non-exclusive each trader and 425 aggregate annual of the limits, but exchanges would be methodologies, by which exchanges given the discretion to adopt rules burden hours for all traders. may set exchange-level limits and grant allowing traders to file applications The Commission proposes to move exemptions therefrom, including within five business days after a trader existing § 150.3(b), which currently separate methodologies for setting limit took on such position. Proposed allows the Commission or certain levels for contracts subject to federal Commission staff to make special calls limits (§ 150.5(a)), physical commodity § 150.5(a)(2) would also provide that to demand certain information regarding derivatives not subject to federal limits exchanges must require that the trader persons claiming exemptions, to reapply for the exemption at least proposed § 150.3(e), with some 690 The special call authority under part 19 and annually. Proposed § 150.5(a)(4) would modifications to include swaps.689 the proposed special call authority discussed under require each exchange to provide a Together with the recordkeeping § 150.3 would be similar in nature; however, part monthly report showing the disposition provision of proposed § 150.3(d), 19 would apply to special calls regarding bona fide of any exemption application, including hedge recognitions and related underlying cash proposed § 150.3(e) should enable the market positions while the special calls under the recognition of any position as a bona Commission to monitor the use of proposed § 150.3 would apply to the other fide hedge, the exemption of any spread exemptions from speculative position exemptions under proposed § 150.3. transaction, the renewal, revocation, or 691 limits and help to ensure that any 2 respondents subject to special calls under modification of a previously granted person who claims any exemption existing § 150.3 + 18 additional respondents under proposed § 150.3 = 20 total respondents. The permitted by proposed § 150.3 can Commission estimates, at least during the initial 693 Proposed § 150.5 addresses exchange-set implementation period, that it is likely to issue position limits and exemptions therefrom, whereas products, cross-commodity hedges, and a record of more special calls for information to monitor proposed § 150.9 addresses federal limits and an bona fide hedging swap counterparties. compliance with position limits, particularly in the exchange-administered process for purposes of 689 Proposed § 150.3(e) would refer to commodity commodity markets that will now be subject to federal limits where an applicant may apply derivative contracts, whereas current § 150.3(b) federal position limits for the first time. through an exchange to the Commission for refers to futures and options. The proposed change 692 20 special calls × 10 burden hours per call = recognition of an non-enumerated bona fide hedge would result in the inclusion of swaps. 200 total burden hours. for purposes of federal position limits.

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recognition or exemption, or the The Commission estimates under The Commission estimates that under rejection of any application.694 proposed § 150.5(a)(4) that six proposed § 150.5(b)(3), six exchanges These proposed collections of exchanges would provide monthly would make submissions to information related to exemptions from reports for a total of 72 monthly reports demonstrate to the Commission how the exchange-set limits are necessary to for all exchanges.696 The Commission non-comparable levels comply with the ensure that such exchange-set limits further estimates that it will take 5 standards set forth in proposed comply with Commission regulations, hours to complete and file each monthly § 150.5(b)(1) and (2). The Commission including that exchange limits are no report for a total of 60 annual burden estimates that each exchange on average higher than the applicable federal level; hours for each exchange and 360 annual would make 3 submissions each year for to establish minimum standards needed burden hours for all exchanges.697 a total of 18 submissions for all for exchanges to administer the Proposed § 150.5(b) would require exchanges. The Commission further exchange’s position limits framework; exchanges, for physical commodity estimates that it will take 10 hours to and to enable the Commission to derivatives that are not subject to federal complete and file each submission for a oversee an exchange’s exemptions limits to set limits during the spot total of 18 annual burden hours for each process to ensure it does not undermine month and to set either limits or exchange and 180 burden hours for all the federal position limits framework. In accountability outside of the spot exchanges.698 addition, the Commission would use the month. Under proposed § 150.5(b)(3), Proposed § 150.5(b)(4) would permit information to confirm that exemptions where multiple exchanges list contracts exchanges to grant exemptions from any are granted and renewed in accordance that are substantially the same, exchange limit established for physical with the types of exemptions that may including physically-settled contracts commodity contracts not subject to be granted under proposed that have the same underlying federal limits. To grant such § 150.3(a)(1)–(4). commodity and delivery location, or exemptions, exchanges must require The Commission estimates under cash-settled contracts that are directly or traders to file an application to show proposed § 150.5(a) that 425 traders indirectly linked to a physically-settled whether the requested exemption from would submit applications to claim contract, the exchange must either adopt exchange-set limits would be in accord spread exemptions and bona fide hedge ‘‘comparable’’ limits for such contracts, with sound commercial practices in the recognitions from exchange-set position or demonstrate to the Commission how relevant commodity derivative market limits on commodity derivatives the non-comparable levels comply with and/or that may be established and contracts subject to federal limits set the standards set forth in proposed liquidated in an orderly fashion in that forth in § 150.2. The Commission § 150.5(b)(1) and (2). Such a market. This proposed collection of estimates that each trader on average determination also must address how information is necessary to confirm that would submit one application to an the levels are necessary and appropriate any exemptions granted from exchange exchange each year for a total of 425 to reduce the potential threat of market limits on physical commodity contracts applications for all respondents. The manipulation or price distortion of the not subject to federal limits do not pose Commission further estimates that it contract’s or the underlying a threat of market manipulation or will take 2 hours to complete and file commodity’s price or index. Proposed congestion, and maintains orderly each application for a total of 2 annual § 150.5(b)(3) is intended to help ensure execution of transactions. The burden hours for each trader and 850 that position limits established on one Commission estimates that 200 traders aggregate burden hours for all traders.695 exchange would not jeopardize market would submit one application each year integrity or otherwise harm other and that each application would take 694 Additionally, each report should include the markets. This provision may also approximately two hours to complete, following details: (A) The date of disposition; (B) improve the efficiency with which for an aggregate total of 400 burden The effective date of the disposition; (C) The exchanges adopt limits on newly-listed hours per year for all traders. expiration date of any recognition or exemption; (D) Proposed § 150.5(e) reflects that, Any unique identifier(s) the designated contract contracts that compete with an existing market or swap execution facility may assign to contract listed on another exchange and consistent with the definition of ‘‘rule’’ track the application, or the specific type of help reduce the amount of time and in existing § 40.1, any exchange action recognition or exemption; (E) If the application is effort needed for Commission staff to establishing or modifying position for an enumerated bona fide hedging transaction or limits or exemptions therefrom, or position, the name of the enumerated bona fide assess the new limit levels. Further, hedging transaction or position listed in Appendix proposed § 150.5(b)(3) would be position accountability, in any case A to this part; (F) If the application is for a spread consistent with the Commission’s pursuant to proposed § 150.5(a), (b), (c), transaction listed in the spread transaction proposal to generally apply equivalent or Appendix F to part 150, would definition in § 150.1, the name of the spread qualify as a ‘‘rule’’ and must be transaction as it is listed in § 150.1; (G) The identity federal limits to linked contracts, of the applicant; (H) The listed commodity including linked contracts listed on submitted to the Commission pursuant derivative contract or position(s) to which the multiple exchanges. to part 40 of the Commission’s application pertains; (I) The underlying cash regulations. Proposed § 150.5(e) further commodity; (J) The maximum size of the provides that exchanges would be commodity derivative position that is recognized by would allow market participants to request non- the designated contract market or swap execution enumerated bona fide hedge recognitions from both required to review regularly any facility as a bona fide hedging transaction or federal and exchange-set position limits at the same position limit levels established under position, specified by contract month and by the time. The Commission believes that under a single proposed § 150.5 to ensure the level type of limit as spot month, single month, or all- process, the estimated burdens under proposed continues to comply with the months-combined, as applicable; (K) Any size § 150.5(a) discussed in this section for exemptions limitations or conditions established for a spread from exchange-set limits will include the burdens requirements of those sections. The exemption or other exemption; and (L) For bona under the federal limit exemption process for non- Commission estimates under proposed fide hedging transactions or positions, a concise enumerated bona fide hedges under proposed § 150.5(e) that six exchanges would summary of the applicant’s activity in the cash § 150.9 discussed below. submit revised rulebooks to satisfy their markets and swaps markets for the commodity 696 6 exchanges × 12 months = 72 total monthly underlying the commodity derivative position for reports per year. compliance obligations under part 40. which the application was submitted. 697 5 hours per monthly report × 12 months = 60 695 To increase efficiency and reduce duplicative hours per year for each exchange. 60 annual hours 698 18 estimated annual submissions × 10 burden efforts, the proposed rule would permit an × 6 exchanges = 360 aggregate annual hours for all hours per submission = 180 aggregate annual exchange to have a single process in place that exchanges. burden hours.

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The Commission estimates that each Commission estimates that six application for a non-enumerated bona exchange on average would make 1 exchanges would elect to process fide hedge recognition under proposed initial revision of its rulebook to reflect applications for non-enumerated bona § 150.9 for a total of six aggregate annual the new position limit framework for a fide hedge recognitions that would applications for all exchanges; however, total of 6 applications for all exchanges. satisfy the federal position limit as noted above, this amount is included The Commission further estimates that requirements under proposed § 150.9, in the Commission’s estimate in it will take 30 hours to revise a rulebook and would be required to file amended connection with proposed § 150.5(a).701 for a total of 30 annual burden hours for rulebooks pursuant to part 40 of the Specifically, as discussed above in each exchange and 180 burden hours for Commission’s regulations. The connection with proposed § 150.5(a), all exchanges.699 Commission bases its estimate on the the Commission estimates under This proposed collection of number of exchanges that have proposed §§ 150.5(a) and 150.9(a) that information is necessary to ensure that submitted similar rules to the 425 traders would submit applications the exchanges’ rulebooks reflect the Commission in the past. to claim exemptions and/or bona fide most up to date rules and requirements Proposed § 150.9(c) would require a hedge recognitions for contracts subject in compliance with the proposed trader to submit an application with to federal position limits as set forth in position limits framework. The sufficient information to enable the § 150.2.702 information would be used to confirm exchange to determine whether it Proposed § 150.9(d) would require that exchanges are complying with their should recognize a position as a bona exchanges to keep full, complete, and requirements to regularly review any fide hedge for purposes of federal systematic records, including all position limit levels established under position limits. Each applicant would pertinent data and memoranda, of all proposed § 150.5. need to reapply for its non-enumerated activities relating to the processing of bona fide hedge recognition at least on v. § 150.9 Exchange Process for Bona such applications and the disposition an annual basis by updating its original Fide Hedge Recognitions From Federal thereof. In addition, as provided for in application. The Commission expects Limits proposed § 150.9(g), the Commission that traders would benefit from the may, in its discretion, at any time, Proposed § 150.9 would establish a exchange-administered framework review the designated contract market’s new streamlined process in which a established under proposed § 150.9 records retained pursuant to proposed trader could apply through an exchange because traders may submit one § 150.9(d). The proposed recordkeeping to request a non-enumerated bona fide application to obtain a non-enumerated requirement is necessary for the hedging recognition from federal bona fide hedge recognition for Commission to review the exchanges’ position limits. As part of the process, purposes of both exchange-set and processes, retention of records, and proposed § 150.9 would create certain federal limits, as opposed to submitting recordkeeping and reporting obligations separate applications to the Commission 701 As discussed above, the process and estimated on the market participant and the for federal position limit purposes and burdens under proposed § 150.9 would not apply to exchange, including: (i) An application separate applications to an exchange for § 150.5(b) because proposed § 150.5(b) applies to to request non-enumerated bona fide exchange limit purposes.700 those physical commodity contracts that are not subject to federal limits (as opposed to proposed hedge recognitions, which the trader Accordingly, the estimated burden for § 150.5(a), which applies to those contracts subject would submit to the exchange and traders requesting non-enumerated bona to federal limits). As a result, a trader that would which the exchange would fide hedge recognitions from exchange- use the process established under § 150.5(b) for subsequently provide to the set limits under § 150.5(a) would exchange-set limits would not need to apply under subsume the burden estimates in proposed § 150.9 since the traders would not need Commission if the exchange approves a bona fide hedge recognition or an exemption from the application for purposes of connection with proposed § 150.9 for federal position limits. exchange-set limits; (ii) a notification to requesting non-enumerated bona fide 702 As discussed in connection with proposed the Commission and the applicant of the hedge recognition’s from federal limits § 150.5(a) above, the Commission estimates that exchange’s determination for purposes since the Commission preliminarily each trader on average would make one application each year for a total of 425 applications across all of exchange limits regarding the trader’s believes exchanges would combine the exchanges. The Commission further estimates that, request for recognition of a bona fide two processes (i.e., any trader who for proposed §§ 150.5(a) and 150.9(a), taken hedge or spread exemption; (iii) and a applies through an exchange under together, it will take two hours to complete and file requirement to maintain full, complete proposed § 150.9 for a non-enumerated each application for a total of two annual burden bona fide hedge for federal position hours for each trader and 850 aggregate annual and systematic records for Commission burden hours for all traders. (425 annual review of the exchange’s decisions. The limits purposes also would be deemed applications × 2 burden hours per application = 850 Commission believes that the exchanges to be applying at the same time under aggregate annual burden hours). The Commission that will elect to process applications proposed § 150.5(a) for exchange preliminarily anticipates that compared to proposed position limits purposes and thus it § 150.5(a), fewer traders will apply under proposed for non-enumerated bona fide hedging § 150.9 since proposed § 150.9 applies only to non- exemptions under proposed § 150.9(a) would not be appropriate to distinguish enumerated bona fide hedge recognitions for federal already have similar processes for the between the two for PRA purposes). purposes. In comparison, while proposed § 150.5 review and disposition of such Accordingly, the Commission would encompass these same applications for non- preliminarily anticipates that 6 enumerated bona fide hedge recognitions (but for exemption applications in place through the purpose of exchange-set limits), proposed their rulebooks for purposes of exchanges each would receive only one § 150.5(a) also would include enumerated bona fide exchange-set position limits. hedge applications along with spread exemption Accordingly, the estimated burden on 700 The Commission believes the collections of requests. The Commission’s estimate of 850 information set forth above are necessary for the aggregate annual burden hours encompasses all an exchange to comply with the exchange to process requests for recognition of non- such requests from all traders. However, for the proposed rule will be less burdensome enumerated bona fide hedges for purposes of both sake of clarity, the Commission preliminarily because the exchanges may leverage exchange-set position limits and federal position anticipates that 6 exchanges each would receive one their existing policies and procedures to limits. The information would be used by the application per year for a non-enumerated bona fide exchange to determine, and the Commission to hedge under proposed § 150.9 (for a total of six comply with the proposed rule. The review and verify, whether the facts and applications across all exchanges); as noted, this circumstances demonstrate it is appropriate to burden is included in the Commission’s estimate of 699 6 initial applications × 30 burden hours = 180 recognize a position as a non-enumerated bona fide 425 annual applications in connection with its initial aggregate burden hours. hedging transaction or position. estimate under proposed § 150.5(a).

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compliance with requirements in which an exchange administers its outside legal and compliance counsel to established and implemented under this application procedures, and the update existing rulebooks and it will section. exchange’s rationale for permitting large take 25 hours to complete and file each Proposed § 150.9(d) would create a positions. rule for a total 25 one-time burden hours new recordkeeping obligation consistent The Commission estimates that under for each exchange and 150 one-time with the standards in existing § 1.31.703 proposed § 150.9(e), 6 exchanges would burden hours for all exchanges. The Commission estimates that six submit notifications of approved exchanges would each create one record application of an exchange’s 2. Request for Comments on Collection in connection with proposed § 150.9 determination to recognize non- The Commission invites the public each year for a total of six annual enumerated bona fide hedges for and other Federal agencies to comment records for all respondents. The purposes of exceeding the federal on any aspect of the proposed Commission further estimates that it position limits. The Commission information collection requirements will take five hours to comply with the estimates that each exchange on average discussed above. Pursuant to 44 U.S.C. proposed recordkeeping requirement of would make 2 notifications: one 3506(c)(2)(B), the Commission solicits § 150.9(d) for a total of five annual notification each to the applicant trader comments in order to (i) evaluate burden hours for each exchange and 30 and to the Commission each year for a whether the proposed collections of aggregate annual burden hours across all total of 12 notices for all exchanges. The information are necessary for the proper exchanges. Commission further estimates that it performance of the functions of the Proposed § 150.9(f) would allow the will take 0.5 hours to complete and file Commission, including whether the Commission to inspect such books and each notification for a total of one information will have practical utility; 704 records. In the event the Commission annual burden hour for each exchange (ii) evaluate the accuracy of the exercises its authority to inspect such and six burden hours for all Commission’s estimate of the burden of books and records, it estimates that the exchanges.706 the proposed collections of information; Commission would make an inspection c. OMB Control Number 3038–0093— (iii) determine whether there are ways to two exchanges per year and each to enhance the quality, utility, and exchange would incur four hours to Provisions Common to Registered Entities clarity of the information proposed to be make its books and records available to collected; and (iv) minimize the burden the Commission for review for a total of 1. § 150.9(a) of the proposed collections of 8 aggregate annual burden hours for the Under proposed § 150.9(a), exchanges 705 information on those who are to two estimated respondent exchanges. that would like for their market respond, including through the use of Under proposed § 150.9(e), an participants to be able to exceed federal appropriate automated collection exchange would need to provide an position limits based on a non- techniques or other forms of information applicant and the Commission with enumerated bona fide hedge recognition technology. notice of any approved application of an granted by the exchange with respect to Those desiring to submit comments exchange’s determination to recognize its own limits must have rules, adopted bona fide hedges and grant spread on the proposed information collection pursuant to the rule approval process in requirements should submit them exemptions with respect to its own § 40.5 of the Commission’s regulations, position limits for purposes of directly to the Office of Information and establishing processes consistent with Regulatory Affairs, OMB, by fax at (202) exceeding the federal position limits. the provisions of proposed § 150.9. The The proposed notification requirement 395–6566, or by email at proposed collection of information is [email protected]. Please is necessary to inform the Commission necessary to capture the new non- of the details of the type of bona fide provide the Commission with a copy of enumerated bona fide hedge process in submitted comments so that all hedge recognitions or spread the exchanges’ rulebook, which is exemptions being granted. The comments can be summarized and subject to Commission approval. The addressed in the final rule preamble. information would be used to keep the information would be used to assess the Commission informed as to the manner Refer to the ADDRESSES section of this process put in place by each exchange notice of proposed rulemaking for submitting amended rulebooks. 703 comment submission instructions to the Consistent with existing § 1.31, the The Commission has previously Commission expects that these records would be Commission. A copy of the supporting readily available during the first two years of the estimated the combined annual burden statements for the collection of hours for both §§ 40.5 and 40.6 to be required five year recordkeeping period for paper information discussed above may be records, and readily accessible for the entire five- 7,000 hours.707 If the proposed rule is obtained by visiting http:// year recordkeeping period for electronic records. In adopted, the Commission estimates that addition, the Commission expects that records www.RegInfo.gov. OMB is required to six exchanges would make one initial required to be maintained by an exchange pursuant make a decision concerning the § 40.5 rule filings per year for a total of to this section would be readily accessible during collection of information between 30 the pendency of any application, and for two years six one-time initial submissions for all and 60 days after publication of this following any disposition that did not recognize a exchanges. The Commission further derivative position as a bona fide hedge. document in the Federal Register. estimates that the exchanges would 704 Proposed § 150.9(g)(1) provides the Therefore, a comment is best assured of employ a combination of in-house and Commission’s authority to, at its discretion, and at having its full effect if OMB receives it any time, review the exchange’s processes, within 30 days of publication. retention of records, and compliance with 706 12 notices for all exchanges × 0.5 hours per requirements established and implemented under notice = six (6) total burden hours across all C. Regulatory Flexibility Act this section. Under proposed § 150.9(g)(2), if the exchanges. Commission determines additional information is 707 The supporting statement for the current The Regulatory Flexibility Act required to conduct its review, pursuant to active information collection request, ICR Reference (‘‘RFA’’) requires that agencies consider proposed § 150.9(g)(1), then it would notify the No: 201503–3038–002, for OMB control number exchange and the relevant market participant of any 3038–0013, estimated that seven respondents whether the rules they propose will issues identified and provide them with ten would file the §§ 1.47 and 1.48 reports, and that have a significant economic impact on business days to provide supplemental information. each respondent would file two reports for a total a substantial number of small entities 705 2 exchanges per year subject to a Commission of 14 annual responses, requiring three hour per and, if so, provide a regulatory inspection × 4 hours per inspection request = 8 response, for a total of 42 burden hours for all aggregate annual burden hours for all exchanges. respondents. flexibility analysis respecting the

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impact.708 A regulatory flexibility approving any bylaw, rule, or regulation the price concession that a market analysis or certification typically is of a contract market or registered futures participant might have to absorb to required for ‘‘any rule for which the association established pursuant to establish a large position may be lower agency publishes a general notice of section 17 of the Act.714 on an incumbent DCM than an entrant proposed rulemaking pursuant to’’ the The Commission believes that the DCM. Both of these factors would notice-and-comment provisions of the public interest to be protected by the inform a DCM’s decision regarding Administrative Procedure Act, 5 U.S.C. antitrust laws is generally to protect where to set the levels for its own 553(b).709 The requirements related to competition. The Commission requests exchange-set limits. Moreover, the the proposed amendments fall mainly comment on whether the proposed rule incumbent DCM can use other tools to on registered entities, exchanges, FCMs, implicates any other specific public defend its advantage such as the swap dealers, clearing members, foreign interest to be protected by the antitrust implementation of new technologies, brokers, and large traders. The laws. the use of various fees/charges and the Commission has previously determined The Commission has considered the application of exemptions to federal that registered DCMs, FCMs, swap proposed rules to determine whether limits. The Commission preliminarily dealers, major swap participants, they are anticompetitive and has believes that the relatively high limit eligible contract participants, SEFs, preliminarily determined that the levels that the Commission proposes clearing members, foreign brokers and proposed rules could, in some today do not at this time establish a large traders are not small entities for circumstances, be anticompetitive barrier to entry or competitive restraint purposes of the RFA.710 because position limits at low levels are, likely to facilitate anticompetitive Further, while the requirements under to some degree, inherently effects in any relevant antitrust market this rulemaking may impact anticompetitive. A more established for contract trading. This is because the nonfinancial end users, the Commission DCM that already lists, or is first to list, limit levels that the Commission notes that position limits levels apply a core referenced futures contract (an proposes today are based on recent data only to large traders. Accordingly, the ‘‘incumbent DCM’’) has a competitive regarding deliverable supply and open Chairman, on behalf of the Commission, advantage over smaller DCMs seeking to interest. However, if the size of the hereby certifies, on behalf of the expand or future entrant DCMs relevant markets continues on an Commission, pursuant to 5 U.S.C. (collectively ‘‘entrant DCMs’’), even in upward trend and the Commission does 605(b), that the actions proposed to be the absence of position limits, because not adjust federal limit levels taken herein would not have a ‘‘liquidity attracts liquidity.’’ That is, a commensurately, limit levels that significant economic impact on a market participant seeking to execute a become stale over time could facilitate substantial number of small entities. single transaction or, for that matter, anticompetitive effects. The The Chairman made the same establish a large position would, other Commission requests comment on 711 things being equal, gravitate toward a certification in the 2013 Proposal, the whether and in what circumstances 712 more established facility that 2016 Supplemental Proposal, and the adopting the proposed rules could be 713 successfully lists a contract with 2016 Reproposal. anticompetitive. relatively consistent volume and D. Antitrust Considerations transparent pricing—where there is The Commission has also Section 15(b) of the CEA requires the likely to be someone willing to take the preliminarily determined that the Commission to take into consideration other side of a trade. This is especially proposed rules serve the regulatory the public interest to be protected by the true if the market participant is already purpose of the Act ‘‘to deter and prevent antitrust laws and endeavor to take the clearing other products with the price manipulation or any other least anticompetitive means of incumbent DCM. This would tend to disruptions to market integrity.’’ 715 The achieving the objectives of the Act, and protect the incumbent DCM’s contract Commission proposes to implement the the policies and purposes of the Act, in and reinforce the advantage of an rules pursuant to section 4a(a) of the issuing any order or adopting any incumbent DCM, which has to do less CEA, which articulates additional Commission rule or regulation to keep and attract customers and policies and purposes.716 (including any exemption under section should be able to keep more of the The Commission has identified the 4(c) or 4c(b)), or in requiring or profits from trading volume. That is, the following less anticompetitive means: status of incumbency by itself may to Requiring derivatives clearing 708 44 U.S.C. 601 et seq. some extent create a barrier to entry for organizations (‘‘DCOs’’) to impose initial 709 5 U.S.C. 601(2), 603–05. an entrant DCM where the presence of margin surcharges for position limits. 710 See Policy Statement and Establishment of a counterparty at the desired price is This would be less anticompetitive Definitions of ‘‘Small Entities’’ for Purposes of the Regulatory Flexibility Act, 47 FR 18618–19, Apr. less assured. Position limits at low because initial margin surcharges would 30, 1982 (DCMs, FCMs, and large traders) (‘‘RFA levels, especially in the non-spot month, still allow a large speculator to Small Entities Definitions’’); Opting Out of may exacerbate the situation. If a market accumulate a futures position on Segregation, 66 FR 20740–43, Apr. 25, 2001 participant establishes a futures position another DCM if the speculator so (eligible contract participants); Position Limits for Futures and Swaps; Final Rule and Interim Final on an incumbent DCM and then reaches desired while protecting against the Rule, 76 FR 71626, 71680, Nov. 18, 2011 (clearing the federal limit level on the incumbent price impact from a large price change members); Core Principles and Other Requirements DCM, it becomes even less likely that against the speculator who would for Swap Execution Facilities, 78 FR 33476, 33548, the market participant will migrate to an otherwise be forced to offload a position Jun. 4, 2013 (SEFs); A New Regulatory Framework entrant DCM, because the federal limit for Clearing Organizations, 66 FR 45604, 45609, due to position limits. The Commission Aug. 29, 2001 (DCOs); Registration of Swap Dealers would still apply and prevents the requests comment on whether there are and Major Swap Participants, 77 FR 2613, Jan. 19, market participant from increasing its other less anticompetitive means of 2012, (swap dealers and major swap participants); aggregate futures position where ever achieving the relevant purposes of the and Special Calls, 72 FR 50209, Aug. 31, 2007 located. Higher volume may permit an (foreign brokers). Act. The Commission is not required to 711 See 2013 Proposal, 78 FR at 75784. incumbent DCM to charge lower 712 See 2016 Supplemental Proposal, 81 FR at transaction fees than an entrant DCM; 715 Section 3(b) of the CEA, 7 U.S.C. 5(b). 38499. 716 7 U.S.C. 7a(a) (burdens on interstate 713 See 2016 Reproposal, 81 FR at 96894. 714 7 U.S.C. 19(b). commerce; trading or position limits).

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follow the least anticompetitive course 17 CFR Part 17 Authority: 7 U.S.C. 2, 5, 6a, 6c, 6f, 6g, 6i, of action. 6k, 6m, 6n, 7, 7a, 9, 12a, 19, and 21, as Brokers, Commodity futures, amended by Title VII of the Dodd-Frank Wall The Commission has examined Reporting and recordkeeping Street Reform and Consumer Protection Act, whether requiring DCOs to impose requirements, Swaps. Pub. L. 111–203, 124 Stat. 1376 (2010). initial margin surcharges for position limits in lieu of imposing position limits 17 CFR Part 19 ■ 6. In § 15.00, revise paragraph (p)(1) to is feasible and has preliminarily Commodity futures, Cottons, Grains, read as follows: Reporting and recordkeeping determined that is not because it could § 15.00 Definitions of terms used in parts be inconsistent with a relevant requirements, Swaps. 15 to 19, and 21 of this chapter. provision of the CEA and would require 17 CFR Part 40 * * * * * the Commission to revise its current regulations in part 39 to be more Commodity futures, Reporting and (p) * * * prescriptive and less principles-based. recordkeeping requirements, Procedural (1) For reports specified in parts 17 Thus, the Commission has preliminarily rules. and 18 and in § 19.00(a) and (b) of this determined not to adopt this less 17 CFR Part 140 chapter, any open contract position that at the close of the market on any anticompetitive means. Under section Authority delegations (Government 5b(c)(2)(A)(ii) of the CEA 717 and the business day equals or exceeds the agencies), Conflict of interests, quantity specified in § 15.03 in either: corresponding provision of the Organizations and functions (i) Any one futures of any commodity Commission’s current regulations, a (Government agencies). registered DCO has ‘‘reasonable on any one reporting market, excluding discretion in establishing the manner by 17 CFR Part 150 futures contracts against which notices which it complies with each core Bona fide hedging, Commodity of delivery have been stopped by a principle.’’ 718 Moreover, the futures, Cotton, Grains, Position limits, trader or issued by the clearing Commission’s regulations already Referenced Contracts, Swaps. organization of the reporting market; or require DCOs to ‘‘establish initial (ii) Long or short put or call options margin requirements that are 17 CFR Part 151 that exercise into the same future of any commensurate with the risks of each Bona fide hedging, Commodity commodity, or other long or short put or product and portfolio, including any futures, Cotton, Grains, Position limits, call commodity options that have unusual characteristics of, or risks Referenced Contracts, Swaps. identical expirations and exercise into associated with, particular products or For the reasons stated in the the same commodity, on any one portfolios . . ., ’’ 719 which would preamble, the Commodity Futures reporting market. include large positions. DCOs are also Trading Commission proposes to amend * * * * * already required to use models that take 17 CFR chapter I as follows: ■ 7. In § 15.01, revise paragraph (d) to into account concentration, minimum read as follows: liquidation time, and other risk factors PART 1—GENERAL REGULATIONS inherent in large positions, and the UNDER THE COMMODITY EXCHANGE § 15.01 Persons required to report. Commission reviews these models.720 ACT * * * * * Finally, Congress has required that the ■ 1. The authority citation for part 1 (d) Persons, as specified in part 19 of Commission establish position limits continues to read as follows: this chapter, who: ‘‘as the Commission finds are (1) Are merchants or dealers of cotton necessary.’’ 721 The Commission Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 6h, 6i, 6k, 6l, 6m, 6n, 6o, 6p, holding or controlling positions for requests comment on its feasibility future delivery in cotton that equal or analysis. 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 exceed the amount set forth in § 15.03; List of Subjects 24 (2012). or (2) Are persons who have received a 17 CFR Part 1 § 1.3 [Amended] special call from the Commission or its ■ 2. In § 1.3, remove the definition of designee under § 19.00(b) of this Agricultural commodity, Agriculture, the term ‘‘bona fide hedging chapter. Brokers, Committees, Commodity transactions and positions for excluded futures, Conflicts of interest, Consumer commodities.’’ * * * * * protection, Definitions, Designated ■ 8. Revise § 15.02 to read as follows: contract markets, Directors, Major swap § 1.47 [Removed and Reserved] participants, Minimum financial ■ 3. Remove and reserve § 1.47. § 15.02 Reporting forms. requirements for intermediaries, Forms on which to report may be Reporting and recordkeeping § 1.48 [Removed and Reserved] obtained from any office of the requirements, Swap dealers, Swaps. ■ 4. Remove and reserve § 1.48. Commission or via https://www.cftc.gov. 17 CFR Part 15 PART 15—REPORTS—GENERAL Listed below are the forms to be used for PROVISIONS the filing of reports. To determine who Brokers, Commodity futures, shall file these forms, refer to the Reporting and recordkeeping ■ 5. The authority citation for part 15 Commission rule listed in the column requirements, Swaps. continues to read as follows: opposite the form number.

Form No. Title Rule

40 ...... Statement of Reporting Trader ...... 18.04

717 7 U.S.C. 7a–1(c)(2)(A)(ii). 719 17 CFR 39.13(g)(2)(i). 721 See supra Section III.F. (discussion of the 718 17 CFR 39.10(b). 720 See generally 17 CFR 39.13. necessity finding).

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Form No. Title Rule

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 ...... 17.01 304 ...... Statement of Cash Positions for Unfixed-Price Cotton ‘‘On Call’’ ...... 19.00

(Approved by the Office of Management or controls, or in which the person has under § 19.00(a) shall file CFTC Form and Budget under control numbers a financial interest. 304 reports showing the quantity of call 3038–0007, 3038–0009, 3038–0013, and ■ 12. Revise part 19 to read as follows: cotton bought or sold on which the 3038–0103.) price has not been fixed, together with PART 19—REPORTS BY PERSONS the respective futures on which the PART 17—REPORTS BY REPORTING HOLDING REPORTABLE POSITIONS purchase or sale is based. As used MARKETS, FUTURES COMMISSION IN EXCESS OF POSITION LIMITS, AND herein, call cotton refers to spot cotton MERCHANTS, CLEARING MEMBERS, BY MERCHANTS AND DEALERS IN bought or sold, or contracted for AND FOREIGN BROKERS COTTON purchase or sale at a price to be fixed later based upon a specified future. ■ 9. The authority citation for part 17 Sec. continues to read as follows: 19.00 Who shall furnish information. (b) Time and place of filing reports. 19.01 [Reserved] Each CFTC Form 304 report shall be Authority: 7 U.S.C. 2, 6a, 6c, 6d, 6f, 6g, 19.02 Reports pertaining to cotton on call made weekly, dated as of the close of 6i, 6t, 7, 7a, and 12a. purchases and sales. business on Friday, and filed not later ■ 19.03 Delegation of authority to the Director than 9 a.m. Eastern Time on the third 10. In § 17.00, revise paragraph (b) of the Division of Market Oversight and introductory text to read as follows: the Director of the Division of business day following that Friday using Enforcement. the format, coding structure, and § 17.00 Information to be furnished by 19.04–19.10 [Reserved] electronic data transmission procedures futures commission merchants, clearing Appendix A to Part 19—Form 304 members and foreign brokers. approved in writing by the Commission. * * * * * Authority: 7 U.S.C. 6g, 6c(b), 6i, and § 19.03 Delegation of authority to the 12a(5). (b) Interest in or control of several Director of the Division of Enforcement. accounts. Except as otherwise § 19.00 Who shall furnish information. (a) The Commission hereby delegates, instructed by the Commission or its (a) Persons filing cotton on call until it orders otherwise, to the Director designee and as specifically provided in reports. Merchants and dealers of cotton of the Division of Enforcement, or such § 150.4 of this chapter, if any person holding or controlling positions for other employee or employees as the holds or has a financial interest in or future delivery in cotton that are Director may designate from time to controls more than one account, all such reportable pursuant to § 15.00(p)(1)(i) of time, the authority in § 19.00(b) to issue accounts shall be considered by the this chapter shall file CFTC Form 304. special calls. futures commission merchant, clearing (b) Persons responding to a special (b) The Commission hereby delegates, member, or foreign broker as a single call. All persons: until it orders otherwise, to the Director account for the purpose of determining (1) Exceeding speculative position of the Division of Enforcement, or such special account status and for reporting limits under § 150.2 of this chapter; or other employee or employees as the purposes. (2) Holding or controlling positions Director may designate from time to * * * * * for future delivery that are reportable time, the authority in § 19.00(b) to pursuant to § 15.00(p)(1) of this chapter ■ 11. In § 17.03, add paragraph (i) to provide instructions or to determine the and who have received a special call read as follows: format, coding structure, and electronic from the Commission or its designee data transmission procedures for § 17.03 Delegation of authority to the shall file any pertinent information as submitting data records and any other Director of the Office of Data and instructed in the special call. Filings in information required under this part. Technology or the Director of the Division response to a special call shall be made (c) The Director of the Division of of Market Oversight. within one business day of receipt of the Enforcement may submit to the * * * * * special call unless otherwise specified Commission for its consideration any in the call. Such filing shall be (i) Pursuant to § 17.00(b), and as matter which has been delegated in this transmitted using the format, coding specifically provided in § 150.4 of this section. chapter, the authority shall be structure, and electronic data (d) Nothing in this section prohibits designated to the Director of the Office submission procedures approved in the Commission, at its election, from of Data and Technology to instruct a writing by the Commission. exercising the authority delegated in futures commission merchant, clearing § 19.01 [Reserved] this section. member, or foreign broker to consider otherwise than as a single account for § 19.02 Reports pertaining to cotton on § § 19.04–19.10 [Reserved] the purpose of determining special call purchases and sales. account status and for reporting (a) Information required. Persons Appendix A to Part 19—Form 304 purposes all accounts one person holds required to file CFTC Form 304 reports 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")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 section 6(c)(2) of the Act (7 U.S.C. 9), section 9(a)(3) of the Act (7 U.S.C. 13(a)(3)), and/or section 1001 of Title 18, Crimes and Criminal Procedure (18 U.S.C. 1001) and (b) result in punishment by fine or imprisonment, or both.

PRIVACY ACT NOTICE

The Commission's authority for soliciting this information is granted in sections 4i and 8 of the CEA and related regulations (see, e.g., 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, e.g., 7 U.S.C. 9 and 13a-l, and/or 18 U.S.C. 1001). The information requested is used by the Commission to prepare its cotton on-call report. 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 www.cftc.gov.

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

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BACKGROUND & INSTRUCTIONS

Applicable Regulations:

• 17 CPR 19.00(a) specifies who shall file Form 304.

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

• 17 CPR 19.02(b) specifies the frequency (weekly), the report date (close of business on Friday), and the time (9 a.m. Eastern Time on the third business day following that Friday) and manner, for filing the Form 304.

Please follow the instructions below to generate and submit the required 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 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 or 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 ("NFA ID") and/or a Legal Entity Identifier ("LEI"), the trader should also identify itself 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 shall report on Form 304. Report in hundreds of 500-lb. bales unfixed-price cotton "on-call" pursuant to§ 19.02(a) of the Commission's regulations. 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 shall be completed by all filers. This page shall 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 section 6(c)(2) of the Act (7 U.S.C. 9), section 9(a)(3) of the Act (7 U.S.C. 13(a)(3)), and/or section 1001 of Title 18, Crimes and Criminal Procedure (18 U.S.C. 1001) and (b) result in punishment by fine or imprisonment, or both.

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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 CPR 1320.5(b)(2)(i), you are not required to respond to this collection of information unless it displays a currently valid 0MB control number.

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BILLING CODE 6351–01–C commodity derivative contracts in a Core referenced futures contract physical commodity, where: means a futures contract that is listed in PART 40—PROVISIONS COMMON TO § 150.2(d). REGISTERED ENTITIES (1) Such position: (i) Represents a substitute for Economically equivalent swap means, ■ 13. The authority citation for part 40 transactions made or to be made, or with respect to a particular referenced continues to read as follows: positions taken or to be taken, at a later contract, any swap that has identical material contractual specifications, Authority: 7 U.S.C. 1a, 2, 5, 6, 7, 7a, 8 and time in a physical marketing channel; 12, as amended by Titles VII and VIII of the (ii) Is economically appropriate to the terms, and conditions to such Dodd-Frank Wall Street Reform and reduction of price risks in the conduct referenced contract. Consumer Protection Act, Public Pub. L. and management of a commercial (1) Other than as provided in 111–203, 124 Stat. 1376 (2010). enterprise; and paragraph (2) of this definition, for the ■ 14. In § 40.1, revise paragraphs (iii) Arises from the potential change purpose of determining whether a swap (j)(1)(vii) and (j)(2)(vii) to read as in the value of— is an economically equivalent swap follows: (A) Assets which a person owns, with respect to a particular referenced produces, manufactures, processes, or contract, the swap shall not be deemed § 40.1 Definitions. merchandises or anticipates owning, to lack identical material contractual * * * * * producing, manufacturing, processing, specifications, terms, and conditions (j) * * * or merchandising; due to different lot size specifications or (1) * * * (B) Liabilities which a person owes or notional amounts, delivery dates (vii) Speculative position limits, anticipates incurring; or diverging by less than one calendar day, position accountability standards, and (C) Services that a person provides or or different post-trade risk management position reporting requirements, purchases, or anticipates providing or arrangements. including an indication as to whether purchasing; or (2) With respect to any natural gas the contract meets the definition of a (2) Such position qualifies as: referenced contract, for the purpose of referenced contract as defined in § 150.1 (i) Pass-through swap and pass- determining whether a swap is an of this chapter, and, if so, the name of through swap offset pair. Paired economically equivalent swap to such the core referenced futures contract on positions of a pass-through swap and a referenced contract, the swap shall not which the referenced contract is based. pass-through swap offset, where: be deemed to lack identical material * * * * * (A) The pass-through swap is a swap contractual specifications, terms, and (2) * * * position entered into by one person for conditions due to different lot size (vii) Speculative position limits, which the swap would qualify as a bona specifications or notional amounts, position accountability standards, and fide hedging transaction or position delivery dates diverging by less than position reporting requirements, pursuant to paragraph (1) of this two calendar days, or different post- including an indication as to whether definition (the bona fide hedging swap trade risk management arrangements. the contract meets the definition of counterparty) that is opposite another (3) With respect to any referenced economically equivalent swap as person (the pass-through swap contract or class of referenced contracts, defined in § 150.1 of this chapter, and, counterparty); and the Commission may make a if so, the name of the referenced (B) The pass-through swap offset is a determination that any swap or class of contract to which the swap is futures, option on a futures, or swap swaps satisfies, or does not satisfy, this economically equivalent. position entered into by the pass- economically equivalent swap definition. * * * * * through swap counterparty in the same physical commodity as the pass-through Eligible affiliate means an entity with PART 140—ORGANIZATION, swap, and which reduces the pass- respect to which another person: (1) Directly or indirectly holds either: FUNCTIONS, AND PROCEDURES OF through swap counterparty’s price risks (i) A majority of the equity securities THE COMMISSION attendant to that pass-through swap; of such entity, or and provided that the pass-through ■ (ii) The right to receive upon 15. The authority citation for part 140 swap counterparty is able to continues to read as follows: dissolution of, or the contribution of, a demonstrate upon request that the pass- majority of the capital of such entity; Authority: 7 U.S.C. 2(a)(12), 12a, 13(c), through swap qualifies as a bona fide (2) Reports its financial statements on 13(d), 13(e), and 16(b). hedging transaction or position a consolidated basis under Generally § 140.97 [Removed and Reserved] pursuant to paragraph (1) of this Accepted Accounting Principles or definition; or ■ 16. Remove and reserve § 140.97. International Financial Reporting (ii) Offsets of a bona fide hedger’s Standards, and such consolidated PART 150—LIMITS ON POSITIONS qualifying swap position. A futures, financial statements include the option on a futures, or swap position financial results of such entity; and ■ 17. The authority citation for part 150 entered into by a bona fide hedging (3) Is required to aggregate the is revised to read as follows: swap counterparty that reduces price positions of such entity under § 150.4 Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6c, 6f, risks attendant to a previously-entered- and does not claim an exemption from 6g, 6t, 12a, and 19, as amended by Title VII into swap position that qualified as a aggregation for such entity. of the Dodd-Frank Wall Street Reform and bona fide hedging transaction or Eligible entity 1 means a commodity Consumer Protection Act, Pub. L. 111–203, position at the time it was entered into pool operator; the operator of a trading 124 Stat. 1376 (2010). for that counterparty pursuant to ■ 18. Revise § 150.1 to read as follows: paragraph (1) of this definition. 1 The definition of the term eligible entity was Commodity derivative contract means amended by the Commission in a final rule § 150.1 Definitions. any futures, option on a futures, or swap published on December 16, 2016 (81 FR at 91454, 91489). Aside from proposing to remove the As used in this part— contract in a commodity (other than a lettering from each of the defined terms and to Bona fide hedging transactions or security futures product as defined in display them in alphabetical order, the definition of positions means a position in section 1a(45) of the Act). Continued

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vehicle which is excluded, or which (3) A swap which has been converted swap execution facility; and (2) halt itself has qualified for exclusion from to an economically equivalent amount increasing further its position or reduce the definition of the term ‘‘pool’’ or of an open position in a core referenced its position in an orderly manner, in ‘‘commodity pool operator,’’ futures contract. each case as requested by the designated respectively, under § 4.5 of this chapter; Independent account controller 2 contract market or swap execution the limited partner, limited member or means a person: facility. shareholder in a commodity pool the (1) Who specifically is authorized by Pre-enactment swap means any swap operator of which is exempt from an eligible entity, as defined in this entered into prior to enactment of the registration under § 4.13 of this chapter; section, independently to control Dodd-Frank Act of 2010 (July 21, 2010), a commodity trading advisor; a bank or trading decisions on behalf of, but the terms of which have not expired as trust company; a savings association; an without the day-to-day direction of, the of the date of enactment of that Act. insurance company; or the separately eligible entity; Pre-existing position means any organized affiliates of any of the above (2) Over whose trading the eligible position in a commodity derivative entities: entity maintains only such minimum contract acquired in good faith prior to (1) Which authorizes an independent control as is consistent with its the effective date of any bylaw, rule, account controller independently to fiduciary responsibilities for managed regulation, or resolution that specifies a control all trading decisions with positions and accounts to fulfill its duty speculative position limit level or a respect to the eligible entity’s client to supervise diligently the trading done subsequent change to that level. positions and accounts that the on its behalf or as is consistent with Referenced contract means: independent account controller holds such other legal rights or obligations (1) A core referenced futures contract directly or indirectly, or on the eligible which may be incumbent upon the listed in § 150.2(d) or, on a futures- entity’s behalf, but without the eligible eligible entity to fulfill; equivalent basis with respect to a entity’s day-to-day direction; and (3) Who trades independently of the particular core referenced futures (2) Which maintains: eligible entity and of any other contract, a futures contract or options on (i) Only such minimum control over independent account controller trading a futures contract, including a spread, the independent account controller as is for the eligible entity; that is either: consistent with its fiduciary (4) Who has no knowledge of trading (i) Directly or indirectly linked, responsibilities to the managed decisions by any other independent including being partially or fully settled positions and accounts, and necessary account controller; and on, or priced at a fixed differential to, to fulfill its duty to supervise diligently (5) Who is: the price of that particular core the trading done on its behalf; or (i) Registered as a futures commission referenced futures contract; or (ii) If a limited partner, limited merchant, an introducing broker, a (ii) Directly or indirectly linked, member or shareholder of a commodity commodity trading advisor, or an including being partially or fully settled pool the operator of which is exempt associated person of any such registrant, on, or priced at a fixed differential to, from registration under § 4.13 of this or the price of the same commodity chapter, only such limited control as is (ii) A general partner, managing underlying that particular core consistent with its status. member or manager of a commodity referenced futures contract for delivery Entity means a ‘‘person’’ as defined in pool the operator of which is excluded at the same location or locations as section 1a of the Act. from registration under § 4.5(a)(4) of this specified in that particular core Excluded commodity means an chapter or § 4.13 of this chapter, referenced futures contract; or ‘‘excluded commodity’’ as defined in provided that such general partner, (2) On a futures-equivalent basis, an section 1a of the Act. managing member or manager complies economically equivalent swap. Futures-equivalent means: with the requirements of § 150.4(c). (3) The definition of referenced (1) An option contract, whether an Long position means, on a futures- contract does not include a location option on a future or an option that is equivalent basis, a long call option, a basis contract, a commodity index a swap, which has been adjusted by an short put option, a long underlying contract, any guarantee of a swap, or a economically reasonable and futures contract, or a swap position that trade option that meets the requirements analytically supported risk factor, or is equivalent to a long futures contract. of § 32.3 of this chapter. delta coefficient, for that option Physical commodity means any Short position means, on a futures- computed as of the previous day’s close agricultural commodity as that term is equivalent basis, a short call option, a or the current day’s close or defined in § 1.3 of this chapter or any long put option, a short underlying contemporaneously during the trading exempt commodity as that term is futures contract, or a swap position that day, and converted to an economically defined in section 1a of the Act. is equivalent to a short futures contract. equivalent amount of an open position Position accountability means any Speculative position limit means the in a core referenced futures contract, bylaw, rule, regulation, or resolution maximum position, either net long or provided however, if a participant’s that is submitted to the Commission net short, in a commodity derivative position exceeds speculative position pursuant to part 40 of this chapter in contract that may be held or controlled limits as a result of an option lieu of, or along with, a speculative by one person, absent an exemption, assignment, that participant is allowed position limit, and that requires a trader whether such limits are adopted for one business day to liquidate the excess whose position exceeds the combined positions in all commodity position without being considered in accountability level to consent to: (1) derivative contracts in a particular violation of the limits; Provide information about its position commodity, including the spot month (2) A futures contract which has been to the designated contract market or future and all single month futures (the converted to an economically equivalent spot month and all single month amount of an open position in a core 2 The definition of the term independent account futures, cumulatively, ‘‘all-months- referenced futures contract; and controller was amended by the Commission in a combined’’), positions in a single month final rule published on December 16, 2016 (81 FR of commodity derivative contracts in a the term eligible entity would not be further at 91454, 91489). This term would not be further amended by this proposal and is included solely to amended by this proposal and is included solely to particular commodity other than the maintain the continuity of this definitions section. maintain the continuity of this definitions section. spot month future (‘‘single month’’), or

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positions in the spot month of beginning on the third-to-last trading amendments to this part implementing commodity derivative contacts in a day of the contract month until the section 737 of the Dodd-Frank Act of particular commodity. Such a limit may contract expires; 2010. be established under federal regulations (iii) For Chicago Mercantile Exchange ■ 19. Revise § 150.2 to read as follows: or rules of a designated contract market Live Cattle (LC) core referenced futures or swap execution facility. For contract, the spot month means the § 150.2 Federal speculative position limits. referenced contracts other than core period of time beginning at the close of (a) Spot month speculative position referenced futures contracts, single trading on the fifth business day of the limits. For physical-delivery referenced month means the same period as that of contract month until the contract contracts and, separately, for cash- the relevant core referenced futures expires; settled referenced contracts, no person contract. (2) For referenced contracts other than may hold or control positions in the Spot month means: core referenced futures contracts, the spot month, net long or net short, in (1) For physical-delivery core spot month means the same period as excess of the levels specified by the referenced futures contracts, the period that of the relevant core referenced Commission. of time beginning at the earlier of the futures contract. (b) Single month and all-months- close of business on the trading day Spread transaction means either a combined speculative position limits. preceding the first day on which calendar spread, intercommodity For any referenced contract, no person delivery notices can be issued by the spread, quality differential spread, may hold or control positions in a single clearing organization of a contract processing spread, product or by- month or in all-months-combined market, or the close of business on the product differential spread, or futures- (including the spot month), net long or trading day preceding the third-to-last option spread. net short, in excess of the levels trading day, until the contract expires, Swap means ‘‘swap’’ as that term is specified by the Commission. except as follows: defined in section 1a of the Act and as (c) Relevant contract month. For (i) For ICE Futures U.S. Sugar No. 11 further defined in § 1.3 of this chapter. purposes of this part, for referenced (SB) core referenced futures contract, Swap dealer means ‘‘swap dealer’’ as contracts other than core referenced the spot month means the period of time that term is defined in section 1a of the futures contracts, the spot month and beginning at the opening of trading on Act and as further defined in § 1.3 of any single month shall be the same as the second business day following the this chapter. those of the relevant core referenced expiration of the regular option contract Transition period swap means a swap futures contract. traded on the expiring futures contract entered into during the period (d) Core referenced futures contracts. until the contract expires; commencing after the enactment of the Federal speculative position limits (ii) For ICE Futures U.S. Sugar No. 16 Dodd-Frank Act of 2010 (July 21, 2010), apply to referenced contracts based on (SF) core referenced futures contract, and ending 60 days after the publication the following core referenced futures the spot month means the period of time in the Federal Register of final contracts:

TABLE 1 TO PARAGRAPH (d)—CORE REFERENCED FUTURES CONTRACTS

Commodity type Designated contract market Core referenced futures contract 1

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

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TABLE 1 TO PARAGRAPH (d)—CORE REFERENCED FUTURES CONTRACTS—Continued

Commodity type Designated contract market Core referenced futures contract 1

Silver (SI). Copper (HG). New York Mercantile Exchange Palladium (PA). Platinum (PL). 1 The core referenced futures contract includes any successor contracts.

(e) Establishment of speculative final settlement price) of one or more § 150.3 Exemptions. position limit levels. The levels of contracts listed for trading on a (a) Positions which may exceed limits. federal speculative position limits are designated contract market or swap The speculative position limits set forth fixed by the Commission at the levels execution facility that is a trading in § 150.2 may be exceeded to the extent listed in appendix E to this part; facility; and that all applicable requirements in this provided however, compliance with (2) The foreign board of trade makes part are met, provided that such such speculative limits shall not be available such referenced contracts to its positions are one of the following: required until 365 days after publication members or other participants located in (1) Bona fide hedging transactions or in the Federal Register. the United States through direct access positions. Positions that comply with (f) Designated contract market to its electronic trading and order the bona fide hedging transaction or estimates of deliverable supply. Each matching system. position definition in § 150.1, and are: designated contract market listing a core (i) Anti-evasion provision. For the (i) Enumerated in appendix A to this referenced futures contract shall supply purposes of applying the speculative part; or to the Commission an estimated spot position limits in this section, if used to (ii) Bona fide hedging transactions or month deliverable supply upon request willfully circumvent or evade positions, other than those enumerated by the Commission, and may supply speculative position limits: in appendix A to this part, that are such estimates to the Commission at any approved as non-enumerated bona fide other time. Each estimate shall be (1) A commodity index contract and/ hedging transactions or positions in accompanied by a description of the or a location basis contract shall be accordance with paragraph (b)(4) of this methodology used to derive the estimate considered to be a referenced contract; section or § 150.9; and any statistical data supporting the (2) A bona fide hedging transaction or (2) Spread transactions. Transactions estimate, and shall be submitted using position recognition or spread that: the format and procedures approved in exemption shall no longer apply; and (i) Meet the spread transaction writing by the Commission. A (3) A swap shall be considered to be definition in § 150.1; or designated contract market should use an economically equivalent swap. (ii) Do not meet the spread transaction the guidance regarding deliverable (j) Delegation of authority to the definition in § 150.1, but have been supply in appendix C to part 38 of this Director of the Division of Market approved by the Commission pursuant chapter. Oversight. (1) The Commission hereby to paragraph (b)(4) of this section. (g) Pre-existing positions—(1) Pre- delegates, until it orders otherwise, to (3) Financial distress positions. existing positions in a spot month. A the Director of the Division of Market Positions of a person, or related persons, spot month speculative position limit Oversight or such other employee or under financial distress circumstances, established under this section shall employees as the Director may designate when exempted by the Commission apply to pre-existing positions other from time to time, the authority in from any of the requirements of this part than pre-enactment swaps and paragraph (f) of this section to request in response to a specific request made transition period swaps. estimated deliverable supply from a to the Commission pursuant to § 140.99 (2) Pre-existing positions in a non- designated contract market and to of this chapter, where financial distress spot month. A single month or all- provide the format and procedures for circumstances include, but are not months-combined speculative position submitting such estimates. limited to, situations involving the limit established under this section (2) The Director of the Division of potential default or bankruptcy of a shall not apply to pre-existing positions, Market Oversight may submit to the customer of the requesting person or provided however, that if such position Commission for its consideration any persons, an affiliate of the requesting is not a pre-enactment swap or matter which has been delegated in this person or persons, or a potential transition period swap then that section. acquisition target of the requesting position shall be attributed to the person person or persons; (3) Nothing in this section prohibits if the person’s position is increased after (4) Conditional spot month limit the Commission, at its election, from the effective date of such limit. exemption positions in natural gas. Spot (h) Positions on foreign boards of exercising the authority delegated in month positions in natural gas cash- trade. The speculative position limits this section. settled referenced contracts that exceed established under this section shall (k) Eligible affiliates and aggregation. the spot month speculative position apply to a person’s combined positions For purposes of this part, if an eligible limit set forth in § 150.2, provided that in referenced contracts, including affiliate meets the conditions for any such positions: positions executed on, or pursuant to exemption from aggregation under (i) Do not exceed the equivalent of the rules of a foreign board of trade, § 150.4, the eligible affiliate may choose 10,000 contracts of the NYMEX Henry pursuant to section 4a(a)(6) of the Act, to utilize that exemption, or it may opt Hub Natural Gas core referenced futures provided that: to be aggregated with its affiliated contract per designated contract market (1) Such referenced contracts settle entities. that lists a natural gas cash-settled against any price (including the daily or ■ 20. Revise § 150.3 to read as follows: referenced contract;

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(ii) Do not exceed 10,000 futures hedging transaction or position in violation during the period of the equivalent contracts in economically § 150.1. Commission’s review nor once the equivalent swaps in natural gas; and (ii) With respect to an application for Commission has issued its (iii) That the person holding or a spread exemption: determination. controlling such positions does not hold (A) A description of the spread (4) Commission determination. After or control positions in spot-month position for which the application is review of the application and any physical-delivery referenced contracts submitted; supplemental information provided by in natural gas; or (B) A statement concerning the the requestor, the Commission will (5) Pre-enactment and transition maximum size of all gross positions in determine, with respect to the period swaps exemption. The commodity derivative contracts for transaction or position for which the speculative position limits set forth in which the application is submitted; and request is submitted, whether to § 150.2 shall not apply to positions (C) Any other information that may recognize all or a specified portion of acquired in good faith in any pre- help the Commission determine such transaction or position as a bona enactment swap, or in any transition whether the position is consistent with fide hedging transaction or position or period swap, in either case as defined section 4a(a)(3)(B) of the Act. whether to exempt all or a specified by § 150.1; provided however, that a (2) Additional information. If the portion of such spread transaction, as person may net such positions with Commission determines that it requires applicable. The Commission shall notify post-effective date commodity additional information in order to the applicant of its determination, and derivative contracts for the purpose of determine whether to recognize a an applicant may exceed federal complying with any non-spot month position as a bona fide hedging speculative position limits set forth in speculative position limit. transaction or position, or grant a spread § 150.2 upon receiving a notice of (b) Application for relief. Any person exemption, the Commission shall: approval. (i) Notify the applicant of any with a position in a referenced contract (5) Renewal of application. With supplemental information required; and seeking recognition of such position as respect to any application approved by (ii) Provide the applicant with ten the Commission pursuant to this a bona fide hedging transaction or business days in which to provide the section, a person shall renew such position, in accordance with paragraph Commission with any supplemental application if the information provided (a)(1)(ii) of this section, or seeking an information. pursuant to paragraph (b)(1) of this exemption for a spread position in (3) Timing of application. (i) Except as section changes or upon request by the accordance with paragraphs (a)(2)(ii) of provided in paragraph (b)(3)(ii) of this Commission. this section, in each case for purposes section, a person seeking relief in (6) Commission revocation or of federal speculative position limits set accordance with this section must modification. If the Commission forth in § 150.2, may submit an submit an application to the determines, at any time, that a application to the Commission in Commission and receive a notice of recognized bona fide hedging accordance with this section. approval of such application prior to the transaction or position is no longer (1) Required information. The date that the position for which the consistent with section 4a(c)(2) of the application shall include the following application was submitted would be in Act or the definition of bona fide information: excess of the applicable federal hedging transaction or position in (i) With respect to an application for speculative position limit set forth in § 150.1, or that a spread exemption is no a recognition of a bona fide hedging § 150.2; longer consistent with section transaction or position: (ii) A person may, however, due to 4a(a)(3)(B) of the Act, the Commission (A) A description of the position in demonstrated sudden or unforeseen shall notify the person holding such the commodity derivative contract for increases in their bona fide hedging position and, in its discretion, revoke or which the application is submitted, needs, submit an application for a modify the bona fide hedge recognition including, but not limited to, the name recognition of a bona fide hedging or spread exemption for purposes of of the underlying commodity and the transaction or position within five federal speculative position limits and derivative position size; business days after the person require the person to reduce the (B) Information to demonstrate why established the position that exceeded derivatives position within a the position satisfies the requirements of the applicable federal speculative commercially reasonable time or section 4a(c)(2) of the Act and the position limit. otherwise come into compliance. This definition of bona fide hedging (A) Any application filed pursuant to notification shall briefly specify the transaction or position in § 150.1, paragraph (b)(3)(ii) of this section must nature of the issues raised and the including factual and legal analysis; include an explanation of the specific provisions of the Act or the (C) A statement concerning the circumstances warranting the sudden or Commission’s regulations with which maximum size of all gross positions in unforeseen increases in bona fide the position or application is, or appears commodity derivative contracts for hedging needs. to be, inconsistent. which the application is submitted; (B) If an application filed pursuant to (c) Previously-granted risk (D) A description of the applicant’s paragraph (b)(3)(ii) of this section is management exemptions. Exemptions activity in the cash markets and swaps denied, the person must bring its previously granted by the Commission markets for the commodity underlying position within the federal speculative under § 1.47 of this chapter, or by a the position for which the application is position limits within a commercially designated contract market or swap submitted, including, but not limited to, reasonable time, as determined by the execution facility, in either case to the information regarding the offsetting cash Commission in consultation with the extent that such exemptions are for the positions; and applicant and the applicable designated risk management of positions in (E) Any other information that may contract market or swap execution financial instruments, including but not help the Commission determine facility. limited to index funds, shall not apply whether the position satisfies the (C) The Commission will not after the effective date of speculative requirements of section 4a(c)(2) of the determine that the person holding the position limit levels adopted, pursuant Act and the definition of bona fide position has committed a position limits to § 150.2(e). Nothing in this paragraph

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shall preclude the Commission, a section with respect to such aggregated (i) Exemption levels. Exemptions of designated contract market, or swap account or position. the type that conform to the exemptions execution facility from recognizing a (g) Delegation of authority to the the Commission identified in: bona fide hedging transaction or Director of the Division of Market (A) Sections 150.3(a)(1)(i), (a)(2)(i), position for the former holder of such a Oversight. (1) The Commission hereby and (a)(4) through (5) may be granted at risk management exemption if the delegates, until it orders otherwise, to a level that exceeds the level of the position complies with the definition of the Director of the Division of Market applicable federal limit in § 150.2; bona fide hedging transaction or Oversight, or such other employee or (B) Sections 150.3(a)(1)(ii) and position under this part, including employees as the Director may designate (a)(2)(ii) may be granted at a level that appendices hereto. from time to time: exceeds the level of the applicable (d) Recordkeeping. (1) Persons who (i) The authority in paragraph (a)(3) of federal limit in § 150.2, provided that, avail themselves of exemptions or relief this section to provide exemptions in the exemption is first approved in under this section shall keep and circumstances of financial distress; accordance with § 150.3(b) or 150.9, as maintain complete books and records (ii) The authority in paragraph (b)(2) applicable; (C) Section 150.3(a)(3) may be granted concerning all details of their related of this section to request additional at a level that exceeds the level of the cash, forward, futures, options on information with respect to a request for applicable federal limit in § 150.2, futures, and swap positions and a bona fide hedging transaction or provided that, the Commission has first transactions, including anticipated position recognition or spread approved such exemption pursuant to a requirements, production and royalties, exemption; contracts for services, cash commodity request submitted under § 140.99 of this (iii) The authority in paragraph products and by-products, cross- chapter; and (b)(3)(ii)(B) of this section to, if commodity hedges, and records of bona (D) Exemptions of the type that do not applicable, determine a commercially fide hedging swap counterparties, and conform to the exemptions identified in reasonable amount of time required for shall make such books and records § 150.3(a) shall be granted at a level that a person to bring its position within the available to the Commission upon is capped at the level of the applicable federal speculative position limits: request under paragraph (e) of this federal limit in § 150.2 and that section. (iv) The authority in paragraph (b)(4) complies with paragraph (a)(2)(ii)(C) of (2) Any person that relies on a of this section to make a determination this section, unless the Commission has representation received from another whether to recognize a position as a first approved such exemption pursuant person that a swap qualifies as a pass- bona fide hedging transaction or to § 150.3(b) or pursuant to a request through swap under paragraph (2) of the position or to grant a spread exemption; submitted under § 140.99. definition of bona fide hedging and (ii) Application for exemption from transaction or position in § 150.1 shall (v) The authority in paragraph (b)(2) exchange-set limits. A designated keep and make available to the or (b)(5) of this section to request that contract market or swap execution Commission upon request all relevant a person submit updated materials or facility that is a trading facility that books and records supporting such a renew their request with the elects to grant exemptions under representation, including any record the Commission. paragraph (a)(2)(i) of this section: person intends to use to demonstrate (2) The Director of the Division of (A) (1) Except as provided in that the pass-through swap is a bona Market Oversight may submit to the paragraph (a)(2)(ii)(A)(2) of this section, fide hedging transaction or position, for Commission for its consideration any shall require traders to file an a period of at least two years following matter which has been delegated in this application requesting such exemption the expiration of the swap. section. in advance of the date that such position (3) All books and records required to (3) Nothing in this section prohibits would be in excess of the limits then in be kept pursuant to this section shall be the Commission, at its election, from effect. Such application shall include kept in accordance with the exercising the authority delegated in any information needed to enable the requirements of § 1.31 of this chapter. this section. designated contract market or swap (e) Call for information. Upon call by ■ 21. Revise § 150.5 to read as follows: execution facility to determine, and the the Commission, the Director of the Commission to verify, whether the facts Division of Enforcement or the § 150.5 Exchange-set speculative position and circumstances demonstrate that the Director’s delegate, any person claiming limits and exemptions therefrom. designated contract market or swap an exemption from speculative position (a) Requirements for exchange-set execution facility may grant an limits under this section shall provide limits on commodity derivative exemption. Any application for a bona to the Commission such information as contracts subject to federal limits set fide hedging transaction or position specified in the call relating to the forth in § 150.2—(1) Exchange-set limits. shall include a description of the positions owned or controlled by that For any commodity derivative contract applicant’s activity in the cash markets person; trading done pursuant to the that is subject to a federal speculative and swaps markets for the commodity claimed exemption; the commodity position limit under § 150.2, a underlying the position for which the derivative contracts or cash market designated contract market or swap application is submitted, including, but positions which support the claimed execution facility that is a trading not limited to, information regarding the exemption; and the relevant business facility shall set a speculative position offsetting cash positions. relationships supporting a claimed limit no higher than the level specified (2) The designated contract market or exemption. in § 150.2. swap execution facility may, however, (f) Aggregation of accounts. Entities (2) Exemptions to exchange-set limits. adopt rules that allow a person, due to required to aggregate accounts or A designated contract market or swap demonstrated sudden or unforeseen positions under § 150.4 shall be execution facility that is a trading increases in its bona fide hedging needs, considered the same person for the facility may grant exemptions from any to file an application to request a purpose of determining whether they speculative position limits it sets under recognition of a bona fide hedging are eligible for an exemption under paragraph (a)(1) of this section in transaction or position within five paragraphs (a)(1) through (4) of this accordance with the following: business days after the person

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established the position that exceeded a trading facility shall require and by the type of limit as spot month, the applicable exchange-set speculative compliance with spot month exchange- single month, or all-months-combined, position limit. set speculative position limits for pre- as applicable; (3) The designated contract market or existing positions in commodity (K) Any size limitations or conditions swap execution facility must require derivative contracts other than pre- established for a spread exemption or that any application filed pursuant to enactment swaps and transition period other exemption; and paragraph (a)(2)(ii)(A)(2) of this section swaps. (L) For bona fide hedging transactions include an explanation of the (ii) Pre-existing positions in a non- or positions, a concise summary of the circumstances warranting the sudden or spot month. A single month or all- applicant’s activity in the cash markets unforeseen increases in bona fide months-combined speculative position and swaps markets for the commodity hedging needs. limit established under paragraph (a)(1) underlying the commodity derivative (4) If an application filed pursuant to of this section shall not apply to any position for which the application was paragraph (a)(2)(ii)(A)(2) of this section pre-existing positions in commodity submitted. is denied, the applicant must bring its derivative contracts, provided however, (ii) The designated contract market or position within the designated contract that if such position is not a pre- swap execution facility shall submit to market or swap execution facility’s enactment swap or transition period the Commission the information speculative position limits within a swap, then such position shall be required by paragraph (a)(4)(i) of this commercially reasonable time as attributed to the person if the person’s section: determined by the designated contract position is increased after the effective (A) As specified by the Commission market or swap execution facility. date of such limit. on the Forms and Submissions page at (5) The designated contract market, (4) Monthly reports detailing the www.cftc.gov; and swap execution facility, or Commission disposition of each application. (i) For (B) Using the format, coding structure, will not determine that the person commodity derivative contracts subject and electronic data transmission holding the position has committed a to federal speculative position limits, procedures approved in writing by the position limits violation during the the designated contract market or swap Commission. (b) Requirements for exchange-set period of the designated contract market execution facility shall submit to the limits on commodity derivative or swap execution facility’s review nor Commission a report each month contracts in a physical commodity that once the designated contract market or showing the disposition of any are not subject to the limits set forth in swap execution facility has issued its exemption application, including the § 150.2—(1) Exchange-set spot month determination; recognition of any position as a bona limits—(i) Spot month speculative (B) Shall require, for any such fide hedging transaction or position, the position limit levels. For any commodity exemption granted, that the trader re- exemption of any spread transaction or derivative contract subject to paragraph apply for the exemption at least on an other position, the renewal, revocation, (b) of this section, a designated contract annual basis; or modification of a previously granted (C) May, in accordance with the market or swap execution facility that is recognition or exemption, or the designated contract market or swap a trading facility shall establish rejection of any application, as well as execution facility’s rules, deny any such speculative position limits for the spot the following details: application, or limit, condition, or (A) The date of disposition; month no greater than 25 percent of the revoke any such exemption, at any time (B) The effective date of the estimated spot month deliverable after providing notice to the applicant, disposition; supply, calculated separately for each and shall take into account whether the (C) The expiration date of any month to be listed. requested exemption would result in recognition or exemption; (ii) Additional sources for positions that would not be in accord (D) Any unique identifier(s) the compliance. Alternatively, a designated with sound commercial practices in the designated contract market or swap contract market or swap execution relevant commodity derivative market execution facility may assign to track facility that is a trading facility may and/or that would exceed an amount the application, or the specific type of submit rules to the Commission that may be established and liquidated recognition or exemption; establishing spot month speculative in an orderly fashion in that market; and (E) If the application is for an position limits other than as provided in (D) Notwithstanding paragraph enumerated bona fide hedging paragraph (b)(1)(i) of this section, (a)(2)(ii)(C) of this section, may require transaction or position, the name of the provided that the limits are set at a level persons with positions that comply enumerated bona fide hedging that is necessary and appropriate to either with the bona fide hedging transaction or position listed in reduce the potential threat of market transactions or positions definition or appendix A to this part; manipulation or price distortion of the the spread transactions definition in (F) If the application is for a spread contract’s or the underlying § 150.1, as applicable, to exit any such transaction listed in the spread commodity’s price or index. positions in excess of limits during the transaction definition in § 150.1, the (2) Exchange-set limits or lesser of the last five days of trading or name of the spread transaction as it is accountability outside of the spot the time period for the spot month in listed in § 150.1; month—(i) Non-spot month speculative such physical-delivery contract, or to (G) The identity of the applicant; position limit or accountability levels. otherwise limit the size of such (H) The listed commodity derivative For any commodity derivative contract position. Designated contract markets contract or position(s) to which the subject to paragraph (b) of this section, and swap execution facilities may refer application pertains; a designated contract market or swap to paragraph (b) of appendix B to part (I) The underlying cash commodity; execution facility that is a trading 150 for guidance regarding the (J) The maximum size of the facility shall adopt either speculative foregoing. commodity derivative position that is position limits or position (3) Exchange-set limits on pre-existing recognized by the designated contract accountability outside of the spot month positions—(i) Pre-existing positions in a market or swap execution facility as a at a level that is necessary and spot month. A designated contract bona fide hedging transaction or appropriate to reduce the potential market or swap execution facility that is position, specified by contract month threat of market manipulation or price

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distortion of the contract’s or the contract market or swap execution associated recordkeeping and reporting underlying commodity’s price or index. facility that is a trading facility shall regulations in this chapter. Nothing in (ii) Additional sources for have aggregation rules that conform to this part shall be construed to relieve compliance. A designated contract § 150.4. any contract market, swap execution market or swap execution facility that is (e) Requirements for submissions to facility, or its governing board from a trading facility may refer to the non- the Commission. A designated contract responsibility under section 5(d)(4) of exclusive acceptable practices in market or swap execution facility that is the Act to prevent manipulation and paragraph (b) of appendix F of this part a trading facility that adopts speculative corners. Further, nothing in this part to demonstrate to the Commission position limits and/or position shall be construed to affect any other compliance with the requirements of accountability levels pursuant to provisions of the Act or Commission paragraph (b)(2)(i) of this section. paragraphs (a) or (b) of this section, and/ regulations, including, but not limited (3) Look-alike contracts. For any or that elects to offer exemptions from to, those relating to actual or attempted newly listed commodity derivative any such levels pursuant to such manipulation, corners, squeezes, contract subject to paragraph (b) of this paragraphs, shall submit to the fraudulent or deceptive conduct, or to section that is substantially the same as Commission pursuant to part 40 of this prohibited transactions. an existing contract listed on a chapter rules establishing such levels designated contract market or swap and/or exemptions. To the extent any § 150.7 [Reserved]. execution facility that is a trading such designated contract market or ■ 23. Add and reserve § 150.7. ■ facility, a designated contract market or swap execution facility adopts 24. Add § 150.8 to read as follows: swap execution facility that is a trading speculative position limit levels, such § 150.8 Severability. facility listing such newly listed part 40 submission shall also include If any provision of this part, or the contract shall adopt spot month, the methodology by which such levels application thereof to any person or individual month, and all-months- are calculated, and the designated circumstances, is held invalid, such combined speculative position limits contract market or swap execution invalidity shall not affect the validity of comparable to those of the existing facility shall review such speculative other provisions or the application of contract. Alternatively, if such position limit levels regularly for such provision to other persons or designated contract market or swap compliance with this section and circumstances that can be given effect execution facility seeks to adopt update such speculative position limit without the invalid provision or speculative position limits that are not levels as needed. application. comparable to those of the existing (f) Delegation of authority to the ■ 25. Add § 150.9 to read as follows: contract, such designated contract Director of the Division of Market market or swap execution facility shall Oversight—(1) Commission delegations. § 150.9 Process for recognizing non- demonstrate to the Commission how the The Commission hereby delegates, until enumerated bona fide hedging transactions levels comply with paragraphs (b)(1) it orders otherwise, to the Director of the or positions with respect to federal speculative position limits. and/or (b)(2) of this section. Division of Market Oversight, or such (4) Exemptions to exchange-set limits. other employee or employees as the For purposes of federal speculative A designated contract market or swap Director may designate from time to position limits, a person with a position execution facility that is a trading time, the authority in paragraph (a)(4)(ii) in a referenced contract seeking facility may grant exemptions from any of this section to provide instructions recognition of such position as a non- speculative position limits it sets under regarding the submission to the enumerated bona fide hedging paragraphs (b)(1) or (b)(2) of this section Commission of information required to transaction or position, in accordance in accordance with the following: be reported, pursuant to paragraph with § 150.3(a)(1)(ii), shall submit an (i) Traders shall be required to apply (a)(4)(i) of this section, by a designated application to the Commission, to the designated contract market or contract market or swap execution pursuant to § 150.3(b), or submit an swap execution facility for any such facility, to specify the manner for application to a designated contract exemption from its speculative position submitting such information on the market or swap execution facility in accordance with this section. If such limit rules; and Forms and Submissions page at person submits an application to a (ii) A designated contract market or www.cftc.gov and to determine the designated contract market or swap swap execution facility that is a trading format, coding structure, and electronic execution facility in accordance with facility may deny any such application, data transmission procedures for this section, and the designated contract or limit, condition, or revoke any such submitting such information. exemption, at any time after providing (2) Commission consideration of market or swap execution facility, with notice to the applicant, and shall take delegated matter. The Director of the respect to its own speculative position into account whether the requested Division of Market Oversight may limits established pursuant to § 150.5(a), exemption would result in positions submit to the Commission for its recognizes the person’s position as a that would not be in accord with sound consideration any matter which has non-enumerated bona fide hedging commercial practices in the relevant been delegated in this section. transaction or position, then the person commodity derivative market and/or (3) Commission authority. Nothing in may also exceed the applicable federal would exceed an amount that may be this section prohibits the Commission, speculative position limit for such established and liquidated in an orderly at its election, from exercising the position, in accordance with paragraph fashion in that market. authority delegated in this section. (e) of this section. The designated (c) Requirements for security futures ■ 22. Revise § 150.6 to read as follows: contract market or swap execution products. For security futures products, facility may approve such applications speculative position limits and position § 150.6 Scope. only if the designated contract market or accountability requirements are This part shall only be construed as swap execution facility complies with specified in § 41.25 of this chapter. having an effect on speculative position the conditions set forth in paragraphs (a) (d) Rules on aggregation. For limits set by the Commission or by a through (e) of this section. commodity derivative contracts in a designated contract market or swap (a) Approval of rules. The designated physical commodity, a designated execution facility, including any contract market or swap execution

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facility maintains rules, consistent with (v) Any other information the such position would be in excess of the the requirements of this section and designated contract market or swap applicable federal speculative position approved by the Commission pursuant execution facility requires, in its limits. to § 40.5 of this chapter, that establish discretion, to verify that the position (4) Exchange revocation authority. application processes and conditions for complies with paragraph (b)(2) of this The designated contract market or swap recognizing bona fide hedging section, as applicable. execution facility retains its authority to transactions or positions. (2) Timing of application. (i) Except as limit, condition, or revoke, at any time (b) Prerequisites for a designated provided in paragraph (c)(2)(ii) of this after providing notice to the applicant, contract market or swap execution section, the designated contract market any bona fide hedging transaction or facility to recognize bona fide hedging or swap execution facility requires the position recognition for purposes of the transactions or positions in accordance applicant to submit an application and designated contract market or swap with this section. (1) The designated receive a notice of approval of such execution facility’s speculative position contract market or swap execution application prior to the date that the limits established under § 150.5(a), for facility lists the applicable referenced position for which such application was any reason as determined in the contract for trading; submitted would be in excess of the discretion of the designated contract (2) The position meets the definition applicable federal speculative position market or swap execution facility, of bona fide hedging transactions or limits. including if the designated contract positions in section 4a(c)(2) of the Act (ii) A designated contract market or market or swap execution facility and the definition of bona fide hedging swap execution facility may, however, determines that the position no longer transactions or positions in § 150.1; and adopt rules that allow a person to, due meets the conditions set forth in (3) The designated contract market or to demonstrated sudden or unforeseen paragraph (b) of this section, as swap execution facility does not increases in its bona fide hedging needs, applicable. recognize as a bona fide hedging file an application with the designated (d) Recordkeeping. (1) The designated transaction or position any position contract market or swap execution contract market or swap execution involving a commodity index contract facility to request a recognition of a facility keeps full, complete, and and one or more referenced contracts, bona fide hedging transaction or systematic records, which include all including exemptions known as risk position within five business days after pertinent data and memoranda, of all management exemptions. the person established the position that activities relating to the processing of (c) Application process. The exceeded the applicable federal such applications and the disposition designated contract market or swap speculative position limit. thereof. Such records include: execution facility’s application process (A) The designated contract market or (i) Records of the designated contract meets the following conditions: swap execution facility must require market or swap execution facility’s (1) Required application information. that any application filed pursuant to recognition of any derivative position as The designated contract market or swap paragraph (c)(2)(ii) of this section a bona fide hedging transaction or execution facility requires the applicant include an explanation of the position, revocation or modification of to provide, and can obtain from the circumstances warranting the sudden or any such recognition, or the rejection of applicant, all information to enable the unforeseen increases in bona fide an application; designated contract market or swap hedging needs. (ii) All information and documents execution facility to determine, and the (B) If an application filed pursuant to submitted by an applicant in connection Commission to verify, whether the facts paragraph (c)(2)(ii) of this section is with its application, including and circumstances demonstrate that the denied by the designated contract documentation and information that is designated contract market or swap market, swap execution facility, or submitted after the disposition of the execution facility may recognize a Commission, the applicant must bring application, and any withdrawal, position as a bona fide hedging its position within the applicable supplementation, or update of any transaction or position, including the federal speculative position limits application; following: within a commercially reasonable time (iii) Records of oral and written (i) A description of the position in the as determined by the Commission in communications between the commodity derivative contract for consultation with the applicant and the designated contract market or swap which the application is submitted, applicable designated contract market or execution facility and the applicant in including but not limited to, the name swap execution facility. connection with such application; and of the underlying commodity and the (C) The designated contract market, (iv) All information and documents in derivative position size; swap execution facility, or Commission connection with the designated contract (ii) Information to demonstrate why will not determine that the person market or swap execution facility’s the position satisfies the requirements of holding the position has committed a analysis of, and action(s) taken with section 4a(c)(2) of the Act and the position limits violation during the respect to, such application. definition of bona fide hedging period of the designated contract (2) All books and records required to transaction or position in § 150.1, market, swap execution facility, or be kept pursuant to this section shall be including factual and legal analysis; Commission’s review nor once a kept in accordance with the (iii) A statement concerning the determination has been issued. requirements of § 1.31 of this chapter. maximum size of all gross positions in (3) Renewal of applications. The (e) Process for a person to exceed commodity derivative contracts for designated contract market or swap federal speculative position limits on a which the application is submitted; execution facility requires each referenced contract—(1) Notification to (iv) A description of the applicant’s applicant to reapply for such the Commission. The designated activity in the cash markets and the recognition or exemption at least on an contract market or swap execution swaps markets for the commodity annual basis by updating the original facility must submit to the Commission underlying the position for which the application, and to receive a notice of a notification of each initial application is submitted, including, but approval of the renewal from the determination to recognize a bona fide not limited to, information regarding the designated contract market or swap hedging transaction or position in offsetting cash positions; and execution facility prior to the date that accordance with this section,

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concurrently with the notice of such determine whether the position for purposes of federal speculative position determination the designated contract which the application is submitted limits and require the person to reduce market or swap execution facility meets the conditions set forth in the derivatives position within a provides to the applicant. paragraph (b) of this section, the commercially reasonable time as (2) Notification requirements. The Commission shall notify the applicable determined by the Commission in notification in paragraph (e)(1) of this designated contract market or swap consultation with the applicant and the section shall include, at a minimum, the execution facility and applicant of the applicable designated contract market or following information: Commission’s determination or request swap execution facility, or otherwise (i) Name of the applicant; for any supplemental information come into compliance; (ii) Brief description of the bona fide required, and provide an opportunity (ii) The Commission shall include in hedging transaction or position being for the applicant to respond with any its notification a brief explanation of the recognized; supplemental information. nature of the issues raised and the (iii) Name of the contract(s) relevant (6) Commission determination. If the specific provisions of the Act or the to the recognition; Commission determines that a position Commission’s regulations with which (iv) The maximum size of the position for which the application is submitted the position or application is, or appears that may exceed federal speculative does not meet the conditions set forth in to be, inconsistent; and position limits; paragraph (b) of this section, the (iii) The Commission shall not (v) The effective date and expiration Commission shall: determine that the person holding the date of the recognition; (i) Notify the designated contract position has committed a position limits (vi) An indication regarding whether market or swap execution facility and violation during the period of the the position may be maintained during applicant, and, after providing an Commission’s review nor once the the last five days of trading during the opportunity for the applicant to Commission has issued its spot month, or the time period for the respond, the Commission may, in its determination, provided the person spot month; and discretion, reject the exchange’s reduced the derivatives position within (vii) A copy of the application and determination for purposes of federal a commercially reasonable time, as any supporting materials. speculative position limits and, as determined by the Commission in (3) Exceeding federal speculative applicable, require the person to reduce consultation with the applicant and the position limits on referenced contracts. the derivatives position within a applicable designated contract market or A person may exceed federal commercially reasonable time, as swap execution facility, or otherwise speculative position limits on a determined by the Commission in came into compliance. referenced contract ten business days consultation with the applicant and the (g) Delegation of authority to the after the designated contract market or applicable designated contract market or Director of the Division of Market swap execution facility issues the swap execution facility, or otherwise Oversight—(1) Commission delegations. notification required pursuant to come into compliance; and The Commission hereby delegates, until paragraph (e)(1) of this section, unless (ii) The Commission will not it orders otherwise, to the Director of the the Commission notifies the designated determine that the person holding the Division of Market Oversight, or such contract market or swap execution position has committed a position limits other employee or employees as the facility and the applicant otherwise, violation during the period of the Director may designate from time to pursuant to paragraph (e)(5) of this Commission’s review nor once the time, the authority in paragraph (e)(5) of section, before the ten business day Commission has issued its this section, to request additional period expires. determination. information from the applicable (4) Exceeding federal speculative (f) Commission revocation of designated contract market or swap position limits on referenced contracts approved applications. (1) If a execution facility and applicant; due to sudden or unforeseen designated contract market or swap (2) Commission consideration of circumstances. If a person files an execution facility limits, conditions, or delegated matter. The Director of the application for a recognition of a bona revokes any recognition of a bona fide Division of Market Oversight may fide hedging transaction or position in hedging transaction or position for submit to the Commission for its accordance with paragraph (c)(2)(ii) of purposes of the designated contract consideration any matter which has this section, then such person may rely market or swap execution facility’s been delegated in this section. on the designated contract market or speculative position limits established (3) Commission authority. Nothing in swap execution facility’s determination under § 150.5(a), then such recognition this section prohibits the Commission, to grant such recognition for purposes of will also be deemed limited, at its election, from exercising the federal speculative position limits two conditioned, or revoked for purposes of authority delegated in this section. business days after the designated federal speculative position limits. ■ 26. Add appendices A through F to contract market or swap execution (2) If the Commission determines, at read as follows: facility issues the notification required any time, that a position that has been pursuant to paragraph (e)(1) of this recognized as a bona fide hedging Appendix A to Part 150—List of section, unless the Commission notifies transaction or position has been granted Enumerated Hedges the designated contract market or swap for a position that, for purposes of Persons that follow specific practices execution facility and the applicant federal speculative position limits, is no outlined in the enumerated hedges in this otherwise, pursuant to paragraph (e)(5) longer consistent with section 4a(c)(2) of appendix shall establish compliance with the of this section, before the two business the Act or the definition of bona fide bona fide hedging transactions or positions day period expires. hedging transaction or position in definition in § 150.1 and with § 150.3(a)(1)(i) (5) Commission stay of pending § 150.1, the following applies: without being required to request approval applications and requests for additional (i) The Commission shall notify the under § 150.3 or § 150.9 prior to exceeding the applicable federal speculative position information. If the Commission person holding the position and, after limit. All other persons must request determines to stay an application that providing an opportunity to respond, approval pursuant to § 150.3 or § 150.9 prior requires additional time to analyze, or the Commission may, in its discretion, to exceeding the applicable federal request additional information to revoke the exchange’s determination for speculative position limit.

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Compliance with an enumerated bona fide (7) Hedges of cash commodity fixed-price regulatory requirements are met, including hedge listed below does not, however, sales contracts. Long positions in commodity that the position is economically appropriate diminish or replace, in any event, the derivative contracts that do not exceed in to the reduction of risks in the conduct and obligations and requirements of the person to quantity the sum of the person’s fixed-price management of a commercial enterprise and comply with the regulations provided under sales contracts in the contract’s underlying otherwise satisfies the bona fide hedging this part 150. The enumerated bona fide cash commodity and the quantity equivalent definition in § 150.1, and provided further hedges do not state the exclusive means for of fixed-price sales contracts of the cash that: establishing compliance with the bona fide products and by-products of such (A) The manner in which the person hedging transactions or positions definition commodity. measures risk is consistent and follows in § 150.1 or with the requirements of (8) Hedges by agents. Long or short historical practice for that person; § 150.3(a)(1). positions in commodity derivative contracts (B) The person is not measuring risk on a (a) Enumerated hedges. The following by an agent who does not own or has not gross basis to evade the speculative position positions comply with the bona fide hedging contracted to sell or purchase the commodity limits in § 150.2 or the aggregation rules in transactions or positions definition in derivative contract’s underlying cash § 150.4; § 150.1: commodity at a fixed price, provided that the (C) The person is able to demonstrate (1) Hedges of unsold anticipated agent is responsible for merchandising the compliance with paragraphs (A) and (B) production. Short positions in commodity cash positions that are being offset in upon the request of the Commission and/or derivative contracts that do not exceed in commodity derivative contracts and the agent of a designated contract market, including by quantity the person’s unsold anticipated has a contractual arrangement with the providing information regarding the entities production of the contract’s underlying cash person who owns the commodity or holds with which the person aggregates positions; commodity. the cash market commitment being offset. and (2) Hedges of offsetting unfixed-price cash (9) Offsets of commodity trade options. (D) A designated contract market or swap commodity sales and purchases. Both short Long or short positions in commodity execution facility that recognizes a particular and long positions in commodity derivative derivative contracts that do not exceed in gross hedging position as bona fide pursuant contracts that do not exceed in quantity the quantity, on a futures-equivalent basis, a to § 150.9 documents the justifications for amount of the contract’s underlying cash position in a commodity trade option that doing so, and maintains records of such commodity that has been both bought and meets the requirements of § 32.3 of this justifications in accordance with § 150.9(d). sold by the same person at unfixed prices: chapter. Such commodity trade option (b) Guidance regarding positions held (A) Basis different delivery months in the transaction, if it meets the requirements of during the spot period. Section same commodity derivative contract; or § 32.3 of this chapter, may be deemed, for 150.5(a)(2)(ii)(D) confirms the existing (B) Basis different commodity derivative purposes of complying with this paragraph authority of designated contract markets and contracts in the same commodity, regardless (a)(9) of this appendix A, a cash commodity swap execution facilities to maintain rules of whether the commodity derivative purchase or sales contract as set forth in that subject positions that comply with the contracts are in the same calendar month. paragraphs (a)(6) or (a)(7) of this appendix A, bona fide hedging position or transaction (3) Hedges of anticipated mineral royalties. as applicable. definition in § 150.1 to a restriction that no Short positions in a person’s commodity (10) Hedges of unfilled anticipated such position is maintained in any physical- derivative contracts offset by the anticipated requirements. Long positions in commodity delivery commodity derivative contract change in value of mineral royalty rights that derivative contracts that do not exceed in during the lesser of the last five days of are owned by that person, provided that the quantity the person’s unfilled anticipated trading or the time period for the spot month royalty rights arise out of the production of requirements for the contract’s underlying in such physical-delivery contract (the ‘‘spot the commodity underlying the commodity cash commodity, for processing, period’’). Any such designated contract derivative contract. manufacturing, or use by that person, or for market or swap execution facility may waive (4) Hedges of anticipated services. Short or resale by a utility as it pertains to the utility’s any such restriction, including if: long positions in a person’s commodity obligations to meet the unfilled anticipated (1) The position complies with the bona derivative contracts offset by the anticipated demand of its customers for the customer’s fide hedging transaction or position change in value of receipts or payments due use. definition in § 150.1; or expected to be due under an executed (11) Hedges of anticipated merchandising. (2) There is an economically appropriate contract for services held by that person, Long or short positions in commodity need to maintain such position in excess of provided that the contract for services arises derivative contracts that offset the federal speculative position limits during the out of the production, manufacturing, anticipated change in value of the underlying spot period for such contract, and such need processing, use, or transportation of the commodity that a person anticipates relates to the purchase or sale of a cash commodity underlying the commodity purchasing or selling, provided that: commodity; and derivative contract. (A) The position in the commodity (3) The person wishing to exceed federal (5) Cross-commodity hedges. Positions in derivative contract does not exceed in position limits during the spot period: commodity derivative contracts described in quantity twelve months’ of current or (A) Intends to make or take delivery during paragraph (2) of the bona fide hedging anticipated purchase or sale requirements of that time period; transactions or positions definition in § 150.1 the same cash commodity that is anticipated (B) Provides materials to the designated or in paragraphs (a)(1) through (a)(4) and to be purchased or sold; and contract market or swap execution facility paragraphs (a)(6) through (a)(9) of this (B) The person is a merchant handling the supporting a classification of the position as appendix A may also be used to offset the underlying commodity that is subject to the a bona fide hedging transaction or position risks arising from a commodity other than the anticipatory merchandising hedge, and that and demonstrating facts and circumstances cash commodity underlying a commodity such merchant is entering into the position that would warrant holding such position in derivative contract, provided that the solely for purposes related to its excess of limits during the spot period; fluctuations in value of the position in the merchandising business and has a (C) Demonstrates cash-market exposure in- commodity derivative contract, or the demonstrated history of buying and selling hand that is verified by the designated commodity underlying the commodity the underlying commodity for its contract market or swap execution facility derivative contract, shall be substantially merchandising business. and that supports holding the position during related to the fluctuations in value of the the spot period; actual or anticipated cash position or pass- Appendix B to Part 150—Guidance on (D) Demonstrates that, for short positions, through swap. Gross Hedging Positions and Positions the delivery is feasible, meaning that the (6) Hedges of inventory and cash Held During the Spot Period person has the ability to deliver against the commodity fixed-price purchase contracts. short position (i.e., has inventory on hand in Short positions in commodity derivative (a) Guidance on gross hedging positions. a deliverable location and in a condition in contracts that do not exceed in quantity the (1) A person’s gross hedging positions may be which the commodity can be used upon sum of the person’s ownership of inventory deemed in compliance with the bona fide delivery); and and fixed-price purchase contracts in the hedging transactions or positions definition (E) Demonstrates that, for long positions, contract’s underlying cash commodity. in § 150.1, provided that all applicable the delivery is feasible, meaning that the

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person has the ability to take delivery at (a) Guidance. (1) As provided in paragraph commodities that are not the same or levels that are economically appropriate (i.e., (3) of the ‘‘referenced contract’’ definition in substantially the same and that is not a the delivery comports with the person’s § 150.1, the following types of contracts are location basis contract, a calendar spread demonstrated need for the commodity and not deemed referenced contracts, meaning contract, or an intercommodity spread the contract is the cheapest source for that such contracts are not subject to federal contract as such terms are defined in this commodity). limits and cannot be netted with positions in guidance, where: referenced contracts for purposes of federal Appendix C to Part 150—Guidance (i) A calendar spread contract means a limits: location basis contracts; commodity cash-settled agreement, contract, or Regarding the Referenced Contract index contracts; swap guarantees; and trade transaction that represents the difference Definition in § 150.1 options that meet the requirements of § 32.3 between the settlement price in one or a This appendix C provides guidance of this chapter. series of contract months of an agreement, regarding the ‘‘referenced contract’’ (2) Location basis contract. For purposes of contract, or transaction and the settlement definition in § 150.1, which provides in the referenced contract definition in § 150.1, price of another contract month or another paragraph (3) that the definition of referenced a location basis contract means a commodity series of contract months’ settlement prices contract does not include a location basis derivative contract that is cash-settled based for the same agreement, contract, or contract, a commodity index contract, or a on the difference in: transaction; and trade option that meets the requirements of (i) The price, directly or indirectly, of: (ii) An intercommodity spread contract § 32.3 of this chapter. The term referenced (A) A particular core referenced futures means a cash-settled agreement, contract, or contract is used throughout part 150 of the contract; or transaction that represents the difference Commission’s regulations to refer to contracts (B) A commodity deliverable on a between the settlement price of a referenced that are subject to federal limits. A position particular core referenced futures contract, contract and the settlement price of another in a contract that is not a referenced contract whether at par, a fixed discount to par, or a contract, agreement, or transaction that is is not subject to federal limits, and, as a premium to par; and based on a different commodity. consequence, cannot be netted with positions (ii) The price, at a different delivery in referenced contracts for purposes of location or pricing point than that of the Appendix D to Part 150—Commodities federal limits. This guidance is intended to same particular core referenced futures Listed as Substantially the Same for clarify the types of contracts that would contract, directly or indirectly, of: Purposes of the Term ‘‘Location Basis qualify as a location basis contract or (A) A commodity deliverable on the same Contract’’ As Used in the Referenced commodity index contract. particular core referenced futures contract, Contract Definition Compliance with this guidance does not whether at par, a fixed discount to par, or a diminish or replace, in any event, the premium to par; or The following table lists core referenced obligations and requirements of any person (B) A commodity that is listed in appendix futures contracts and commodities that are to comply with the regulations provided D to this part as substantially the same as a treated as substantially the same as a under this part, or any other part of the commodity underlying the same core commodity underlying a core referenced Commission’s regulations. The guidance is referenced futures contract. futures contract for purposes of the term for illustrative purposes only and does not (3) Commodity index contract. For ‘‘location basis contract’’ as used in the state the exclusive means for a contract to purposes of the referenced contract definition referenced contract definition under § 150.1, qualify, or not qualify, as a referenced in § 150.1, a commodity index contract and as discussed in the associated appendix, contract as defined in § 150.1, or to comply means an agreement, contract, or transaction Appendix C—Guidance Regarding the with any other provision in this part. based on an index comprised of prices of Referenced Contract Definition in § 150.1.

LOCATION BASIS CONTRACT LIST OF SUBSTANTIALLY THE SAME COMMODITIES

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

NYMEX Light Sweet Crude Oil fu- 1. Light Louisiana Sweet (LLS) NYMEX Argus LLS vs. WTI (Argus) Trade Month futures contract tures contract (CL): Crude Oil. (E5). NYMEX LLS (Argus) vs. WTI Financial futures contract (WJ). ICE Futures Europe Crude Diff—Argus LLS vs WTI 1st Line Swap fu- tures contract (ARK). ICE Futures Europe Crude Diff—Argus LLS vs WTI Trade Month Swap futures contract (ARL). NYMEX New York Harbor ULSD 1. Chicago ULSD ...... NYMEX Chicago ULSD (Platts) vs. NY Harbor ULSD Heating Oil fu- Heating Oil futures contract (HO): tures 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). ICE Futures Europe Diesel Diff- Gulf Coast vs Heating Oil 1st Line Swap futures contract (GOH). CME Clearing Europe Gulf Coast ULSD( Platts) vs. New York Heat- ing 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 NYMEX Los Angeles CARB Diesel (OPIS) vs. NY Harbor ULSD Spec ULSD (CARB no. 2 oil). Heating Oil futures contract (KL). 4. Gas Oil Deliverable in Antwerp, ICE Futures Europe Gasoil futures contract (G). Rotterdam, or Amsterdam Area.

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LOCATION BASIS CONTRACT LIST OF SUBSTANTIALLY THE SAME COMMODITIES—Continued

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

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 1. Chicago Unleaded 87 gasoline NYMEX Chicago Unleaded Gasoline (Platts) vs. RBOB Gasoline fu- contract (RB): tures contract (3C). NYMEX Group Three Unleaded Gasoline (Platts) vs. RBOB Gasoline futures contract (A8). 2. Gulf Coast Conventional NYMEX Gulf Coast CBOB Gasoline A1 (Platts) vs. RBOB Gasoline Blendstock for Oxygenated futures contract (CBA). Blending (CBOB) 87. NYMEX Gulf Coast Unl 87 (Argus) Up-Down futures contract (UZ). 3. Gulf Coast CBOB 87 (Summer NYMEX Gulf Coast CBOB Gasoline A2 (Platts) vs. RBOB Gasoline Assessment). futures contract (CRB). 4. Gulf Coast Unleaded 87 (Sum- NYMEX Gulf Coast 87 Gasoline M2 (Platts) vs. RBOB Gasoline fu- mer Assessment). tures contract (RVG). NYMEX Gulf Coast 87 Gasoline M2 (Platts) vs. RBOB Gasoline BALMO futures contract (GBB). NYMEX Gulf Coast 87 Gasoline M2 (Argus) vs. RBOB Gasoline BALMO futures contract (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 Refor- NYMEX Los Angeles CARBOB Gasoline (OPIS) vs. RBOB Gasoline mulated Blendstock for Oxygen- futures contract (JL). ate Blending (CARBOB) Regular. 7. Los Angeles California Refor- NYMEX Los Angeles CARBOB Gasoline (OPIS) vs. RBOB Gasoline mulated Blendstock for Oxygen- futures contract (JL). ate Blending (CARBOB) Pre- mium. 8. Euro-BOB OXY NWE Barges ... NYMEX RBOB Gasoline vs. Euro-bob Oxy NWE Barges (Argus) (1000mt) futures contract (EXR). CME Clearing Europe New York RBOB Gasoline (NYMEX) vs. Euro- pean 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).

Appendix E to Part 150—Speculative Position Limit Levels

Single-month Contract Spot month and all months

Legacy Agricultural: Chicago Board of Trade Corn (C) ...... 1,200 57,800. Chicago Board of Trade Oats (O) ...... 600 2,000. Chicago Board of Trade Soybeans (S) ...... 1,200 27,300. Chicago Board of Trade Soybean Meal (SM) ...... 1,500 16,900. Chicago Board of Trade Soybean Oil (SO) ...... 1,100 17,400. Chicago Board of Trade Wheat (W) ...... 1,200 19,300. Chicago Board of Trade KC HRW Wheat (KW) ...... 1,200 12,000. Minneapolis Grain Exchange Hard Red Spring Wheat (MWE) ...... 1,200 12,000. ICE Futures U.S. Cotton No. 2 (CT) ...... 1,800 11,900. Other Agricultural: Chicago Board of Trade Rough Rice (RR) ...... 800 Not Applicable. Chicago Mercantile Exchange Live Cattle (LC) ...... 1 600/300/200 Not Applicable. ICE Futures U.S. Cocoa (CC) ...... 4,900 Not Applicable. ICE Futures U.S. Coffee C (KC) ...... 1,700 Not Applicable. ICE Futures U.S. FCOJ–A (OJ) ...... 2,200 Not Applicable. ICE Futures U.S. Sugar No. 11 (SB) ...... 25,800 Not Applicable.

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Single-month Contract Spot month and all months

ICE Futures U.S. Sugar No. 16 (SF) ...... 6,400 Not Applicable. Energy: New York Mercantile Exchange Henry Hub Natural Gas (NG) ...... 2 2,000 Not Applicable. New York Mercantile Exchange Light Sweet Crude Oil (CL) ...... 3 6,000/5,000/ Not Applicable. 4,000 New York Mercantile Exchange NY Harbor ULSD (HO) ...... 2,000 Not Applicable. New York Mercantile Exchange RBOB Gasoline (RB) ...... 2,000 Not Applicable. Metal: Commodity Exchange, Inc. Copper (HG) ...... 1,000 Not Applicable. Commodity Exchange, Inc. Gold (GC) ...... 6,000 Not Applicable. Commodity Exchange, Inc. Silver (SI) ...... 3,000 Not Applicable. New York Mercantile Exchange Palladium (PA) ...... 50 Not Applicable. New York Mercantile Exchange Platinum (PL) ...... 500 Not Applicable.

Appendix F to Part 150—Guidance on, (iii) 5,000 contracts (scaled-down Appendix 2—Supporting Statement of and Acceptable Practices in, proportionally to the notional quantity per Chairman Heath Tarbert contract relative to the typical cash-market Compliance With § 150.5 I am pleased to support the Commission’s transaction if the notional quantity per The following are guidance and acceptable proposed rule on limits for speculative contract is larger than the typical cash market practices for compliance with § 150.5. positions in futures and derivatives markets. Compliance with the acceptable practices transaction, and scaled up proportionally to Today’s proposal is a pragmatic approach and guidance does not diminish or replace, the notional quantity per contract relative to that will protect our agricultural, energy, and in any event, the obligations and the typical cash-market transaction if the metals markets from excessive speculation. requirements of the person to comply with notional quantity per contract is smaller than But just as importantly, it will ensure fair and the other regulations provided under this the typical cash market transaction); or easy access to these markets for businesses part. The acceptable practices and guidance (iv) 10 percent of the average combined producing, consuming, and wholesaling are for illustrative purposes only and do not futures and delta-adjusted option month-end commodities under our jurisdiction. state the exclusive means for establishing open interest in the contract for the most When I came to the Commission, I set out compliance with § 150.5. several strategic goals. Among them is to recent calendar year up to 50,000 contracts, (a) Acceptable practices for compliance regulate our derivatives markets to promote with § 150.5(b)(2)(i) regarding exchange-set with a marginal increase of 2.5 percent of the interests of all Americans. Another goal limits or accountability outside of the spot open interest thereafter. is to enhance the regulatory experience of month. A designated contract market or swap (2) Non-spot month position market participants. The proposal we are execution facility that is a trading facility accountability. For any commodity issuing today will deliver on both. We also may satisfy § 150.5(b)(2)(i) by complying derivative contract subject to § 150.5(b), a drew from each of our agency core values to with either of the following acceptable designated contract market or swap craft it—commitment, forward-thinking, practices: execution facility that is a trading facility teamwork, and clarity. Clarity is of particular (1) Non-spot month speculative position adopts position accountability, as defined in importance here because, ultimately, markets limits. For any commodity derivative § 150.1. and their participants deserve regulatory contract subject to § 150.5(b), a designated certainty. We provide that today. contract market or swap execution facility (b) [Reserved] that is a trading facility sets individual single Making Our Markets Work for the American month or all-months-combined levels no PART 151—[REMOVED AND Economy greater than any one of the following: RESERVED] If adopted, our proposal will help ensure (i) The average of historical position sizes that futures markets in agricultural, energy held by speculative traders in the contract as ■ 27. Under the authority of section and metals commodities work for American a percentage of the average combined futures 8a(5) of the Commodity Exchange Act, households and businesses. Farmers, and delta-adjusted option month-end open 7 U.S.C. 12a(5), remove and reserve part ranchers, energy producers, utilities, and interest for that contract for the most recent 151. manufacturers are the backbone of the calendar year; American economy. Our derivatives markets (ii) The level of the spot month limit for Issued in Washington, DC, on January 31, generally, and in particular the markets the contract; 2020, by the Commission. addressed in this proposal, are designed specifically to allow these businesses to Christopher Kirkpatrick, 1 Step-down spot month limits would be for hedge their exposure to price changes. positions net long or net short as follows: 600 Secretary of the Commission. This Commission’s proposal will protect contracts at the close of trading on the first business Americans from some of the most nefarious day following the first Friday of the contract month; Note: The following appendices will not machinations in our derivatives markets. 300 contracts at the close of trading on the business appear in the Code of Federal Regulations. First, capping speculative positions in the day prior to the last five trading days of the contract month; and 200 contracts at the close of trading on covered derivatives contracts will help the business day prior to the last two trading days Appendices to Position Limits for prevent cornering and squeezing. Such of the contract month. Derivatives—Commission Voting manipulative schemes can cause artificial 2 See § 150.3 regarding the conditional spot Summary, Chairman’s Statement, and prices and can injure the users of month limit exemption for cash-settled positions in Commissioners’ Statements commodities linked to the futures markets. natural gas. Limiting speculative positions can also 3 Step-down spot month limits would be for Appendix 1—Commission Voting reduce the likelihood of chaotic price swings positions net long or net short as follows: 6,000 Summary caused by speculative gamesmanship. In contracts at the close of trading three business days effect, position limits should help ensure that prior to the last trading day of the contract; 5,000 On this matter, Chairman Tarbert and contracts at the close of trading two business days prices in our markets reflect real supply and prior to the last trading day of the contract; and Commissioners Quintenz and Stump voted in demand. 4,000 contracts at the close of trading one business the affirmative. Commissioners Behnam and Position limits are not a solution born day prior to the last trading day of the contract. Berkovitz voted in the negative. inside the Washington Beltway and imposed

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on the market from afar. Instead, they are one commodities. The greatest risk of a position justification. Subsequent proposals in 2013 of many tools that exchanges have used since limits rule is that hedgers are caught in the and 2016 were never finalized, following the 19th century to mitigate the potentially limits aimed at speculators. This could pushback from market participants about damaging effects of excessive speculation. reduce their ability to protect themselves access to bona fide hedge exemptions. The They are a pragmatic, Midwestern solution to from risk, which could in turn negatively Commission and staff have worked with a real-world problem. Recognizing the impact the broader economy. If a farmer diligence and good faith to solve this puzzle. usefulness of exchange-set limits, the cannot offset a risk on next year’s crop—if a There are difficult, often competing interests Commission has worked collaboratively with refiner cannot offset a risk on crude oil for to address in this seemingly simple rule. If our exchanges since 1981 to put sensible a new plant—or if a wholesaler cannot offset an easy solution exists, I have no doubt that position limits and accountability levels on risks on inventory it is buying, those the Commission would have found it. speculative positions in all physical businesses will not expand their operations. Today’s proposal is the culmination of ten commodity futures markets. Any position limits rule must therefore be years of effort across four Chairmen’s tenures. Our proposal would also end the ‘‘risk written with those hedging needs in mind. I sincerely thank my predecessors, as well as management’’ exemption that has allowed Congress and the American people expect the Commission staff, who have worked so banks, hedge funds, and trading firms to take nothing less. The proposal addresses those large and purely speculative positions in hard for so long to strike the right balance. needs through (i) a broad exemption for Each proposal and every piece of feedback agricultural markets. Nearly a decade ago, ‘‘bona fide’’ hedging, and (ii) a streamlined has helped improve the proposal before the Congress directed the Commission to address and non-intrusive process for recognizing Commission today. I believe that the this issue. Today we are acting. those exemptions. proposal offers the pragmatic, workable Some observers have gone so far as to call On the first point, the proposal will expand solution that would protect markets from position limits ‘‘at best, a cure for a disease the types of hedging strategies that are corners and squeezes while preserving the that does not exist or a placebo for one that presumed to meet the bona fide hedging 1 does.’’ I respectfully disagree. To be sure, definition—and therefore be eligible for an ability of American businesses to manage position limits are not a silver bullet against exemption from position limits. For the first their risks. the damaging impact of excessive speculative time, we have included anticipated Putting the Burden in the Right Place activity. But I also believe, as did Congress merchandising, meaning that wholesalers Finally, I want to draw attention to one when it amended the Commodity Exchange and middlemen connecting producers and fundamental shift in approach between prior Act, that position limits can help to consumers could more readily hedge their position limits rules and the present ‘‘diminish, eliminate, or prevent’’ potential risks. We have also expanded the definition damage to the commodities markets that are to conform to the hedging strategies that are proposal. Previously, the Commission had so critical to our real economy. common in energy markets. This will ensure read the Commodity Exchange Act to require Still, setting limits requires balancing the that the new federal speculative limits on federal limits to be placed on every futures competing need for liquidity in our markets energy markets do not inadvertently contract for a physical commodity. This against the potential for disruptive undermine the producers, refiners, pipeline would have required the Commission to speculative positions. I believe that the spot operators, and utilities that keep this country evaluate approximately 1,200 individual month levels we are proposing are reasonably running. contracts to determine the appropriate levels. calibrated. They are based on the current rule On the second point, we have built on The 2011 position limits rule was of thumb that limits should be no more than prior proposals to create a practical and challenged in court on this ground and was 25 percent of the deliverable supply of the efficient way for hedgers to avail themselves struck down. The court found that the statute referenced commodity, in order to prevent of the bona fide hedging exemption. Creating was ambiguous about whether the corners and squeezes that everyone can agree burdensome red tape or slowing down Commission must impose limits on all are bad for the market. approvals to take on hedging positions could futures, or whether it should impose limits For the nine grain futures contracts result in lost business opportunities for the only ‘‘as the Commission finds are currently subject to position limits,2 revising participants we are called to protect. necessary[.]’’ The court said that ‘‘it is non-spot limits required the Commission to For parties whose hedging needs fit within incumbent upon the agency not to rest consider an additional complication. the enumerated list, they could exceed simply on its parsing of the statutory Eliminating the risk management exemption language. It must bring its experience and could potentially take away a source of federal position limits without requesting approval from the Commission. They also expertise to bear in light of competing liquidity further out the curve. For a farmer interests at stake to resolve the ambiguities in who needs to hedge the price risk on crops would not need to submit information on their cash market positions—a duplicative the statute.’’ 3 that are still in the ground, a bank with a risk The Commission is now bringing its management exemption may be the only and burdensome exercise that is better experience and expertise to bear on this willing buyer. To mitigate the impact of handled by the exchanges. matter. We have taken a big picture approach eliminating the risk management exemption, For parties whose hedging needs do not fit to determine when position limits are in fact we have raised the non-spot month limits for within the enumerated list, we are offering a necessary. In short, we are proposing that the grain contracts. This should allow a process whereby an exchange could evaluate speculative limits are necessary for those broader set of market participants to provide that hedging need. If the exchange finds that liquidity and help farmers hedge their crop the need is a bona fide hedge not captured futures contracts that are physically risk as far in advance as they need. by our list, the exchange would notify the delivered and where the futures market is Commission. Unless the Commission votes to important in the price discovery process for Ensuring Access for Bona Fide Hedgers reject it within 10 business days, the the underlying commodity. The Commission Position limits is the rare rule where the exchange’s recognition would be deemed also examined whether a disruption in the exception is as important as the rule itself. effective for purposes of federal position distribution of that commodity would have a It cannot be said too often that these limits limits. Given our expanded definition of significant impact on our economy. This has are on speculative activity. Congress has bona fide hedging, I anticipate that it would led us to propose limits on 25 physically always intended that positions that are a be a rare case that a market participant finds delivered futures contracts,4 which covers bona fide hedge of price risk should not be its legitimate hedging needs are not already the vast majority of trading volume and open subject to limits. covered in the list of enumerated interest in physically delivered derivatives. It is critical, therefore, that we not disrupt exemptions. Still, this process would provide In addition to the nine grain futures contracts the regulatory experience of American flexibility and legal certainty, without currently subject to federal limits, this producers, middlemen, and end-users of excessive red tape. Striking the Right Balance 3 Int’l Swap Dealers Assoc. v. CFTC, 887 1 https://www.cftc.gov/PressRoom/ F.Supp.2d 259, 281 (D.D.C. 2012). SpeechesTestimony/dunnstatement101811. The Commission has grappled with 4 The proposal would also impose limits on 2 The proposal would not set non-spot month position limits for a decade. The 2011 approximately 400 other futures contracts that are limits on the 16 contracts that are not currently proposal was finalized, but struck down by linked, directly or indirectly, to the 25 core subject to federal position limits. a court because of concerns over its legal physically delivered contracts.

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includes the largest energy, metals, and other factors occurs most acutely in the spot month futures trading . . .’’ 7 In its ISDA opinion, agricultural futures contracts. for physically-settled contracts where the the District Court noted the following: ‘‘This Position limits are like medicine; they can delivery process and price convergence is text clearly indicated that Congress intended help cure a symptom but can have most vulnerable to potential manipulation or for the CFTC to make a ‘finding of a burden undesirable side effects. And like medicine, disruption due to outsized positions. By on interstate commerce caused by such position limits should be prescribed only focusing exclusively on spot month position speculation’ prior to enacting position when necessary. I believe this change in the limits in the new set of physically-settled limits.’’ 8 underlying rationale for the proposal will (and closely related cash-settled) contracts, I support the proposal’s view that the most require thoughtful reflection before imposing the proposal elegantly balances the natural reading of section 4a(a)(2)(A)’s additional position limits on additional countervailing policy interests enumerated in reference to paragraph (1)’s ‘‘standards’’ is contracts in the future. Position limits will the statute. that it logically includes the ‘‘necessity’’ always create a burden on someone in the standard. Paragraph (1)’s requirement to market—whether a compliance burden on Necessity Finding make a necessity finding, along with the parties having to track their positions relative Today’s proposal, unlike the recent prior aggregation requirement, provide substantive to limits, or potentially the loss of a business proposals, premises new limits on a finding guidance to the Commission about when and opportunity because the risks cannot be that they are necessary to diminish, how position limits should be implemented. hedged. eliminate, or prevent the burden on interstate If Congress intended to mandate that the The statutory provisions on position limits commerce from extraordinary price Commission impose position limits on all can reasonably be read in two ways. The first movements caused by excessive speculation physical commodity derivatives, there is reading would put the burden on the (‘‘necessity finding’’) in specific contracts, as little reason it would have referred to Commission to find position limits to be Congress has long required in the CEA and paragraph (1) and the Commission’s long necessary before imposing them on new its legislative precursors since 1936.3 I am established practice of necessity findings. contracts. The second reading would pleased that the proposal complies with the Instead, Congress intended to focus the mandate federal limits on all futures District Court’s ruling in the ISDA-position Commission’s attention on whether position contracts irrespective of any need, reflexively limits litigation: That the Commission must limits should be considered for a broader set putting placing a burden on all markets and decide whether section 4a of the CEA of contracts than the legacy agricultural all market participants. Given the choice of mandates the CFTC set new limits or only contracts, but did not mandate those limits burdening a government agency or private permits the CFTC to set such limits pursuant be imposed. enterprise, I think it is more prudent to put to a necessity finding.4 As the District Court the burden on the government. That is what noted, ‘‘the Dodd-Frank amendments do not Setting New Limits ‘‘As Appropriate’’ today’s proposal does. As Thomas Jefferson constitute a clear and unambiguous mandate The proposal preliminarily determines that said, ‘‘Government exists for the interests of to set position limits.’’ 5 I agree with the position limits are necessary to diminish, the governed, not for the governors.’’ proposal’s determination that, when read eliminate, or prevent the burden on interstate commerce posed by unreasonable or Appendix 3—Supporting Statement of together, paragraphs (1) and (2) of section 4a demand a necessity finding. unwarranted prices moves that are Commissioner Brian Quintenz Section 4a(a)(2)(A) states that the attributable to excessive speculation in 25 I am pleased to support the agency’s Commission shall establish limits ‘‘in referenced commodity markets that each play revitalized approach to position limits. accordance with the standards set forth in a crucial role in the U.S. economy. I am Today’s iteration marks the CFTC’s fifth paragraph (1) of this subsection.’’ 6 Paragraph aware that there is significant skepticism in proposed position limits rule since the Dodd- (1) establishes the Commission’s authority to, the marketplace and among academics as to Frank Act 1 amended the Commodity ‘‘proclaim and fix such limits on the amounts whether position limits are an appropriate Exchange Act’s (CEA) section on position of trading . . . as the Commission finds are tool to guard against extraordinary price limits. This proposal is, by far, the strongest necessary to diminish, eliminate or prevent movements caused by extraordinarily large of them all. [the] burden’’ on interstate commerce caused position size. Some argue there is no Today’s proposed rule promotes flexibility, by unreasonable or unwarranted price moves evidence that excessive speculation currently certainty, and market integrity for end- associated with excessive speculation. This exists in U.S. derivatives markets.9 Others users—farmers, ranchers, energy producers, language dates back almost verbatim to believe that large and sudden price transporters, processors, manufacturers, legislation passed in 1936, in which Congress fluctuations are not caused by hyper- merchandisers, and all who use physically- directed the CFTC’s precursor to make a speculation, but rather by market settled derivatives to risk manage their necessity finding before imposing position participants’ interpretations of basic supply exposure to physical goods. The proposal limits. The Congressional report and demand fundamentals.10 In contrast, still includes an expansive list of enumerated and accompanying the CEA from the 74th self-effectuating bona fide hedge exemptions, Congress includes the following directive, 7 H.R. Rep. 74–421, at 5 (1935). and a streamlined, exchange-centered ‘‘[Section 4a of the CEA] gives the 8 887 F. Supp. 2d 259, 269 (fn 4). process to adjudicate non-enumerated bona Commodity Exchange Commission the 9 Testimony of Erik Haas (Director, Market fide hedge exemption requests. power, after due notice and opportunity for Regulation, ICE Futures U.S.) before the CFTC at 70 Of the five proposed rules, this proposal is hearing and a finding of a burden on (Feb. 26, 2015) (‘‘We point out the makeup of these the most true to the CEA in many significant interstate commerce caused by such markets, primarily to show that any regulations respects: By requiring, as has long been the speculation, to fix and proclaim limits on aimed at excessive speculation is a solution to a Commission’s practice, a necessity finding nonexistent problem in these contracts.’’), available at: https://www.cftc.gov/idc/groups/public/@ before imposing limits, by including 3 Sec. 4a(1). aboutcftc/documents/file/emactranscript economically equivalent swaps, and, perhaps 4 ISDA et al. v CFTC, 887 F. Supp. 2d 259, 278 022615.pdf. most importantly, by following Congress’ and 283–84 (D.D.C. Sept. 28, 2012). 10 BAHATTIN BUYUKSAHIN & JEFFREY instruction that, ‘‘to the maximum extent 5 Id. at 280. HARRIS, CFTC, THE ROLE OF SPECULATORS IN practicable,’’ any limits set by the 6 Sec. 4a(a)(2)(A) (‘‘In accordance with the THE CRUDE OIL FUTURES MARKET 1, 16–19 Commission balance the interests among standards set forth in paragraph (1) of this (2009) (‘‘Our results suggest that price changes promoting liquidity, deterring manipulation, subsection and consistent with the good faith leads the net position and net position changes of squeezes, and corners, and ensuring the price exception cited in subsection (b)(2), with respect to speculators and commodity swap dealers, with discovery function of the underlying market physical commodities other than excluded little or no feedback in the reverse direction. This is not disrupted.2 The confluence of these commodities as defined by the Commission, the uni-directional causality suggests that traditional Commission shall by rule, regulation, or order speculators as well as commodity swap dealers are establish limits on the amount of positions, as generally trend followers.’’), available at http:// 1 76 FR 4752 (Jan. 26, 2011); 78 FR 75680 (Dec. appropriate, other than bona fide hedge positions, www.cftc.gov/idc/groups/public/@swaps/ 12, 2013); 81 FR 38458 (June 13, 2016) that may be held by any person with respect to documents/file/plstudy_19_cftc.pdf; Testimony of (‘‘supplemental proposal’’); and 81 FR 96704 (Dec. contracts of sale for future delivery or with respect Philip K. Verleger, Jr. before the CFTC, Aug. 5, 2009 30, 2016). The CEA addresses position limits in to options on the contracts or commodities traded (‘‘The increase in crude prices between 2007 and section (sec.) 4a (7 U.S.C. 6a). on or subject to the rules of a designated contract 2008 was caused by the incompatibility of 2 Sec. 4a(a)(3). market.’’) environmental regulations with the then-current

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others believe that outsized speculative protect the physical delivery process and there is no futures contract, provided that the positions, however defined, may aggravate promote convergence in these critical two commodities share substantially related price volatility, leading to price run-ups or commodity markets. Further, the limits fluctuations in value. declines that are not fully supported by proposed today are higher than in the past, Bona Fide Hedges and Coordination With market fundamentals.11 notably because the proposal utilizes current Exchanges In my opinion, position limits should not estimates of deliverable supply—numbers be viewed as a means to counteract long-term which haven’t been updated since 1999.16 I For those market participants who employ directional price moves. The CFTC is not a am interested to hear feedback from non-enumerated bona fide hedging practices price setting agency and we should not commenters about whether the estimates of in the marketplace, this proposal creates a impede the market from reflecting long term deliverable supply, and the calibrated limits streamlined, exchange-focused process to supply and demand fundamentals. It is worth based off of them, are sufficiently tailored for approve those requests for purposes of both noting that the physically-settled contract the individual contracts. exchange-set and federal limits. As the which has seen the largest sustained price marketplaces for the core referenced futures increase recently is palladium,12 which has Taking End-Users Into Account contracts addressed by the proposal, the also seen its exchange-set position limit Perhaps more than any other area of the DCMs have significant experience in, and decline four times since 2014 to what is now CFTC’s regulations, position limits directly responsibility towards, a workable position the smallest limit of any contract in the affect the participants in America’s real limits regime. CEA core principles require referenced contract set.13 Nevertheless, economy: Farmers, ranchers, energy DCMs and swap execution facilities to set between the start of 2018 and the end of producers, manufacturers, merchandisers, position limits, or position accountability 2019, palladium futures prices rose 76%.14 transporters, and other commercial end-users levels, for the contracts that they list in order Taking these conflicting views and facts into that use the derivatives market as a risk to reduce the threat of market 24 account, it is clear the Commission correctly management tool to support their businesses. manipulation. DCMs have long stated in its 2013 proposal, ‘‘there is a I am pleased that today’s proposal takes into administered position limits in futures demonstrable lack of consensus in the account many of the serious concerns that contracts for which the CFTC has not set limits, including in certain agricultural, [academic] studies’’ as to the effectiveness of end-users voiced in response to the CFTC’s energy, and metals markets. In addition, the position limits.15 previous five unsuccessful position limits exchanges have been strong enforcers of their With that healthy dose of skepticism, I proposals. own rules: during 2018 and 2019, CME think the proposal appropriately focuses on Importantly, and in response to many Group and ICE Futures US concluded 32 the time period and contract type where comments, this proposal, for the first time, expands the possibility for enterprise-wide enforcement matters regarding position position limits can have the most positive, limits. hedging,17 proposes an enumerated and the least negative, impact—the spot As part of their stewardship of their own anticipated merchandising exemption,18 month of physically settled contracts—while position limits regimes, DCMs have long also calibrating those limits to function as eliminates the ‘‘five-day rule’’ for enumerated 19 granted bona fide hedging exemptions in just one of many tools in the Commission’s hedges, and no longer requires the filing of those markets where there are no federal regulatory toolbox that can be used to certain cash market information with the limits. Today’s proposal provides what I promote credible, well-functioning Commission that the CFTC can obtain from believe is a workable framework to utilize 20 derivatives and cash commodity markets. exchanges. Regarding enterprise-wide exchanges’ long standing expertise in Because of the significance of these 25 core hedging—otherwise known as ‘‘gross granting exemptions that are not enumerated referenced futures contracts to the underlying hedging’’—the proposal would provide an by CFTC rules.25 This proposed rule also cash markets, the level of liquidity in the energy company, for example, with increased recognizes that the CEA does not provide the contracts, as well as the importance of these flexibility to hedge different units of its Commission with free rein to delegate all of cash markets to the national economy, I think business separately if those units face the authorities granted to it under the it is appropriate for the Commission to different economic realities. statute.26 The Commission itself, through a With respect to cross-commodity hedging, majority vote of the five Commissioners, global crude supply. Speculation had nothing to do today’s proposal completely rejects the retains the ability to reject an exchange- with the price rise.’’), available athttps:// arbitrary, unworkable, ill-informed, and granted non-enumerated hedge request www.cftc.gov/sites/default/files/idc/groups/public/ frankly, ludicrous ‘‘quantitative test’’ from within 10 days of the exchange’s approval. @newsroom/documents/file/hearing080509_ the 2013 proposal.21 That test would have The Commission has successfully and verleger.pdf. required a correlation of at least 0.80 or responsibly used a similar process for both 11 For a discussion of studies discussing supply greater in the spot markets prices of the two new contract listings as well as exchange rule and demand fundamentals and the role of commodities for a time period of at least 36 filings, and I am pleased to see the proposal speculation, see 81 FR 96704, 96727 (Dec. 30, months in order to qualify as a cross-hedge.22 expand that approach to non-enumerated 2016). See, e.g., Hamilton, Causes and Consequences of the Oil Shock of 2007–2008, Under this test, longstanding hedging hedge exemption requests that will limit the Brookings Paper on Economic Activity (2009); practices in the electric power generation and uncertainty for bone fide commercial market Chevallier, Price Relationships in Crude oil Futures: transmission markets would have been participants. New Evidence from CFTC Disaggregated Data, prohibited. Today’s proposal not only shuns I look forward to hearing from end-users Environmental Economics and Policy Studies this Government-Knows-Best approach, it about whether this proposal provides them (2012). also proposes new flexibility for the cross- the flexibility and certainty they need to 12 Platinum, gold slide as dollar soars; palladium commodity hedging exemption, allowing it to manage their exposures in a way that reflects eases off record, Reuters (Sept. 30, 2019), available be used in conjunction with other the complexities and realities of their at: https://www.reuters.com/article/global-precious/ enumerated hedges.23 For example, a physical businesses. In particular, I am precious-platinum-gold-slide-as-dollar-soars- commodity merchant could rely on the interested to hear if the list of enumerated palladium-eases-off-record-idUSL3N26L3UV. bona fide hedging exemptions should be 13 enumerated hedge for unsold anticipated Between 2014 and 2017, the CME Group broadened to recognize other types of lowered the spot month position limit in the production to exceed limits in a futures contract four times, from 650, to 500, to 400, to 100, contract subject to the CFTC’s limits in order common, legitimate commercial hedging to the current limit of 50 (NYMEX regulation 40.6(a) to hedge exposure in a commodity for which activity. certifications, filed with the CFTC, 14–463 (Oct. 31, 24 2014), 15–145 (Apr. 14, 2015), 15–377 (Aug. 27, 16 64 FR 24038 (May 5, 1999). DCM Core Principle 5 (sec. 5 of the CEA, 7 2015), and 17–227 (June 6, 2017)), available at: U.S.C. 7) (implemented by CFTC regulation 38.300) 17 Proposed Appendix B, paragraph (a). https://sirt.cftc.gov/sirt/sirt.aspx?Topic=Product 18 and SEF Core Principle 6 (sec. 5h of the CEA, 7 TermsandConditions. Proposed Appendix A, paragraph (a)(11). U.S.C. 7b-3) (implemented by CFTC regulation 19 14 Palladium futures were at $1,087.35 on Jan. 2, Preamble discussion of Proposed Enumerated 37.600). 2018 and at $1,909.30 on Dec. 31, 2019. Historical Bona Fide Hedges for Physical Commodities. 25 Proposed regulation 150.9. 20 prices available at: https:// Elimination of CFTC Form 204. 26 Preamble discussion of proposed regulation futures.tradingcharts.com/historical/PA_/2009/0/ 21 78 FR 75,717 (Dec. 12, 2013). 150.9, including references to cases pointing out the continuous.html. 22 Id. extent to which an agency can delegate to persons 15 78 FR 75694 (Dec. 12, 2013). 23 Proposed Appendix A, paragraph (a)(5). outside of the agency.

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Proposed Limits on Swaps ‘‘Ford v Ferrari’’ earned four award adjustments without regard for even trying The CEA requires the Commission to nominations, including best motion picture for that ‘‘perfect lap.’’ It is unfortunate, but consider limits not only on exchange-traded of the year. The film tells the true story of despite the Chairman’s leadership and the futures and options, but also on American car designer Carroll Shelby and talented staff’s hard work, I do not believe ‘‘economically equivalent’’ swaps.27 Today’s British-born driver Ken Miles who built a that this Proposal will hold itself together. I proposal provides the market with far greater race car for Ford Motor Company and must therefore, with all due respect, dissent. competed with Enzo Ferrari’s dominating certainty on the universe of such swaps than Deference to Our Detriment the previous proposals. Prior proposals failed and iconic red racing cars at the 1966 24 to sufficiently explain what constituted an Hours of Le Mans.2 This high drama action While I have a number of concerns with ‘‘economically equivalent swap,’’ thereby film focuses foremost on the relationship the Proposal, my principal disagreement is ensuring that compliance with position between Shelby and Miles—the co-designers with the Commission’s determination to in limits was essentially unworkable, given real- and driver of Ford’s own iconic GT40—and effect disregard the tenets supporting the time aggregation requirements and ambiguity their triumph over the competition, the statutorily created parallel federal and over in-scope contracts. In stark contrast, course, the rulebook, and the bureaucracy. exchange-set position limit regime, and take today’s proposed rule narrows the scope of Even if you aren’t a car enthusiast, the action, a back seat when it comes to administration ‘‘economically equivalent’’ swaps to those acting, and accuracy of the story are well and oversight. In doing so, the Commission with material contractual specifications, worth your time. However, there is a lot more claims victory for recognizing that the terms, and conditions that are identical to to this movie than racing. exchanges are better positioned in terms of exchange-traded contracts.28 For example, in There is a great scene where Miles is resources, information, knowledge, and order for a swap to be considered talking to his son about achieving the agility, and therefore ought to take the wheel. ‘‘economically equivalent’’ to a physically- ‘‘perfect lap’’—no mistakes, every gear While the Commission believes it can settled core referenced futures contract, that change, and every corner perfect. In response withdraw and continue to maintain access to swap would also have to be physically- to his son’s observation that you can’t just information that is critical to oversight, I fear settled, because settlement type is considered ‘‘push the car hard’’ the whole time, Miles that giving way absent sufficient a material contractual term. I believe the agrees, pensively staring down the track understanding of what we are giving up, and proposed narrowly-tailored definition will towards the setting sun. He says, ‘‘If you are planning for ad hoc Commission (and staff) provide market participants with clarity over going to push a piece of machinery to the determinations on key issues that are certain those contracts subject to position limits. I limit, and expect it to hold together, you have to come up, will let loose a different set of also welcome suggestions from commenters to have some sense of where that limit is.’’ responsibilities that we have yet to consider. regarding ways in which the definition can It’s been nine years since the Commission I believe the Proposal has many flaws that be further refined to complement limits on first set out to establish the position limits could be the subject of dissent. I am focusing exchange-traded contracts. regime required by amendments to section 4a my comments on those issues that I think are of the Commodity Exchange Act (the ‘‘Act’’ most critical for the public’s review. Based Conclusion or ‘‘CEA’’), 3 under the Dodd-Frank Wall on consideration of the Commission’s Section 2a(10) of the CEA is not an often Street Reform and Consumer Protection Act mission, and Congressional intent as evinced cited passage of text. It describes the Seal of of 2010.4 While I would like to be in a in the Dodd-Frank Act amendments to CEA the United States Commodity Futures position to say that today’s proposed rule section 4a and elsewhere in the Act, I believe Trading Commission, and in particular, lists addressing Position Limits for Derivatives that (1) the Commission is required to a number of symbols on the seal which (the ‘‘Proposal’’) is leading us towards that establish position limits based on its represent the mission and legacy of our ‘‘perfect lap,’’ I cannot. While the Proposal reasoned and expert judgment within the agency: The plough showing the agricultural purports to respect Congressional intent and parameters of the Act; (2) the Commission origin of futures markets; the wheel of the purpose and language of CEA section 4a, has not provided a rational basis for its commerce illuminating the importance of in reality, it pushes the bounds of reasonable determination not to propose federal limits hedging markets to the broader economy; interpretation by deferring to the exchanges 5 outside of the spot month for referenced and, the scale of balanced interests, and setting the Commission on a course contracts based on commodities other than proposing a fair weighing of competing or where it will remain perpetually in the draft, the nine legacy agricultural commodities; contradicting forces. unable to acquire the necessary experience to and (3) the Commission’s seemingly As I think about the proposal in front of retake the lead in administering a position unlimited flexibility in proposing to (a) us today, I believe it speaks to all of those limits regime. significantly broaden the bona fide hedging elements enshrined in our agency’s legacy, In 2010 and the decades leading up to it, definition, (b) codify an expanded list of self- but the scale of balanced interests comes Congress understood that for the derivatives effectuating enumerated bona fide hedges, (c) most to mind with this rule: new flexibility markets in physical commodities to perform provide for exchange recognition of non- combined with new regulation, the removal optimally, there needed to be limits on the enumerated bona fide hedge exemptions with of a few exemptions with the expansion or amount of control exerted by a single person respect to federal limits, and (d) addition of others, the reliance on exchange (or persons acting in agreement). In tasking simultaneously eliminate notice and expertise but with Commission review and the Commission with establishing limits and reporting mechanisms, is both inexplicably oversight, and the balance of liquidity and the framework around their operation, complicated to parse and inconsistent with price discovery against the threat of corners Congress was aware of our relationship with Congressional intent. and squeezes. I am very pleased to support the exchanges, but nevertheless opted for our today’s revitalized, confined, and tempered experience and our expertise to meet the The Commission Is Required To Establish approach to position limits and look forward policy objectives of the Act. Position Limits to comment letters, particularly from the end- Right now, we are pushing to go faster and The Proposal goes to great lengths to user community. just get to the finish line, making real-time reconcile whether the CEA section Appendix 4—Dissenting Statement of 4a(a)(2)(A) requires the Commission to make 2 Ford v Ferrari, Fox Movies, https:// an antecedent necessity finding before Commissioner Rostin Behnam 6 Introduction www.foxmovies.com/movies/ford-v-ferrari (Last establishing any position limit, with the visited Jan. 28, 2020, 1:55 p.m.). implication that if a necessity finding is The ceremony for the 92nd Academy 3 See Position Limits for Derivatives, 76 FR 4752 required, then the Commission could Awards will air in a little over a week. I (proposed Jan. 26, 2011) (the ‘‘2011 Proposal’’). rationalize imposing no limits at all. I do not haven’t seen too many movies this year given 4 The Dodd-Frank Wall Street Reform and believe it was necessary to rehash the my two young girls and hectic work Consumer Protection Act, Public Law 111–203 legislative and regulatory histories to schedule, but I did see ‘‘Ford v Ferrari.’’ 1 section 737, 124 Stat. 1376, 1722–25 (2010) (the determine the Commission’s authority with ‘‘Dodd-Frank Act’’). respect to CEA section 4a. Nor do I believe 5 As in the Proposal, unless otherwise indicated, 27 Sec. 4a(5). the use of the term ‘‘exchanges’’ throughout this it was worthwhile here to reply in such great 28 Proposed regulation 150.1. statement refers to designated contract markets 1 Ford v Ferrari (Twentieth Century Fox 2019). (‘‘DCMs’’) and swap execution facilities (‘‘SEFs’’). 6 See Proposal at III.

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depth to the U.S. District Court for the can neither predetermine deference nor be month . . . and there are other tools other District of Columbia’s opinion vacating the justified absent substantial consideration. than federal position limits for deterring and Commission’s 2011 final rulemaking on The authority and jurisdiction of individual preventing manipulation outside of the spot Position Limits for Futures and Swaps.7 The exchanges are necessarily different than that month.’’ 18 The ‘‘other tools’’ include Proposal uses a tremendous amount of text of the Commission. They do not always have surveillance by the Commission and to try and flesh out what is meant by congruent interests to the Commission in exchanges, coupled with exchange-set limits ‘‘necessary’’, and yet I fear it does not monitoring instruments that do not trade on and/or accountability levels. As laid out in demonstrate the Commission’s ‘‘bringing its or subject to the rules of their particular several paragraphs of the Proposal, the expertise and experience to bear when platform or the market participants that trade Commission would maintain a window into interpreting the statute,’’ giving effect to the them. They do not have the attendant the setting of any limits or accountability meaning of each word in the statute, and authority to determine key issues such as levels that in its view are ‘‘an equally robust’’ providing an explanation for how any whether a swap performs or affects a alternative to federal non-spot month interpretation comports with the policy significant price discovery function, or what speculative position limits. In describing objectives of the Act as amended by the instruments fit into the universe of how accountability levels implemented by Dodd-Frank Act, as directed by the District economically equivalent swaps. They are not exchanges work, the Commission touts the 8 Court. The Commission ought to avoid the permitted to define bona fide hedging flexibility in application because they temptation to retract when doing so requires transactions or grant exemptions for purposes provide exchanges—and not the the torture of strawmen. Not only do we look of federal position limits. It is therefore clear Commission—the ability to ask questions complacent, but we invite criticism for our that CEA section 4a, as amended by the about positions, determine if a position raises unnecessary affront to the sensibilities of the Dodd-Frank Act ‘‘warrants extension of any concerns, provide an opportunity to public we serve. Commission-set position limits beyond intervene—or not—etc.19 Looking back at the record, what is agricultural products to metals and energy While all of this reads well, it ignores necessary is that the Commission complies commodities.’’ 14 Congressional intent. The Proposal never with the mandate.9 In response to the District considers that Congress directed the Court’s directive, the Commission could have Unsupportable Deference Commission to establish limits—not gone back through its own records to the In spite of all of this—the foregoing 2011 Proposal. If it had done so, it would mandate; the clear Congressional intent in accountability levels. Given the have found that the Commission provided a CEA section 4a(a)(3)(A); and the Commission’s ‘‘decades of experience in review of CEA section 4a(a)—interpreting the Commission’s real experience and expertise overseeing accountability levels various provisions, giving effect to each (including its unique data repository)—the implemented by the exchanges,’’ Congress paragraph, acknowledging the Commission’s Commission only proposes to maintain would have been well aware that this own informational and experiential federal non-spot month limits for the nine alternative path would be a viable option if limitations regarding the swaps markets at legacy agricultural contracts (with it were truly as robust in choosing the that time, and focusing on the Commission’s questionably appropriate modifications), legislative language. But the Commission has primary mission of fostering fair, open and ‘‘because the Commission has observed no failed to make that case. Foremost, federal efficient functioning of the commodity reason to eliminate them.’’ 15 Essentially, in position limits are aimed at diminishing, derivatives markets.10 Of note, ‘‘Critical to the Commission’s reasoned judgment, ‘‘if it eliminating, and preventing sudden and fulfilling this statutory mandate,’’ the ain’t broke, don’t fix it.’’ And so, the unwarranted price changes. These sudden Commission pronounced, ‘‘is protecting Commission, in keeping with this relatively price changes may occur regardless of market users and the public from undue riskless course of action, similarly was able manipulative, intentional or reckless burdens that may result from ‘excessive to conclude that federal non-spot month activity—both within and outside of the spot speculation.’ ’’ 11 Federal position limits, as limits are not necessary for the remaining 16 month. The Commission provides no predetermined by Congress, are most proposed core referenced futures contracts explanation regarding how exchange-set certainly the only means towards addressing identified in the Proposal. limits or accountability levels would the burdens of excessive speculation when The Commission provides two reasons in compare, in terms of effectiveness, to federal such limits must address a ‘‘proliferation of support of its determination, and neither position limits, which among other things, economically equivalent instruments trading sufficiently demonstrates that the must apply in the aggregate as mandated by in multiple trading venues.’’ 12 Exchange-set Commission utilized its experience and CEA section 4a(a)(6). It is difficult to measure position limits or accountability levels expertise. Rather, the Commission backs into the robustness of a regime when there is simply cannot meet the mandate. deferring to the exchanges’ authority to nothing to compare it to. As well, the In exercising its authority, the Commission establish position limits or accountability Commission’s observation that exchange-set may evaluate whether exchange-set position levels. This course of action ignores the accountability levels have ‘‘functioned as- limits, accountability provisions, or other reality that Commission-set position limits intended’’ until this point time, ignores the tools for contracts listed on such exchanges serve a higher purpose than just addressing wider purpose and function of aggregate are currently in place to protect against threats of market manipulation 16 or creating position limits established by the manipulation, congestion, and price parameters for exchanges in establishing Commission, and is shortsighted given the distortions.13 Such an evaluation—while their own limits.17 The Proposal advocates ever expanding universe of economically permissible—is just one factor for that there is no need to disturb the status equivalent instruments trading across consideration. The existence of exchange-set quo, despite the fact that we have nothing to multiple trading venues. Not to belabor the limits or accountability levels, on their own, compare it to. The Commission places a point, but it seems odd to conclude that higher value on minimizing the impact on Congress envisioned that its painstaking 7 Int’l Swaps & Derivatives Ass’n v. CFTC, 887 F. industry—which it appears to have not amendments to CEA section 4a were a Supp. 2d 259 (D.D.C. 2012). quantified for purposes of the Proposal—than directive for the Commission to check the 8 Id. at 284. actually evaluating the appropriateness of box that the current system is working 9 The Proposal’s analysis in support of its denial limits in light of the purposes of the Act and perfectly. of a mandate misconstrues form over substance and as described in CEA section 4a(a)(3). The Commission’s second reason is that assumes the answer it is looking for by providing The first reason the Commission submits in layering federal non-spot limits for the 16 a misleading recitation of Michigan v. EPA, 135 defense of not proposing federal limits contracts on top of existing exchange-set S.Ct. 2699 (2015). In doing so, the Proposal seems outside of the spot month for the 16 limit/accountability levels may only provide to suggest that the Commission is free to ignore a minimal benefits—if any—while sacrificing Congressional mandate if it determines that aforementioned contracts is that ‘‘corners and squeezes cannot occur outside the spot the benefits associated with flexible Congress is wrong about the underlying policy. See 20 Proposal at III.D. accountability levels. The Commission, 10 76 FR at 4752–54. 14 Id. 11 Id. at 4753. 15 Proposal at II.B.2.d. 18 Proposal at II.B.2.d. 12 Id. at 4754–55. 16 See 7 U.S.C. 7(d)(5) and 7b–3(f)(6). 19 See id. 13 See 76 FR at 4755. 17 See, e.g., 7 U.S.C. 6a(e). 20 See id.

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again, ignores that Congress was clearly go of the line. The Commission’s decision to hedging positions and spread exemptions aware of the possible layering effect, and did essentially give up primary authority to approved by the exchanges,24 it would not not find it to be comparable let alone as recognize non-enumerated bona fide hedges, itself appear to be useful in discerning any robust.21 Moreover, the Commission fails to and to rely on the exchanges to collect and market participants ongoing justification for, support or otherwise quantify its argument hold relevant cash market data for the or compliance with, self-effectuating or with data. Presumably, the Commission Commission’s use only after requesting it, approved bona fide hedge, spread, or other could calculate anticipated non-spot month seems both careless and inconsistent with exemption requirements. While the contents position limits—based on the formula in the Congressional intent. of the report may prompt the Commission to proposed part 150.2(e) (and described in For example, while the Proposal provides request records from the exchange, it is section II.B.2. e. of the Proposal)—for the 16 the Commission with the authority to reject unclear what may be involved in the making proposed core referenced futures contracts an exchange’s granting of a non-enumerated of, and response to, such requests—including that have never been subject to such limits. bona fide hedge recognition, this time and resources on both sides. Not to The Commission could have based its determination must be in the form of a mention that the Proposal opines that determination on aggregate position data it ‘‘Commission action,’’ and it must take place exchanges would only collect responsive collects through surveillance, and it could in the span of ten business days (or two in information on an annual basis,25 and part have provided a rough estimate of the the case of sudden or unforeseen 150.9(e) does not require exchanges to notify potential impact that limits may have, absent circumstances). Furthermore, the Proposal the Commission of any renewal applications. consideration of any of the proposed offers no guidance as to what factors the Of course, the Proposal posits that the enumerated bona fide hedges or spread Commission may consider, or the criteria it Commission would likely only need to make exemptions. While I am not sure such may use to make the determination. This such requests ‘‘in the event that it noticed an evidence if presented would have changed narrow window of time likely will not issue that could cause market disruptions.’’ 26 my mind, it certainly would have been provide Commission staff with a reasonable My guess is that our surveillance staff and helpful in determining the reasonableness of timeframe to prepare the necessary Division of Enforcement may have other the Commission’s determination. documentation for the full Commission to ideas, but I will leave that with the ‘‘what deliberate and either request additional ifs.’’ What if? information, stay the application, or vote to Conclusion When muscles are overly flexible, they accept the recognition.22 It seems more likely require appropriate strength to ensure that that the Commission will be unable to act The 24 Hours of Le Mans awards the they can perform under stress. In addition to within the ten or two-day window and the victory to the car that covers the greatest largely deferring to the exchanges in recognition will default to being approved. distance in 24 hours. While the Proposal addressing excessive speculation outside of Regardless of what the Commission shoots for victory by similarly attempting to the spot-month for the majority of the 25 core determines—even if it ultimately determines achieve a great amount over a short time referenced futures contracts, the Proposal that a position for which an application for period, I am concerned that all of it will not also incorporates flexibility in a multitude of a bona fide hedge recognition does not meet hold together. The Proposal attempts to justify deferring to the exchanges on just other ways. The Proposal would provide for the CEA definition of a bona fide hedge or about everything, and in-so-doing it pushes significantly broader bona fide hedging the requirements in proposed part 150.9(b)— to the back any earnest interpretation of the opportunities that will be largely self- the Commission could not determine that the Commission’s mandate or the guiding effectuating; it would defer to the exchanges person holding the position has committed a Congressional intent. This is not cooperation, in recognizing non-enumerated bona fide position limits violation during the this is stepping-aside, backing down, giving hedging; and it would eliminate longstanding Commission’s ongoing review or upon way, and getting comfortable in the draft. I notice and reporting mechanisms. In issuing its determination. I have so many am not comfortable in this or any draft. It’s proposing these various provisions, the ‘‘what ifs’’ in response to this set up that I my understanding that the Commission has Proposal flexes and contorts to accommodate feel trapped. each piece. In doing so, it seems the the tools and resources to develop a better In the Proposal, the Commission requires sense of where federal position limits ought Commission will be left insufficient strength exchanges to collect cash-market information to accomplish its mandated role of exercising to be in order to achieve the purposes for from market participants requesting bona fide which they were designed, while appropriate surveillance, monitoring, and hedges, and to provide it to the Commission enforcement authorities—and this will be to maintaining our natural, Congressionally- only upon request. The Proposal also mandated lead. The Proposal fails to the detriment of the derivatives markets and eliminates Commission Form 204, which the public we serve. recognize that Congress already set the market participants currently file each month The main point to get across here is that course in directing us that our derivatives when they have bona fide hedging positions while I support enhancing the cooperation markets will operate optimally with limits— in excess of the federal limits. This form is between the Commission and the exchanges, we just need to provide a sense of where they a necessary mechanism by which market the Commission here is cooperating by are. Perhaps the Proposal was just never participants demonstrate cash-market dropping back and promising to remain in aiming for the ‘‘perfect lap.’’ positions justifying such overages. These the draft—never able to fully compete, or changes may be well-intentioned, but they Appendix 5—Statement of take advantage of a ‘‘slingshot effect.’’ We are ill-conceived in consideration of the will simply never gain the necessary direct Commissioner Dawn D. Stump various changes being proposed to the federal experience with the new regime. The Reasonably designed. Balanced in Commission lacks experience in position limits regime. Foremost, under the Proposal, the approach. And workable in practice—both administering spot month limits for 16 of the for market participants and for the 25 core referenced futures contracts and lacks Commission would receive a monthly report showing the exchange’s disposition of any Commission. These are the 3 guideposts by familiarity with both common commercial which I have evaluated the proposal before hedging practices for the 16 contracts and the applications to recognize a position as a bona fide hedge (both enumerated and non- us to update the Commission’s rules proliferation of the use of the dozen or so regarding position limits for derivatives. Is it self-effectuating enumerated hedges and enumerated) or to grant a spread or other exemption (including any renewal, reasonable in its design? Is it balanced in its spread exemptions (also largely self- approach? And is it workable in practice for effectuating) being proposed. While prior revocation of, or modification of a prior 23 drafts of the Proposal admitted this as recognition or exemption). While the Proposal argues that the monthly report 24 See Proposal at II.D.4. recently as two weeks ago, the Commission 25 See Proposal at I.B.7.a. and b. determined to change course and quickly let would be a critical element of the Commission’s surveillance program by 26 Id. As well, the Proposal opines that the facilitating its ability to track bona fide Commission’s reliance on the ‘‘limited 21 See, e.g., 7 U.S.C. 6a(e) (providing, among other circumstances’’ set forth in proposed part 150.9(f) things and consistent with core principles for DCMs under which it would revoke a bona fide hedge and SEFs, that exchange-set position limits shall 22 See Proposed part 150.9(e). recognition granted by an exchange would be rarely not be higher that the limits fixed by the 23 See Proposed Commission regulation exercised, suggesting a preference to defer to the Commission). 150.5(a)(4). judgment of the exchange. See Proposal at II.G.3.f.

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both market participants and the federal position limits that it finds are rulemaking published in 2013. There, the Commission? Overall, I believe the answer to necessary.5 The issue that has consumed the Commission concluded that the Dodd-Frank each of these questions is yes, and I therefore agency, the industry, and the bar is this: Did Act required the agency to adopt position support the publication of this proposal for the amendments to the CEA’s position limits limits even in the absence of finding them public comment. provisions that were enacted as part of the necessary but, ‘‘in an abundance of caution,’’ There is one question that I have not asked: Dodd-Frank Act strip the Commission of its also made a finding of necessity with respect Is it perfect? It is not. There are two discretion not to impose limits if it does not to the position limits that it was proposing.8 particular areas discussed below that I find them to be necessary? The Commission promulgated this same believe can be improved—the list of I consider it unfortunate that the analysis when, three years later, it re- enumerated hedging transactions and Commission has spent so much time, energy, proposed its position limits rulemaking in positions, and the process for reviewing and resources on this debate. That time, 2016.9 The proposal before us today, by hedging practices outside of that list. energy, and resources would have been much contrast, bases its proposed limits solely on But in reality, how could a position limits better spent focusing on the development of finding them to be necessary—albeit a proposal ever achieve perfection? In section a position limits framework that is finding of necessity that is different from the 4a(a) of the Commodity Exchange Act reasonably designed, balanced in approach, one relied upon in the 2013 Proposal and the (‘‘CEA’’),1 Congress has given the and workable in practice for both market 2016 Re-Proposal. Commission the herculean task of adopting participants and the Commission—which Practical Considerations position limits that: simply cannot be said of the Commission’s I find the analysis put forward by our • It finds necessary to diminish, eliminate, prior efforts in this area. But, in the words General Counsel’s Office in the proposed or prevent an undue and unnecessary burden of American writer Isaac Marion in his rulemaking before us today—which explains on interstate commerce as a result of ‘‘zombie romance’’ novel Warm Bodies: ‘‘We the Commission’s legal interpretation that its excessive speculation in derivatives; are where we are, however we got here.’’ 6 mandate to impose position limits under the • Deter and prevent market manipulation, And so, a few thoughts on necessity and CEA exists only when it finds the limits are squeezes, and corners; mandates. necessary—to be well-reasoned and • Ensure sufficient market liquidity for In the ISDA v. CFTC case, a federal district 2 court in 2012 vacated the Commission’s first compelling. I add two practical bona fide hedgers; considerations in support of that conclusion. • Ensure that the price discovery function post-Dodd-Frank Act attempt to adopt a position limits rulemaking. The court First, if Congress in the Dodd-Frank Act of the underlying market is not disrupted; had wanted to eliminate a necessity finding • Do not cause price discovery to shift to concluded that the Dodd-Frank Act amendments to the position limits provisions as a prerequisite to the imposition of position trading on foreign boards of trade; and limits, it could simply have removed the • Include economically equivalent swaps. of the CEA ‘‘are ambiguous and lend themselves to more than one plausible requirement to find necessity that already And it must do so, according to the CEA’s existed in the CEA. That it did not do so purposes set out in section 3(b), through a interpretation.’’ Accordingly, it remanded the position limits rulemaking to the indicates that on this point, the CEA both system of effective self-regulation of trading before and after the Dodd-Frank Act provides facilities.3 Commission to ‘‘bring its experience and expertise to bear in light of competing that the Commission has a mandate to These statutory objectives are not only impose position limits that it finds are numerous, but in many instances they are in interests at stake’’ in order to ‘‘fill in the gaps and resolve the ambiguities.’’ 7 necessary. tension with one another. As a result, it is not Second, I do not believe that Congress surprising that each of us will have a The Commission attempted to follow the court’s directive in a proposed position limits would have directed the Commission to different view of the perfect position limits spend its limited resources developing and framework. Perfection simply cannot be the administering position limits that are not standard by which this proposal is judged. 5 ‘‘Position Limits and the Hedge Exemption, Brief Legislative History,’’ Testimony of General necessary. We must be careful stewards of But after nearly a decade of false starts, I the taxpayer dollars entrusted to us, and believe the proposal before us brings us close Counsel Dan M. Berkovitz, Commodity Futures Trading Commission, before Hearing on Speculative absent a clear statement of Congressional to the end of that long journey. It is Position Limits in Energy Futures Markets at 1 (July intent to do so, I do not believe those dollars reasonably designed. It is balanced in its 28, 2009) (‘‘Today, I will provide a brief legislative should be spent on position limits that the approach. And it is workable in practice. I history of the mandate in the CEA concerning Commission does not find to be necessary to am pleased to support putting it before the position limits and the exemption from those limits achieve the objectives of the CEA. public for comment. for bona fide hedging transactions.... Since its enactment in 1936, the Commodity Exchange Act Statutory Analysis The Commission Has a Mandate To Impose (CEA) . . . has directed the Commodity Futures This section walks through some of the Position Limits It Finds Are Necessary Trading Commission (CFTC) to establish such statutory text in CEA section 4a(a) that is Background limits on trading ‘as the Commission finds are relevant to the question of whether a finding necessary to diminish, eliminate, or prevent such of necessity is a prerequisite to the Before digging into the substantive burden [on interstate commerce].’ The basic provisions of the proposal, let me offer my statutory mandate in Section 4a of the CEA to Commission’s mandate of imposing position limits. A diagram entitled ‘‘Commodity view on a legal issue that has been debated establish position limits to prevent such burdens Exchange Act Section 4a(a): Finding Position seemingly without end throughout the past has remained unchanged over the past seven decades) (emphasis added), available at https:// Limits Necessary is a Prerequisite to the decade in the Commission’s rulemaking www.cftc.gov/PressRoom/SpeechesTestimony/ Mandate for Establishing Such’’ accompanies proceedings and in federal court. As noted in berkovitzstatement072809; see also, id. at 5 (‘‘By the this statement on the Commission’s website, testimony by the CFTC’s General Counsel in mid-1930s . . . Congress finally provided a federal which may aid in reading the discussion. July 2009, a year before the Dodd-Frank Act 4 regulatory authority with the mandate and Subsection (1) of section 4a(a) is legacy text became law, the CEA has always given the authority to establish and enforce limits on that has been in the CEA for decades. As Commission a mandate to impose federal speculative trading. In Section 4a of the 1936 Act noted above, it has long mandated that the position limits—that is, a mandate to impose (CEA), the Congress .... directed the Commodity Exchange Commission [the CFTC’s predecessor Commission impose position limits that it agency] to establish such limits on trading ‘as the finds necessary to diminish, eliminate, or 1 CEA section 4a(a), 7 U.S.C. 6a(a). commission finds is [sic] necessary to diminish, prevent the burden on interstate commerce 2 Section 4a(c) of the CEA further requires that the eliminate, or prevent’ such burdens . . .’’) resulting from excessive speculation in Commission’s position limit rules ‘‘permit (emphasis added). derivatives. Subsection (2) of section 4a(a), producers, purchasers, sellers, middlemen, and 6 Isaac Marion, Warm Bodies and The New users of a commodity or a product derived on the other hand, was added to the CEA by Hunger: A Special 5th Anniversary Edition, 97, the Dodd-Frank Act. therefrom to hedge their legitimate anticipated Simon and Schuster (2016). business needs . . .’’ CEA section 4a(c), 7 U.S.C. 7 International Swaps and Derivatives Association 6a(c). v. U.S. Commodity Futures Trading Commission, 8 Position Limits for Derivatives, 78 FR 75680, 3 CEA section 3(b), 7 U.S.C. 5(b). 887 F.Supp. 2d 259, 281–282 (D.D.C. 2012) 75685 (proposed Dec. 12, 2013) (‘‘2013 Proposal’’). 4 See Dodd-Frank Wall Street Reform and (emphasis in the original) (‘‘ISDA v. CFTC’’), citing 9 Position Limits for Derivatives, 81 FR 96704, Consumer Protection Act, Public Law 111–203, 124 PDK Labs. Inc. v. U.S. DEA, 362 F.3d 786, 794, 797– 96716 (proposed Dec. 30, 2016) (‘‘2016 Re- Stat. 1376 (2010) (‘‘Dodd-Frank Act’’). 98 (D.C. Cir. 2004). Proposal’’).

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In my view, subsections (1) and (2) are provisions were enacted. We are where we appropriate steps to prevent excessive linked, and cannot each be considered in are, and so the application of the speculation in derivatives markets that can isolation, because the Dodd-Frank Act Commission’s experience and expertise must contribute to a burden on interstate specifically tied them together. First, include a consideration of the substantial commerce. Given the history of the past subparagraph (A) of subsection (2) links the changes in the markets since that time. decade, however, I do not believe Congress Commission’s obligation to set position Given the intervention of a global financial intended, based on the moment in time of limits to the ‘‘standards’’ set forth in crisis, it is hard to recall that the Dodd-Frank 2007–2008, to forever lock our derivatives subsection (1)—including the standard of Act amendments to the CEA’s position limit markets into a straightjacket, or to deny the finding necessity as a prerequisite to the provisions were borne at a time of Commission the flexibility to draw mandate of imposing position limits. Then, skyrocketing energy prices during 2007– conclusions of necessity based on particular subparagraph (B) of subsection (2) links the 2008. The price of oil climbed to over $147 circumstances. timing of issuing position limits to the limits a barrel in July 2008, which represented a Returning to our zombie romance, I’m required under subparagraph (A)—which, as 50% increase in one year and a seven-fold afraid I have not been fair to its author. That noted, is connected to the standards set forth increase since 2002.10 Gas prices at the pump is because there is a second line to the in subsection (1), including the standard of peaked at over $4 a gallon in June and July quotation, which reads: ‘‘We are where we finding necessity. of 2008.11 are, however we got here. What matters is In sum, the new timing provisions in Some at the time charged that these price where we go next.’’ 15 subparagraph (2)(B) apply to the requirement spikes were caused by excessive speculation It is my fervent hope that the majority of in subparagraph (2)(A). Subparagraph (2)(A), in futures contracts on energy commodities comment letters we receive on today’s in turn, informs how Congress intended the traded on U.S. futures exchanges—another proposal provide constructive input on Commission to establish limits, i.e., in topic of debate on which I will save my where the proposal would take us next with specific accordance with the standards in views for another day. But not surprisingly, respect to position limits—and not simply subsection (1)—which includes the necessity legislation soon followed. By the end of 2008, fan the flames of the necessity debate. And standard. They are all linked. the House of Representatives had passed it is the topic of where we go next that I will Yet, some have relied in isolation on the amendments to the CEA’s position limit now turn. ‘‘shall . . . establish limits’’ wording in provisions,12 and after the Senate failed to subparagraph (A) of subsection (2) to argue act, the issue was subsequently addressed in What position limits are necessary? that the Dodd-Frank Act imposed a mandate the Dodd-Frank Act. Having concluded that the CEA mandates on the Commission to establish position How times have changed. The United the Commission to impose position limits limits even in the absence of a finding of States, due to a boom in oil and natural gas that it finds are necessary, the question then necessity. Some also have pointed to the production relating to shale drilling and the becomes: What position limits are necessary? timing provisions in subparagraph (B) of development of liquefied natural gas, will In the 2013 Proposal, the Commission’s subsection (2) to argue that the Dodd-Frank soon become a net energy exporter.13 necessity finding determined that federal Act imposed a mandate on the Commission Although no new federal position limits have spot month position limits were necessary for to establish position limits because been imposed, prices of energy commodities 28 core referenced futures contracts on subparagraph (B) twice says that position have generally dropped and stabilized, and various agricultural, energy, and metals limits ‘‘shall be established.’’ I agree that, cries of excessive speculation in the commodities. In the 2016 Re-Proposal, the under subparagraph (B), position limits derivatives markets are rare. Also, our Commission utilized the same necessity ‘‘shall be established’’ as required under derivatives markets have grown substantially. finding to determine that federal spot month subparagraph (A)—but as noted, Global trading in listed futures and options limits were necessary for 25 of the 28 core subparagraph (A) states that the Commission increased from 22.4 billion contracts in 2010 referenced futures contracts for which they shall establish limits ‘‘[i]n accordance with to a record 34.47 billion contracts in 2019. had been found necessary in 2013.16 And the standards set forth in [subsection (1)].’’ Global open interest increased to a record today’s proposal, although utilizing a This latter point cannot be overlooked or 900 million contracts from 718.5 million in different approach to the necessity finding, ignored. 2010.14 determines that federal spot month limits are Some also have asked why Congress would Applying our experience and expertise, necessary for the same 25 core referenced add all this new language to CEA section what these developments teach us is that futures contracts for which they were found 4a(a) if not to impose a new mandate. Yet, economic conditions change over time. to be necessary in the 2016 Re-Proposal. it makes perfect sense to me that while Technology marches on. Markets evolve. And In other words, three different iterations of expanding the Commission’s authority to prices fluctuate in response to a myriad of the Commission have found federal spot regulate swaps in the Dodd-Frank Act, influences. Having lived through the energy month position limits to be necessary for Congress took the opportunity to review and price increases of the mid-2000s, I do not these 25 core referenced futures contracts. enhance the Commission’s position limit minimize the pain they caused, or the That degree of consistency alone authorities to ensure they were fit for importance of the Commission taking demonstrates the reasonableness of this purpose considering the addition of the new determination. expanded authorities, including how swaps To be sure, both the 2013 Proposal and the 10 Rebeka Kebede, Oil Hits Record Above $147, would be considered in the context of Reuters Business News, July 10, 2008, available at 2016 Re-Proposal found federal position position limits. The timing of the review https://www.reuters.com/article/us-markets-oil/oil- limits for non-spot months to be necessary period was spelled out and the manner in hits-record-above-147-idUST14048520080711. for these 25 contracts, whereas today’s which the Commission would go about 11 Leigh Ann Caldwell, Face the Facts: A Fact proposal does so for only the nine legacy establishing limits was refined to account for Check on Gas Prices, CBS News Face the Nation, agricultural contracts that are currently this massive change in oversight. March 21, 2012, available at https:// subject to federal non-spot month limits. Yet, But never did anyone suggest that the www.cbsnews.com/news/face-the-facts-a-fact- the necessity findings in the 2013 Proposal legacy language in subsection (1) of section check-on-gas-prices/. and the 2016 Re-Proposal were based largely, 4a(a), including the required prerequisite of 12 Commodity Markets Transparency and if not entirely, on just two episodes: (1) The a necessity finding, had effectively been Accountability Act of 2008, H.R. 6604, 110th Cong. activity of the Hunt Brothers in the silver eliminated and replaced with a new mandate sec. 8 (2008). market in 1979–1980; and (2) the activity of 13 that would apply even in the absence of a Tom DiChristopher, US to Become a Net Energy the Amaranth hedge fund in the natural gas Exporter in 2020 for First Time in Nearly 70 Years, necessity finding. Energy Dept. Says, CNBC Business News, Energy, market in the mid-2000s. Subsequent History Jan. 24, 2019, available at https://www.cnbc.com/ 2019/01/24/us-becomes-a-net-energy-exporter-in- 15 See fn. 6, supra, at 97. Finally, as noted above, the court in ISDA 2020-energy-dept-says.html. 16 v. CFTC instructed the Commission to use its The 2016 Re-Proposal did not propose that 14 Futures Industry Association, Global Futures federal position limits be imposed on three cash- ‘‘experience and expertise’’ to resolve the and Options Trading Reaches Record Level in 2019, settled futures contracts (Class III Milk, Feeder ambiguity it found in the statute. That Jan. 16, 2020, available at https://fia.org/articles/ Cattle, and Lean Hogs) that were included as core experience and expertise cannot look only to global-futures-and-options-trading-reaches-record- referenced futures contracts in the 2013 Proposal. the era in which these position limit level-2019. See 2016 Re-Proposal, 81 FR at 96740 n.368.

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The Hunt Brothers silver episode and formula with which the Commission is anticipated business needs . . .’’ 19 This Amaranth natural gas episode occurred over familiar in proposing non-spot month limits serves as a statutory reminder of the 30 and over 15 years ago, respectively. It also for the nine legacy agricultural contracts, but fundamental point that the Commission is should be noted that the Commission settled it would apply the 2.5% calculation to open imposing speculative position limits, and enforcement actions against both the Hunt interest above 50,000 contracts rather than since bona fide hedging is outside the scope Brothers and Amaranth charging that they the current level of 25,000 contracts. of speculative activity, it is by definition had engaged in manipulation and/or Open interest has roughly doubled since outside the scope of the position limit rules. attempted manipulation.17 Since that time, federal limits were set for these markets, The Commission’s current definition of the Congress has provided the Commission with which has made the current non-spot month term ‘‘bona fide hedging transactions and enhanced anti-manipulation enforcement limits significantly more restrictive as the positions’’ is set out in what is referred to as authority as part of the Dodd-Frank Act, years have gone by. Nevertheless, I ‘‘Rule 1.3(z).’’ In addition to providing a which the Commission has used aggressively appreciate that such a change to established definition, Rule 1.3(z) also identifies certain and serves as an effective tool to deter and limits may raise concern. I am therefore specific ‘‘enumerated’’ hedging practices that combat potential manipulation involving pleased that the proposal includes a question the Commission recognizes as falling within trading in non-spot months. asking whether the proposed increases in the scope of that definition and therefore not Again, I do not minimize the seriousness federal non-spot month limits should be subject to position limits. Other ‘‘non- of the Hunt Brothers and Amaranth episodes, implemented incrementally over a period of enumerated’’ hedging practices can still be both of which had significant ramifications. time, rather than immediately at the effective recognized as bona fide hedging, but only But I am comfortable with the proposal’s date. (There is additionally a question after a Commission review process. determination that two dated episodes of seeking input on the impact of increases in I am delighted that the proposal before us manipulation during the past 30 years do not non-spot month limits for convergence that is recognizes an expanded list of enumerated establish that it is necessary to take the of great interest to me.) bona fide hedging practices than are drastic step of restricting trading (and Finally, it is important to remember that currently recognized in Rule 1.3(z). This is liquidity) in non-spot months by imposing the 16 core referenced futures contracts for entirely appropriate. Hedging practices at position limits for the core referenced futures which federal non-spot month limits are not companies that produce, process, trade, and contracts in these two commodities—let being proposed remain subject to exchange- use agricultural, energy, and metals alone for the other 14 contracts at issue. I set position limit levels or position commodities are far more sophisticated, therefore support publishing the necessity accountability levels.18 The Commission has complex, and global than when the finding in the proposal before us—including decades of experience overseeing Commission last considered Rule 1.3(z). This the limitation on proposed non-spot month accountability levels implemented by is yet one more instance where the limits to the nine legacy agricultural exchanges, including for all 16 contracts that Commission’s position limit rules simply contracts—for public comment. would not be subject to federal limits outside have not kept pace with developments in, the spot month under this proposal. Position Setting Limit Levels and the realities of, the marketplace. In accountability enables the exchange to obtain addition, the proposal would expand federal With respect to setting position limit information about a potentially problematic limits to contracts in commodities not levels, the Commission’s historical practice position while it is at a relatively low level, previously subject to federal limits, and thus has been to set federal spot month levels at and to require a trader to halt increasing that common hedging practices in the markets for or below 25 percent of deliverable supply position or to reduce the position if the those commodities must be considered for based on estimates provided by the exchange considers it warranted. Exchange inclusion in the list of enumerated bona fide exchanges and verified by the Commission. position accountability rules, in combination hedges. Yet, some of the deliverable supply estimates with market surveillance by both the I am particularly pleased that, at my underlying the existing federal spot month exchanges and the Commission and the request, the proposal recognizes anticipatory limits on the nine legacy agricultural futures Commission’s enhanced anti-manipulation merchandising as an enumerated bona fide contracts have remained the same for authority granted by the Dodd-Frank Act, hedge. After all, the CEA itself identifies decades, notwithstanding the revolutionary provide a robust means of detecting and anticipatory merchandising as bona fide changes in U.S. futures markets and the deterring problems in the outer months of a hedging activity,20 and the Commission has explosive growth in trading volume over the contract. The proposal reasonably continues previously granted non-enumerated hedge years. These outdated delivery supply to rely on these tools in the non-legacy recognitions for anticipatory merchandising. estimates require updating. contracts. There is no policy basis for distinguishing The proposal adheres to the Commission’s Undoubtedly, there will be those who merchandising or anticipated merchandising historical approach, which is reasonable believe the proposed spot and non-spot from other activities in the physical supply given the Commission’s years of experience month limits are too high, and others who chain. Although there must be appropriate administering federal spot month limits on consider them too low. I look forward to safeguards against abuse, where the legacy agricultural contracts. And it receiving public comments along these lines, merchandisers anticipate taking price risk, provides a long-overdue update to but expect that any such comments will they should have the same opportunity as deliverable supply estimates for those legacy include market data and analysis for the others in the physical supply chain to contracts to reflect the realities of today’s Commission to consider in developing final manage their risk through recognized risk- markets. The proposed spot month limits for rules. reducing transactions that qualify as bona the 25 core referenced futures contracts are fide hedging. based on deliverable supply estimates of the Bona Fide Hedging Transactions and Positions Although the proposal refers to exchanges that know their markets best, but enumerated bona fide hedges as ‘‘self- that have been carefully analyzed by The CEA provides that the Commission’s effectuating’’ for purposes of federal limits, Commission staff to assure that they strike an position limit rules shall not apply to bona this is a bit of a misnomer. Even if a hedge appropriate balance between protecting fide hedging transactions or positions. It is enumerated, the trader still must receive market integrity and restricting liquidity for gives the Commission the authority to define approval from the relevant exchange to bona fide hedgers. ‘‘bona fide hedging transactions and For limit levels outside the spot month, the positions’’ with the purpose of ‘‘permit[ting] Commission historically has used a formula producers, purchasers, sellers, middlemen, 19 CEA section 4a(c)(1), 7 U.S.C. 6a(c)(1). based on 10% of open interest for the first and users of a commodity or a product 20 CEA section 4a(c)(2)(A)(iii)(I), 7 U.S.C. 25,000 contracts, with a marginal increase of derived therefrom to hedge their legitimate 6a(c)(2)(A)(iii)(I) (bona fide hedging transaction or 2.5% of open interest thereafter. Again, the position is a transaction or position that, among other things, ‘‘arises from the potential change in proposal reasonably adheres to this general 18 The use of position accountability in lieu of the value of . . . assets that a person owns, produces, hard limits is expressly permitted by the CEA for manufactures, processes, or merchandises or 17 The 2016 Re-Proposal acknowledged that ‘‘both both designated contract markets, CEA section anticipates owning, producing, manufacturing, episodes involved manipulative intent.’’ 2016 Re- 5(d)(5), 7 U.S.C. 7(d)(5), and swap execution processing, or merchandising . . .’’ (emphasis Proposal, 81 FR at 96716. facilities, CEA section 5h(f)(6), 7 U.S.C. 7b-3(f)(6). added)).

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exceed the exchange-set limits.21 This, too, is that this rulemaking encompass determinations.1 The Proposal would entirely appropriate. The exchanges know economically equivalent swaps, although I abruptly increase position limits in many their markets, and they are very familiar with invite public comment from those who physical delivery agricultural, metals, and current hedging practices in agricultural, believe another interpretation may be energy commodities, in some instances to energy, and metals commodities, and thus permissible and appropriate. multiples of their current levels. It would are well-suited to apply the enumerated bona The proposal sets forth a narrow definition provide no opportunity for the Commission fide hedges in real-time. And, as noted above, of the term ‘‘economically equivalent swap,’’ to monitor the effect of these increases, or to Congress has declared it a purpose of the which I believe is appropriate. A measured act if necessary to preserve market integrity. CEA to serve the public interest with respect approach is reasonable given that: (1) The The Proposal provides inadequate to derivatives trading ‘‘through a system of Commission’s regulatory regime for swaps explanation for other key approaches in the effective self-regulation of trading facilities remains in its relative infancy; (2) swaps document, including the use of position . . .’’ 22 have never been subject to position limits, be accountability rather than numerical limits I find perplexing what the proposal refers it federal or exchange-set limits; and (3) the for energy and metals commodities in non- to as a ‘‘streamlined’’ process for recognizing implications of imposing position limits on spot months. The Proposal also ignores non-enumerated bona fide hedging practices Congress’s mandate in the Dodd-Frank Act, economically equivalent swaps cannot be with respect to federal position limits. and reverses decades of legal interpretations predicted with any degree of confidence at Pursuant to proposed 150.9, if an exchange of the Commodity Exchange Act (‘‘CEA’’) by this time. Further, a measured approach is recognizes a non-enumerated practice as a the Commission and the courts regarding the more workable because it is the Commission, bona fide hedge for purposes of the Commission’s authority and responsibility to exchange’s position limits, that recognition rather than an exchange, that will be impose position limits. It would require, for would apply to the federal limits as well, responsible for administering the new the first time, the Commission to find that unless the Commission notifies the exchange position limits regime for swaps given that: position limits are necessary for each and market participant otherwise. The (1) Many swaps trade over-the-counter commodity prior to imposing limits. Commission would have 10 business days for (‘‘OTC’’) so there is no exchange to fulfill this an initial application, or 2 business days in responsibility; and (2) for swaps traded on I Support an Effective Position Limits the case of a sudden or unforeseen increase swap execution facilities (‘‘SEFs’’), those Framework With Transparency and Certainty in the applicant’s bona fide hedging needs, SEFs lack the information about a trader’s Position limits is one of the last remaining to approve or reject the exchange’s bona fide swap positions on other SEFs and OTC that items in the Commission’s reform agenda hedging recognition. would be necessary to fulfill this arising from the Dodd-Frank Act. In the wake I do not believe this ‘‘10/2-Day Rule’’ is responsibility. of the 2008 oil price spike to $147 per barrel, workable in practice for either market That said, the proposed definition of an the Amaranth hedge fund’s dominance of the participants or the Commission because it is ‘‘economically equivalent swap’’ is broader natural gas futures and swaps market, the rise both too long and too short. It is too long to than that used in the European position of commodity index funds, and the financial be workable for market participants that may limits regime. In Europe, economic crisis, Congress mandated that the need to take a hedging position quickly, and equivalence requires identical terms; the Commission promptly establish, as it is too short for the Commission to proposal, by contrast, requires only that appropriate, position limits and hedge meaningfully review the relevant material terms be identical. I look forward to exemptions for exempt and agricultural circumstances and make a reasoned receiving comment on this distinction, and commodities and economically equivalent determination related to the exchange’s the experience that market participants have swaps. We must not forget the lessons from recognition of the hedge as bona fide. had with the European application of the financial crisis or prior episodes of My preference would have been to propose position limits to swaps. excessive speculation, nor be lulled back into that recognition of non-enumerated hedges the belief that unfettered markets yield be the responsibility of the exchanges that, Conclusion optimal outcomes. A meaningful, effective again, are most familiar both with their own The fact that the Commission has been position limits regime was important to the markets and with the hedging practices of trying to update these rules for nearly a reform agenda in 2010, and it must remain participants in those markets. The decade demonstrates the challenge presented our goal today. Commission would monitor this process by position limits. I am extremely grateful to I support an effective position limits through our routine, ongoing review of the regime that includes both effective limits on exchanges. I welcome public comment on the the many members of our staff in the speculative positions and appropriate bona proposal’s legal discussion of the sub- Division of Market Oversight, the Office of fide hedge exemptions to meet market delegation of agency decision making General Counsel, and the Chief Economist’s participants’ legitimate commercial needs. authority as relevant to this question, and on Office who have dedicated a significant Position limits are critical to preventing how the proposed 10/2-Day Rule might be portion of their lives to helping us try to meet market manipulation or distortion due to improved in a final rulemaking to make the that challenge. I also appreciate the efforts of excessively large speculative positions. process workable for market participants and my fellow Commissioners as well. Together, position limits and bona fide hedge the Commission alike. Each of us has committed that we would work to finish a position limits rulemaking. exemptions promote the market integrity and A Word About Economically Equivalent The time has come. Overall, today’s proposal the price discovery process, while enabling Swaps is reasonable in design, balanced in producers, end-users, merchants, and others CEA section 4a(a)(5) provides that approach, and workable for both market to use the futures and swaps markets to ‘‘[n]otwithstanding any other provision’’ in participants and the Commission. I therefore manage their commercial risks. The Dodd- section 4a, the Commission’s position limit support it. Frank Act, adopted by Congress in 2010 in rules shall establish limits, ‘‘as appropriate,’’ I ask market participants to view the the midst of the financial crisis, affirmed with respect to economically equivalent proposal in that spirit. Please provide us with Congress’s commitment to federal swaps, and that such limits must be your constructive input on how we can make speculative position limits and its ‘‘develop[ed] concurrently’’ and a good proposal even better. determination that the Commission should ‘‘establish[ed] simultaneously’’ with the act decisively to address excessive limits imposed on futures contracts and Appendix 6—Dissenting Statement of speculation in physical commodity markets. options on futures contracts.23 I share the Commissioner Dan M. Berkovitz Since joining the Commission, I have view that section 4a(a)(5) thereby requires Introduction traveled the country to meet with market participants in many segments of the I dissent from today’s position limits 21 physical commodity markets. I have been to Further, the absence of Commission approval of proposal (‘‘Proposal’’). The Proposal would an enumerated bona fide hedge does not mean that soybean farms and rice mills in Arkansas, the Commission has no access to data about the create an uncertain and unwieldy process feedlots in Colorado, dairy co-ops and position or insight into the hedger’s trading activity. with the Commission demoted from head 22 See fn. 3, supra. coach over the hedge exemption process to 1 See Position Limits for Derivatives (‘‘Proposal’’) 23 CEA section 4a(a)(5), 7 U.S.C. 6a(a)(5). Monday-morning quarterback for exchange at rule text section 150.9(e).

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cornfields in Minnesota, and grain mills and The Proposal departs from the well- guide them through an opaque, non-public elevators in Kansas, Arkansas, Colorado, and established roles of the Commission and process through the halls of the Minnesota. I have met with coffee and cocoa exchanges in the bona fide hedge framework. Commission’s headquarters in Washington, graders in New York, energy companies in As affirmed by the Dodd-Frank Act, it is the DC. Texas, cotton merchandisers from Tennessee, Commission’s responsibility to define what The Commission has almost 40 years of and many others to understand how end- constitutes a bona fide hedge.5 For practical experience with exchange implementation of users participate in our markets. I have reasons, including limited Commission position limits for energy and metals visited the CME in Chicago, ICE in New resources, I support delegating to exchanges commodities, and more for agricultural York, and the Minneapolis Grain Exchange in the authority to determine whether a commodities. Based on this experience, I Minneapolis. The fundamental purpose of particular position, under the particular facts support many of the types of bona fide the commodity markets we oversee is to and circumstances presented, constitutes a hedges that exchanges recognize in these enable end-users to manage the price risks bona fide hedge as defined by the markets today. However, the Commission they face in their businesses. I am committed Commission. The exchanges are well suited should recognize these exemptions in its own to ensuring that this rule is workable for end- for this role and have decades of experience rules through prospective, notice and users and provides them with sufficient in making such determinations. However, the comment rulemaking, not delegate these clarity, predictability, and transparency. initial legal and policy determination of what determinations to the exchanges. In my view, a position limits rule must types of positions constitute bona fide hedges The legal analysis in this Proposal is a meet three basic criteria. First, the rule must must remain the Commission’s provide effective limits on speculative responsibility. convoluted and confusing legal interpretation positions. Second, the rule must recognize The Proposal carries forward all of the of the Dodd-Frank Act that defies legitimate bona fide hedging activities. The bona fide hedges currently enumerated in the Congressional intent. It is implausible that in Commission should provide market Commission’s rules, adds several additional the aftermath of the financial crisis and the participants with certainty regarding which categories to the list of enumerated hedges, run-up to oil at $147 per barrel, Congress activities constitute bona fide hedging and and opens the door to an unlimited number made it more difficult for the Commission to establish a workable, transparent process for of additional, undefined non-enumerated impose position limits. Yet that is the result qualifying additional types of activities as exemptions. The Proposal states, ‘‘the of the Commission’s revisionist bona fide hedging. Such a process should proposed enumerated hedges are in no way interpretation that a predicate finding of recognize both the traditional role of the intended to limit the universe of hedging necessity (i.e., that position limits are Commission in determining, generally, practices which could otherwise be necessary) is required for the imposition of which activities constitute bona fide hedging, recognized as bona fide.’’ 6 The ‘‘universe’’ is a position limit for each commodity. and the role of the exchanges in determining a very large place indeed. Moreover, the Proposal’s finding of necessity whether the specific activities of particular On the other hand, the Proposal does not for the 25 core reference futures contracts commercial market participants fall within address practices that market participants subject to the rule is unpersuasive both such bona fide hedging categories as have urged the Commission to recognize as economically and legally, and is highly determined by the Commission. bona fide hedges, including practices unlikely to survive legal challenge. The Third, from a legal perspective, a final rule currently recognized by the exchanges. The necessity finding largely consists of general must recognize that Congress has authorized Proposal thus deprives end-users and other economic statistics about the importance of and directed the Commission to promulgate market participants of legal certainty the physical commodities underlying these position limits—without a predicate finding regarding what constitutes a bona fide hedge futures contracts to commerce, together with that position limits are necessary to prevent for various practices currently permitted by statistics about open interest and trading excessive speculation—and that the the exchanges as bona fide hedges. volume in those futures contracts. These Commission has the flexibility to determine Rather than determine whether to statistics bear little rational relationship to the appropriate tools and limits to recognize these practices as bona fide hedges why position limits are necessary to prevent accomplish that Congressional directive. through notice and comment in today’s excessive speculation in derivative contracts Unfortunately, the Proposal fails to satisfy rulemaking, the Proposal contemplates that for these commodities. For example, the any of these criteria. The Proposal would additional non-enumerated bona fide hedges imposition of limits on cocoa futures is greatly increase position limits in many should first be considered by the exchanges, justified on the basis that ‘‘in 2010 the United physical delivery agricultural, metals, and and then reviewed by the Commission during States exported chocolate and chocolate-type energy commodities in spot and individual a cramped 10-day retrospective review confectionary products worth $799 million to non-spot months, with no opportunity to period.7 Determination of what constitutes a more than 50 countries around the world.’’ 8 monitor for or guard against adverse market bona fide hedge for non-enumerated hedges There is a simpler, more logical, and impacts. Although I am pleased that the would begin anew each time that an defensible path forward, as I will outline Proposal would no longer recognize risk exchange must decide whether a purported later in this statement. management exemptions as bona fide hedges bona fide hedge held by a market participant I thank the Commission staff for working 2 for physical commodities, the higher limits is consistent with the CEA, and then await with my office on the Proposal. Although I allowed under the Proposal could the Commission’s retrospective review. am not able to support it as currently accommodate substantially more speculative Market participants should be able to discern formulated, I look forward to working with 3 positions, with potentially adverse impacts whether particular types of practices qualify my colleagues and staff to improve the on markets. There is solid evidence that the as bona fide hedging by reading the Proposal so that it effectively protects our financialization and growth of commodity Commission’s rules and regulations rather markets from excessive speculation and index investments can raise commodity than by engaging lawyers and lobbyists to provides end-users and other market prices and negatively affect end-users in the participants with the regulatory certainty 4 real economy. 5 See CEA section 4a(c); 7 U.S.C. 6a(c). they need. I encourage market participants to 6 Proposal at preamble section II(A)(1)(c)(i) comment on the Proposal. 2 See Proposal at preamble section (emphasis added). II(A)(1)(c)(ii)(1). This change comports with 7 The Proposal would establish two distinct Additional Flaws in the Proposal amendments to the definition of bona fide hedging processes for recognition of non-enumerated No Phase-In for Large Increase in Speculative in CEA section 4a(c)(2) made by the Dodd-Frank hedges. One process would be Commission-based, Position Limits Act. but the Proposal anticipates that this process would 3 Proposal at preamble section II(A)(1)(c)(ii)(1). rarely, if ever, be used by market participants. See The Proposal would generally increase 4 See, e.g., Ke Tang & Wei Xiong, Index Proposal at rule text section 150.3. The other, in existing federal or exchange spot month Investment and Financialization of Commodities, proposed § 150.9(e), would require the Commission position limits for 25 physical delivery 68 Financial Analysts Journal 54, 55 (2012); to retroactively review bona fide hedge exemptions agricultural, metals, and energy commodities Luciana Juvenal & Ivan Petrella, Speculation in the approved by an exchange. See Proposal at rule text by a factor of two or more.9 It would Oil Market, Federal Reserve Bank of St. Louis, section 150.9(e). Such review would need to be Working Paper 2011–027E (June 2012), available at conducted within business10 days, would involve http://research.stlouisfed.org/wp/2011/2011- the five-member Commission itself, and could be 8 Proposal at preamble section III(F)(3). 027.pdf. stayed for a longer period. 9 See Proposal at preamble section I(B).

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substantially increase existing federal single Commission ‘‘shall set limits’’ on positions of prior Commission determinations.18 month and all months combined limits for held not only in the spot month, but also Neither the statutory language of CEA section the nine legacy agricultural commodities. As ‘‘each other month’’ and ‘‘for all months,’’ 4a(a)(2), nor the district court’s decision in examples, spot month limits on ICE’s frozen ‘‘as appropriate.’’ 14 Despite this directive, ISDA v. CFTC, compels this outcome.19 The concentrated orange juice contract would the Proposal does not adopt non-spot month Commission should not adopt it. increase from 300 to 2,200 contracts, and limits for these commodities. It includes Title VII of the Dodd-Frank Act amended single month and all months combined limits virtually no analysis of why the Commission CEA section 4a and directed in 4a(a)(2)(A) on CBOT soybean meal would increase from believes that non-spot limits are not that ‘‘the Commission shall’’ establish 6,500 to 16,900 contracts.10 Single month appropriate. position limits for agricultural and exempt and all months combined limits for CBOT Exchanges have demonstrated an ability to physical commodities ‘‘as appropriate.’’ 20 In corn would increase to 57,800 contracts.11 manage speculation and maintain orderly ISDA v. CFTC, the district court directed the The proposed increases are largely due to markets with position accountability in non- Commission to resolve a perceived ambiguity increases in deliverable supply, and the new spot months. However, experiences such as in section 4a(a)(2)(A) by bringing the spot and non-spot month limits continue to the collapse of the Amaranth hedge fund in Commission’s ‘‘experience and expertise to reflect the Commission’s 25% and 10%/2.5% 2006 demonstrate how large trades in the bear in light of the competing interests at 21 of deliverable supply formulas. non-spot month can also distort markets, stake ....’’ That experience includes 15 The Proposal does not provide for phasing widen spreads, and increase volatility. I over 80 years of position limits rulemakings, in the new, higher limits or for otherwise believe the exchanges have learned from the as described below. It provides ample providing a transition period.12 It presents no Amaranth experience and that position practical and legal bases to determine that analysis of the market’s ability to absorb accountability can be an effective tool, where Congress intended the Commission to adopt appropriate. The Proposal, however, also federal position limits for certain these large increases without disruption, and fails to demonstrate why accountability commodities pursuant to CEA section no analysis of how large new speculative levels, rather than numerical limits, are 4a(a)(2). positions may affect the price discovery appropriate in light of the statutory directives Starting in 1936, and across multiple process. in the CEA. It provides no discussion of the iterations of the CEA and its predecessors, Large increases in the amounts of effect of applying the 10/2.5% formula to the the CEA has consistently and continuously speculative activity in individual non-spot energy and metals contracts covered by the reflected Congress’s finding that excessive months have the potential to disrupt the Proposal, and why the application of this speculation in a commodity can cause convergence process and distort market traditional formula would not be appropriate. sudden, unreasonable, and unwarranted signals regarding storage of commodities. The Similarly, there is no analysis regarding the movements in commodity prices that are Proposal provides no analysis of whether numerical limits that could result from undue burden on interstate commerce.22 these potential price distortions and their applying the four factors specified in 4a(a)(3), Congress also has declared that ‘‘[f]or the attendant detrimental consequences could be and why such numerical limits would not be purpose of diminishing, eliminating, or avoided by distributing the large increases in appropriate. preventing such burden,’’ the Commission the numerical limits across several non-spot shall . . . proclaim and fix such [position] months, rather than permit such large 3. Definition of Economically Equivalent Swap limits’’ that the Commission finds ‘‘are positions in individual months. Instead, the necessary to diminish, eliminate, or prevent Proposal would codify an abrupt increase The Proposal would define an such burden.’’ In plain English, Congress has 365 days after publication of any final rule economically equivalent swap as a swap that found that excessive speculation is a burden in the Federal Register. A transition period ‘‘shares identical material contractual on interstate commerce, and the CFTC is or lower individual spot month limits would specifications, terms, and conditions with the directed to impose position limits that are referenced contract ....’’16 The Proposal give the Commission the time and ability to necessary to prevent that burden. Congress offers several rationales for this narrow mitigate any issues that may arise if markets did not direct the Commission to study definition that could potentially lend itself to are unable to absorb the higher limits in an excessive speculation, to prepare any reports evasion through financial engineering. One orderly manner, and prevent disruption if on excessive speculation, or to second-guess such rationale is that it would reduce market necessary. It is a prudent measure that the Congress’s finding that excessive speculation participants’ ability to net down their Commission should adopt in any final rule. was a problem that needed to be prevented. speculative positions through swaps that are Rather, Congress directed the Commission to 2. Absence of Non-Spot Month Limits for not materially identical. While this and other impose position limits that the Commission Exempt and Certain Agricultural rationales proffered in the Proposal have Commodities merit, the Commission must also ensure that believed were necessary to accomplish the statutory objectives. I am concerned with the Proposal’s failure economically equivalent swaps are not Following the passage of the 1936 Act, the to adopt federal non-spot limits for 16 structured in a manner to evade federal or exchange regulation through minor Commission set position limits for grains in energy, metals, and certain agricultural 1938, cotton in 1940, and soybeans in 1951. commodities included in the Proposal.13 modifications to material terms. I invite public comment on this issue. As the Proposal recognizes, in these CEA section 4a(a)(3) directs that the rulemakings the Commission did not publish 4. The Proposal’s Necessity Finding any analyses or make any ‘‘necessity 10 Id. Other notable examples include increased Misconstrues the CEA as Amended by the finding,’’ other than to include a ‘‘recitation’’ spot limits for ICE U.S. Sugar No. 11 (SB) from Dodd-Frank Act of the statutory findings regarding the undue 5,000 to 25,800 contracts; increased spot month limits for ICE Cotton No. 2 (CT) from 300 to 1,800 The Proposal states that, for any particular contracts; increased single month and all months commodity, ‘‘prior to imposing position 18 The Proposal acknowledges ‘‘this approach combined limits for CBOT Soybean Oil (SO) from limits, [the Commission] must make a finding differs from that taken in earlier necessity 8,000 to 17,400 contracts; and increased single that they are necessary.’’ 17 This is a reversal findings.’’ Proposal at preamble section III(F)(1). month and all months combined limits for ICE Specifically, the Proposal identifies different approaches taken in position limit rulemaking Cotton No. 2 (CT) from 5,000 to 11,900 contracts. 14 CEA section 4a(a)(3); 7 U.S.C. 6a(a)(3). 11 undertaken by the Commission’s predecessor Id. Although the proposed new limit for CBOT 15 See Excessive Speculation In the Natural Gas agency, the Commodity Exchange Commission Corn (C) is less than twice the current limit (57,800 Market, Staff Report with Additional Minority Staff (‘‘CEC’’) from 1938 through 1951, the Commission’s contracts proposed versus 33,000 contracts Views, Permanent Subcommittee on Investigations, 1981 rulemaking that required exchanges to impose currently), it would still be a significantly larger United States Senate (2007). position limit and the largest single month and all 16 position limits for each contract not already subject Proposal at preamble section (II)(A)(4) and to a federal limit, and the proposed rulemakings in months combined limit in the Proposal. proposed rule text section 150.1. 2013 and 2016. Id. 12 See Proposal at rule text section 150.2 and 17 Proposal at preamble section III(D). The 19 Int’l Swaps and Derivatives Ass’n (‘‘ISDA’’) v. Appendix E. Proposal also states that ‘‘[t]he Commission will CFTC, 887 F. Supp. 2d 259 (D.D.C. 2012). 13 See Proposal at rule text section 150.5(b)(2), therefore determine whether position limits are 20 providing for exchange-set position limits or necessary for a given contract, in light of those CEA section 4a(a)(2)(A); 7 U.S.C. 6a(a)(2)(A). position accountability in non-spot months premises, considering facts and circumstances and 21 ISDA, 887 F. Supp. 2d at 281. contracts not subject to federal speculative position economic factors.’’ Proposal at preamble section 22 Commodity Exchange Act of 1936, P.O. 76– limits. III(F)(1). 675, 49 Stat. 1491 section 5.

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burdens on commerce that can be caused by positions and the trading of the large soybean to 1936: ‘‘Section 4a(1) represents an express excessively large positions. These traders is unreasonable.’’ 29 Fundamentally, Congressional finding that excessive rulemakings then set numerical limits on the the Hunts alleged that the agency failed to speculation is harmful to the market, and a amounts of commodity futures contracts that demonstrate that the limits were a reasonable finding that speculative limits are an could be held. means—or, alternatively put, ‘‘necessary’’— effective prophylactic measure.’’ 35 The 1981 Court decisions from the 1950s through the to prevent unwarranted price fluctuations in final rule found that ‘‘speculative position 1970s in cases involving the application of soybeans. ‘‘The essence of the Hunts’ attack limits are appropriate for all contract markets the position limits rules reflect a common- on the validity of the regulation is their irrespective of the characteristics of the sense reading: The statute mandates that the substantive contention that there is no underlying market.’’ 36 It required exchanges Commission establish position limits, while connection between large scale speculation to adopt position limits for all listed providing the Commission with discretion as by individual traders and fluctuations in the contracts, and it did so based on statutory to how to craft those limits. In Corn Refining soybean trading market.’’ 30 language that is nearly identical to CEA Products v. Benson, 23 defendants challenged The U.S. Court of Appeals for the Seventh section 4a(a)(1).37 the suspension by the Secretary of Circuit denied the Hunt brothers’ challenge. In the 1981 rulemaking, the Commission Agriculture of their trading privileges on the It held, ‘‘[t]he Commodity Exchange also responded to comments that the Chicago Board of Trade for violating position Authority, operating under an express Commission had failed to ‘‘demonstrate[ ] limits in corn futures on the grounds that the congressional mandate to formulate limits on that position limits provided necessary statutory prohibition only applied to trading in order to forestall the evils of large market protection,’’ or were appropriate for speculative positions. The U.S. Court of scale speculation, was deciding on whether futures markets in ‘‘international soft’’ Appeals for the Second Circuit denied the to raise its then existing limit on commodities, such as coffee, sugar, and appeal, stating in part: soybeans.... There is ample evidence in cocoa. The Commission rejected comments The discretionary powers of the the record to support the regulation.’’ 31 that it was required to make predicate Commission and the exemptions from the The Hunt case also illustrates the necessity findings for particular ‘trading limits’ established under the Act are difference between the requirement for a commodities. The Commission stated: carefully delineated in [section] 4a. The predicate finding of necessity and the The Commission believes that the Commission is given discretionary power to requirement that the Commission’s observations concerning the general prescribe ’ * * * different trading limits for rulemakings be supported by sufficient desirability of limits are contrary to different commodities, markets futures, or evidence. Under the Administrative Congressional findings in sections 3 and 4a delivery months, or different trading limits Procedure Act (‘‘APA’’), the Commission’s of the Act and considerable years of Federal for the purposes of buying and selling regulations must not be ‘‘arbitrary, and contract market regulatory operations, or different limits for the capricious, an abuse of discretion, or experience.... purposes of subparagraphs (A) (i.e., with otherwise not in accordance with law.’’ 32 To *** respect to trading during one business day) make this finding, ‘‘the court must consider As stated in the proposal, the prevention and (B) (i.e., with respect to the net long or whether the decision was based on a of large and/or abrupt price movements net short position held at any one time) of consideration of the relevant factors and which are attributable to extraordinarily large this section * * * ’ .... whether there has been a clear error of speculative positions is a Congressionally Although [section] 4a expresses an judgment.’’ 33 endorsed regulatory objective of the intention to curb ‘excessive speculation,’ we In 1981, following the silver crisis of 1979– Commission. Further, it is the Commission’s think that the unequivocal reference to 1980, the Commission adopted a seminal view that this objective is enhanced by ‘trading,’ coupled with a specific and well- final rule requiring exchanges to establish speculative limits since it appears that the defined exemption for bona-fide hedging, position limits for all commodities that did capacity of any contract market to absorb the clearly indicates that all trading in not have federal limits.34 In the final establishment and liquidation of large commodity futures was intended to be rulemaking, the Commission determined that speculative positions in an orderly manner is subject to trading limits unless within the predicate findings are not necessary in related to the relative size of such positions, terms of the exemptions. 24 position limits rulemakings. It affirmed its i.e., the capacity of the market is not In United States v. Cohen,25 the defendant long-standing statutory mandate going back unlimited.38 challenged his criminal conviction for In the ‘‘Legal Matters’’ section of the 29 violating CEC trading limits in potato futures Id. at 1216. preamble, the Proposal would jettison the 30 contracts. In upholding the conviction, the Id. interpretation that has prevailed over the past 31 court of appeals stated that ‘‘[t]rading in Id. at 1218 (emphasis added). four decades as the basis for the 32 potato futures, as for other commodities, is 5 U.S.C. 706(2)(A). Commission’s position limits regime. Relying 33 limited by statute and by regulations issued Hunt, 591 F.2d at 1216. In the proposed on a non sequitur incorporating a double by the Commission. The statute here requires regulation increasing the speculative position limits for soybeans from 2 million to 3 million bushels, negative, the Preamble brushes off nearly the Commission to fix a trading limit forty years of Commission jurisprudence: ....’’26 The court of appeals further the Commission’s predecessor, the Commodity Exchange Authority (‘‘Authority’’), did not make a [B]ecause the Commission has observed: ‘‘Congress expressed in the statute soybean-specific finding that the limit of three preliminarily determined that section 4a(a)(2) a clear intention to eliminate excessive million bushels was necessary to prevent undue does not mandate federal speculative limits futures trading that can cause sudden or burdens on commerce. Rather, the Authority relied for all commodities, it cannot be that federal unreasonable fluctuations.’’ 27 on its 1938 and 1951 position limit rulemakings for position limits are ‘necessary’ for all physical In CFTC v. Hunt, 28 the Hunt brothers the general principle that ‘‘the larger the net trades challenged the validity of the agency’s by large speculators, the more certain it becomes commodities, within the meaning of section position limit on soybeans of three million that prices will respond directly to trading.’’ Corn 4a(a)(1), on the basis of a property shared by bushels on the basis that the agency ‘‘made and Soybeans, Limits on Position and Daily Trading all of them, i.e., a limited capacity to absorb no analysis of the relationship between the for Future Delivery, 36 FR 1340 (Jan. 28, 1971). The the establishment and liquidation of large Authority then stated that its analysis of speculative speculative positions in an orderly fashion.39 size of soybean price changes and the size of trading between 1966 and 1969 ‘‘did not show that the change in the net position of large undue price fluctuations resulted from speculative 35 traders. They argue[d] that there is no direct trading as the trading by individual traders grew See Establishment of Speculative Positon relationship between these phenomena, and, larger.’’ Id. Following a public hearing, the Limits, 46 FR 50938, 50940 (Oct. 16, 1981) (‘‘1981 therefore, the regulation limiting the Authority adopted the proposed increase. See 36 FR Position Limits Rule’’). 12163 (June 26, 1971). For the past 82 years, the 36 1981 Position Limits Rule at 50941. Commission has relied on this general principle to 37 In the proposed regulation, the Commission 23 232 F.2d 554 (2d Cir. 1956). justify its position limits regime. noted that as of April 1975, position limits were in 24 Id. at 560 (emphasis added). 34 During the silver crisis, the Hunt brothers and effect for ‘‘almost all’’ actively traded commodities 25 448 F.2d 1224 (2d Cir. 1971). others attempted to corner the silver market through then under regulation. Speculative Position Limits, 26 Id. at 1225–6 (emphasis added). large physical and futures positions. The price of 45 FR 79831, 79832 (Dec. 2, 1980). 27 Id. at 1227 (emphasis added). silver rose more than five-fold from August 1979 to 38 1981 Position Limits Rule at 50940. 28 591 F.2d 1211 (7th Cir. 1979). January 1980. 39 Proposal at preamble section III(F)(1).

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In 2010, Congress enacted Title VII of the necessity finding for the 25 core referenced commodity in interstate commerce is Dodd-Frank Act and amended CEA section futures contracts selected for this rulemaking irrelevant to the need for position limits for 4a by directing the Commission to establish boils down to simplistic assertions that the futures contracts for that commodity. speculative position limits for agricultural futures contracts and economically The collapse of the Amaranth hedge fund and exempt commodities and economically equivalent swaps for these contracts ‘‘are in 2006 is another strong example of why a equivalent swaps.40 Congress also set forth large and critically important to the position limits regime is necessary to prevent criteria for the Commission to consider in underlying cash markets.’’ 42 As part of the excessive speculation, in this case in non- establishing limits, including diminishing, necessity finding for these 25 commodities, spot months. Amaranth was a large eliminating, or preventing excessive the Proposal presents general economic speculative hedge fund that at one point held speculation; deterring and preventing market measures, such as production, trade, and some 100,000 natural gas contracts, or manipulation; ensuring sufficient liquidity manufacturing statistics, to illustrate the approximately 5% of all natural gas used in for bona fide hedgers; and ensuring that price importance of these commodities to interstate the U.S. in a year. As the Commission has discovery in the underlying market is not commerce, and therefore for the need for explained in other position limits proposals disrupted.41 Congress directed the position limits. On the other hand, the since 2011, the collapse of Amaranth was a Commission to establish the required Proposal fails to present any rational reason factor in the Dodd-Frank’s amendments to speculative limits within tight deadlines of as to why the economic trade, production, CEA section 4a. 180 days for exempt commodities and 270 and value statistics for commodities other The Commission has ample practical days for agricultural commodities. than the 25 core referenced futures contracts experience and legal precedent to resolve the It defies history and common sense to are insufficient to support a similar finding perceived ambiguity in CEA section 4a(a)(2) assert that the amendments to section 4a that position limits are necessary for futures as instructed by the district court in ISDA v. enacted by Congress in the Dodd-Frank Act contracts in those other commodities. CFTC without making the antecedent made it more difficult for the Commission to For example, the Proposal justifies the necessity finding now incorporated in the impose position limits, such as by requiring exclusion of aluminum, lead, random length Proposal. Our remaining task is to design the predicate necessity findings on a commodity- lumber, and ethanol as examples of contracts overall position limits framework, including for which a necessity finding was not made by-commodity basis. This is particularly true determining the appropriate limit levels, on the basis that the open interest in these given Congress’s repeated use of mandatory defining bona fide hedges through contracts is less than the open interest in the words like ‘‘shall’’ and ‘‘required’’ and the prospective rulemaking, and appropriately oat futures contracts. This comparison has no tight timeframe to respond to the new considering other options such as position basis in rationality. The need for position Congressional directives. In light of the run accountability and exchange-set limits. up in the price of oil and the financial crisis limits for commodity futures contracts in that precipitated the legislation, it is aluminum, lead, lumber, and ethanol is not Conclusion unreasonable to interpret the Dodd-Frank in any way rationally related to the open In CEA section 4a, Congress directed the amendments as creating new obstacles for the interest in those commodity futures contracts Commission to establish position limits and relative to the open interest in oat futures. Commission to establish position limits for appropriate hedge exemptions to prevent the The Proposal is rife with other such illogical oil, natural gas, and other commodities undue burdens on interstate commerce that statements. whose significant price fluctuations had result from excessive speculation. Congress Fundamentally, general economic caused economic harm to consumers and has also entrusted to the Commission’s measures of commodity production, trade, businesses across the nation. The discretion the appropriate regulatory tools to and value are irrelevant with respect to the Commission’s interpretation is revisionist meet this mandate. Congress’ overarching need for position limits to prevent excessive history. policy directive for position limits is speculation. The Congress has found that The Commission’s necessity finding that straightforward and has been remarkably follows its legal analysis is sure to persuade position limits are an effective prophylactic consistent for 84 years. The Commission has no one. Unless substantially modified in the tool to prevent excessive speculation for all had ten years, three prior proposals, one final rulemaking, it will likely doom this commodities. The Congressional findings in supplemental proposal, and hundreds of regulation as ‘‘arbitrary, capricious, or an CEA section 4a regarding the need for pages of comment letters to define bona fide abuse of discretion’’ under the APA. The position limits are not limited to only the most important or the largest commodity hedge exemptions. Now is the time to finish the job, and to do it the right way. 40 See CEA section 4a(a)(2); 7 U.S.C. 6a(a)(2); CEA markets. General economic data regarding a section 4a(a)(5); 7 U.S.C. 6a(a)(5). [FR Doc. 2020–02320 Filed 2–26–20; 8:45 am] 41 See CEA section 4a(a)(3); 7 U.S.C. 6a(a)(3). 42 Proposal at preamble section III(F)(2). BILLING CODE 6351–01–P

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