June 3, 2016

CFTC Supplements Position Limits Proposal

The CFTC Supplements Its Position Limits Proposal by Revising the Proposed Definition of Bona Fide Hedging and Including a Provision that Would Permit Exchanges to Recognize Non-Enumerated Bona Fide Hedges and Other Exemptions

SUMMARY On May 26, 2016, the U.S. Commodity Futures Trading Commission (the “CFTC”) released a supplemental notice of proposed rulemaking along with a proposed rule (the “Supplemental Proposal”) that would supplement and amend the proposed rule originally released by the CFTC in December 2013 (the “2013 Proposed Rule”) that would impose speculative position limits on positions held by traders in 28 physical commodity futures contracts, options and “economically equivalent” futures and swaps contracts. The Supplemental Proposal includes three key changes as compared to the 2013 Proposed Rule, each largely aimed at addressing concerns raised by commercial entities. First, the Supplemental Proposal would provide a new process allowing trading facilities, including designated contract markets (“DCMs”) and swap execution facilities (“SEFs”), to recognize certain positions in commodity derivative contracts as non-enumerated bona fide hedges or enumerated anticipatory bona fide hedges, as well as to exempt from federal position limits certain spread positions, in each case subject to CFTC review. Second, the Supplemental Proposal would amend certain definitions originally proposed in the 2013 Proposed Rule, notably including the definition of “bona fide hedging” for physical commodities. Lastly, the Supplemental Proposal would delay the requirement that DCMs and SEFs establish and monitor position limits on swaps where the DCM or SEF lacks access to sufficient swap position information. Comments on the Supplemental Proposal will be due 30 days after the Supplemental Proposal is published in the Federal Register.

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BACKGROUND The CFTC’s proposed position limit rules generally include three components: (1) the level of the limits, which sets a threshold that restricts the number of speculative positions that a person may hold in the spot month, an individual month and all months combined, (2) exemptions from the limits for positions that constitute bona fide hedging positions and certain other types of transactions or positions, and (3) rules to determine which accounts and positions a person must aggregate for the purpose of determining compliance with the position limit levels.1

CEA section 4a(c) provides generally that federal position limits do not apply to positions that are shown to be “bona fide hedging positions.” CEA section 4a(c)(2), added to the CEA by the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), directs the CFTC to narrow the scope of what constitutes a bona fide hedging position from the previous definition promulgated by the CFTC for the purposes of implementing the federal position limits on certain categories of physical commodity derivatives.

The 2013 Proposed Rule2 sought to amend the CFTC’s existing pre-Dodd-Frank position limit rules (which only apply federal limits to certain futures and options contracts on nine enumerated agricultural commodities) by, among other things, adopting federal position limits applicable to positions in 28 exempt and agricultural commodity futures and option contracts and swaps that are “economically equivalent” to such contracts.3 Additionally, the 2013 Proposed Rule would require that DCMs and SEFs that are trading facilities (collectively, “Exchanges”) establish Exchange-set limits on such futures, options and swaps contracts. The 2013 Proposed Rule also would (i) revise the definition of bona fide hedging positions (including a general definition with requirements applicable to all hedges, as well as an enumerated list of bona fide hedges for which an exemption from position limits may be available), (ii) revise the process for market participants to request CFTC recognition of certain types of positions as bona fide hedges, including anticipatory hedges and hedges not specifically enumerated in the proposed bona fide hedging definition, and (iii) revise the exemptions from position limits for transactions normally known to the trade as spreads.

1 See generally 17 C.F.R. part 150, as proposed to be expanded and revised under the 2013 Proposed Rule and the Supplemental Proposal. 2 Recall that the 2013 Proposed Rule represented the CFTC’s second post-Dodd-Frank attempt at position limits rules following a successful court challenge to position limits rules that the CFTC had originally finalized in 2011. See Sullivan & Cromwell LLP, Court Vacates Position Limit Rules, October 1, 2012, https://www.sullcrom.com/siteFiles/Publications/SC-Publication-Court-Vacates- Position-Limit-Rules.pdf. 3 See Sullivan & Cromwell LLP, CFTC Proposes New Position Limits, November 18, 2013, https://www.sullcrom.com/siteFiles/Publications/SC_Publication_CFTC_Proposes_New_Position_Lim its.pdf. -2- CFTC Supplements Position Limits Proposal June 3, 2016

As noted above, the Supplemental Proposal would supplement and modify the 2013 Proposed Rule by delegating to DCMs and SEFs the authority to recognize certain exemptions from position limits, revising the proposed definition of bona fide hedging (and certain other definitions related to spread positons), and delaying the requirement that DCMs and SEFs establish and monitor position limits on swaps until such time as DCMs and SEFs have access to sufficient swap position information.

THE SUPPLEMENTAL PROPOSAL A. DELEGATION TO EXCHANGES TO RECOGNIZE CERTAIN POSITIONS AS NON-ENUMERATED BONA FIDE HEDGES OR ENUMERATED ANTICIPATORY BONA FIDE HEDGES AND TO EXEMPT FROM FEDERAL POSITION LIMITS CERTAIN SPREAD POSITIONS

The Supplemental Proposal proposes three sets of rules that would enable an Exchange to submit to the CFTC rules under which the Exchange could take action to (i) recognize certain non-enumerated bona fide hedging positions (“NEBFHs”);4 (ii) grant exemptions to position limits for certain spread positions;5 and (iii) recognize certain enumerated anticipatory bona fide hedging positions.6 Each of the proposed rules would establish a formal CFTC review process that would provide the CFTC with the ongoing authority to review all such actions by the Exchange. Notably, the Supplemental Proposal would therefore permit commercial end users to avail themselves of an Exchange’s NEBFH application process in lieu of requesting CFTC approval of an NEBFH, which would have required seeking a staff interpretive letter under section 140.99 of the CFTC’s regulations or seeking CEA section 4a(a)(7) exemptive relief.

The proposed delegations to the Exchanges would be subject to significant CFTC oversight. Each of the three proposed processes requires that (i) an Exchange submit implementing rules subject to CFTC review, (ii) the Exchange’s standards for receiving the recognition of a bona fide hedge position or other exemption conform to the requirements under the statute,7 (iii) each Exchange’s actions under these processes be reviewed under the CFTC’s rule enforcement review program, and (iv) all Exchange actions under such implementing rules (including the recognition of any exemption) be subject to CFTC review.

4 See Supplemental Proposal at proposed section 150.9. 5 See Supplemental Proposal at proposed section 150.10. 6 See Supplemental Proposal at proposed section 150.11. 7 By way of example, the Notice of Supplemental Rulemaking notes that proposed section 150.9(a)(3) requires Exchanges that elect to process NEBFH applications to solicit information to allow it to determine why a derivative position satisfies the requirements of section 4a(c) of the CEA; proposed section 150.9(a)(4) requires Exchanges that elect to process NEBFH applications to determine whether a derivative position for which a complete application has been submitted satisfies the requirements of section 4a(c) of the CEA; and proposed section 150.10(a)(4)(vi) requires Exchanges that elect to process spread exemption applications to determine that exempting a spread position would further the purposes of CEA section 4a(a)(3)(B). -3- CFTC Supplements Position Limits Proposal June 3, 2016

1. Recognition of Certain Non-Enumerated Bona Fide Hedging Positions (“NEBFHs”)

The Supplemental Proposal would permit Exchanges to recognize NEBFHs with respect to the proposed federal speculative position limits (see below for a summary of the proposed definition of “bona fide hedging definition,” as revised by the Supplemental Proposal, including the proposed list of enumerated “bona fide hedging positons”). Exchange recognition of a position as an NEBFH would allow the market participant to exceed the federal position limit, up to approved levels, to the extent that it relied upon the Exchange’s recognition unless and until such time that the CFTC notified the market participant to the contrary.

The Supplemental Proposal would require market participants to report certain facts and circumstances attendant to a position to verify whether the position satisfies the requirements of the definition of a “bona fide hedging transaction or position” in the CEA.8 The Supplemental Proposal also proposes to require that all applicants submit detailed information to demonstrate why the position satisfies the requirements of the definition of bona fide hedging in the CEA and any other information necessary for the Exchange to determine, and for the CFTC to verify, if it reviews the position, whether it is appropriate to recognize such a position as an NEBFH.9 An applicant intending to rely on an Exchange’s recognition of a position as an NEBFH would be required to submit an application in advance of exceeding any applicable position limit and to reapply at least on an annual basis.10 The Supplemental Proposal also would require Exchanges to promulgate reporting rules for applicants who own, hold or control positions recognized as NEBFHs.11

The Supplemental Proposal permits an Exchange to establish a less expansive application process for NEBFHs previously recognized and published on such Exchange’s website than for NEBFHs based on novel facts and circumstances.

The proposed delegations to the Exchanges would permit market participants to rely on an Exchange’s recognition of an NEBFH, spread or anticipatory exemption until an Exchange or the CFTC notifies them to the contrary.

In order to process NEBFH applications with respect to a commodity derivative position, Exchanges must meet certain requirements.12 In each case, the Exchange may elect to process NEBFH applications for positions in commodity derivative contracts only if (i) the commodity derivative is a “referenced contract”; (ii) such Exchange lists such commodity derivative contract for trading; (iii) such commodity derivative contract is actively traded on such Exchange; (iv) such Exchange has established position limits for such

8 See Supplemental Proposal at proposed section 150.9(a)(3). 9 See Supplemental Proposal at proposed sections 150.9(a)(3)(ii) and (v). 10 See Supplemental Proposal at proposed section 150.9(a)(4). 11 See Supplemental Proposal at proposed section 150.9(a)(6). 12 See Supplemental Proposal at proposed section 150.9(a)(1). -4- CFTC Supplements Position Limits Proposal June 3, 2016

commodity derivative contract; and (v) the Exchange has at least one year of experience administering Exchange-set position limits for such commodity derivative contract. The Supplemental Proposal would prohibit Exchanges from recognizing an NEBFH involving a commodity index contract and one or more futures contracts subject to position limits. Additionally, Exchange rules related to recognizing NEBFHs must incorporate the general definition of bona fide hedging position, as proposed to be revised by the Supplemental Proposal (see discussion below).

The Supplemental Proposal would require Exchanges that elect to process NEBFH applications to keep certain records, including all pertinent data and memoranda, of all activities relating to the processing of such applications and the disposition thereof.13 Exchanges must keep all information and documents submitted by an applicant; records of oral and written communications between the Exchange and the applicant in connection with the application; and all information in connection with the Exchange’s analysis of an action on such application. In addition, the Supplemental Proposal would require Exchanges that elect to process NEBFH applications to submit a weekly report to the CFTC providing information regarding each commodity derivative position recognized by the Exchange as an NEBFH during the course of the week.14 This information would include the identity of the applicant seeking such recognition, the maximum size of the derivative position that is recognized as an NEBFH and, to the extent that the Exchange determines to limit the size of such bona fide hedge position under the Exchange’s own speculative position limits program, the size of any limit established by the Exchange.

2. Exemptions to Position Limits for Certain Spread Positions

The Supplemental Proposal would permit Exchanges, by rule, to exempt from federal position limits certain spread transactions. CEA section 4a(a)(1) provides the CFTC with authority to exempt from federal position limits transactions normally known to the trade as “spreads” or “straddles” or “arbitrage” or to fix limits for such transactions or positions different from limits fixed for other transactions or positions. The Supplemental Proposal would permit Exchanges to process and grant applications for spread exemptions from federal position limits. Most DCMs already have rules in place to process and grant applications for such spread exemptions from Exchange-set position limits, and the Supplemental Proposal would expand this ability to also cover federal limits.

Similar to the delegation of authority to Exchanges with respect to recognizing NEBFHs, Exchanges would be required to file new rules or rule amendments with the CFTC to process spread exemption applications. In addition, the requirements related to the eligibility of Exchanges to process such applications are similar to those required for Exchanges to recognize NEBFHs noted above (generally, the Exchange must actively list for trading at least one contract that is either a component of the spread

13 See Supplemental Proposal at proposed section 150.9(b). 14 See Supplemental Proposal at proposed section 150.9(c)(1). -5- CFTC Supplements Position Limits Proposal June 3, 2016

or a referenced contract that is a component of the spread, and such contract must have been subject to position limits of the Exchange for at least one year).

3. Recognition of Certain Enumerated Anticipatory Bona Fide Hedging Positions

The Supplemental Proposal would permit certain Exchanges, as an alternative to the CFTC, to recognize exemptions from position limits for certain enumerated anticipatory hedging positions as set forth under the definition of bona fide hedging position, as proposed to be revised in the Supplemental Proposal (see discussion below). The December 2013 Proposed Rule would have required market participants to file statements with the CFTC regarding certain anticipatory hedges, which would have become effective absent CFTC action or inquiry 10 days after submission. In contrast, the Supplemental Proposal would permit Exchanges, as an alternative to the CFTC, to review requests for recognition of such enumerated anticipatory bona fide hedging exemptions pursuant to Exchange Rules submitted to the CFTC. The 2013 Proposed Rule enumerated the anticipatory bona fide hedging positions that would be eligible for recognition, including unfilled anticipation requirements, unsold anticipated production, anticipated royalties, anticipated service contract payments or receipts, and anticipatory cross-commodity hedges. The requirements for Exchanges to recognize such positions are similar to those imposed on the Exchanges under the rules regarding NEBFHs.

As noted above, with respect to processing applications for NEBFHs, the Supplemental Proposal would allow Exchanges to establish a less expansive application process for NEBFHs previously recognized and published on such Exchange’s website than for NEBFHs based on novel facts and circumstances. However, the Supplemental Proposal expressly noted that the CFTC would not permit such an expedited process for applications based on novel versus non-novel facts and circumstances with respect to recognition of enumerated anticipatory bona fide hedging positions.

B. AMENDMENT TO THE DEFINITION OF BONA FIDE HEDGING AND OTHER DEFINITIONS UNDER THE CFTC’S POSITION LIMITS RULES

Bona Fide Hedging Position. As noted above, the 2013 Proposed Rule provided certain exemptions from position limits (1) for “bona fide hedging positions,” with respect to commercial physical commodity activities, including eight enumerated bona fide hedging positions; (2) for offsets of “pass-through swaps”; and (3) for certain cross-commodity hedges. The CEA states that the CFTC shall define what constitutes a “bona fide hedging transaction or position” as a transaction or position that:

(i) represents a substitute for transactions made or to be made or positions taken or to be taken at a later time in a physical marketing channel;

(ii) is economically appropriate to the reduction of risks in the conduct and management of a commercial enterprise; and

(iii) arises from the potential change in the value of—

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(I) assets that a person owns, produces, manufactures, processes, or merchandises or anticipates owning, producing, manufacturing, processing, or merchandising;

(II) liabilities that a person owns or anticipates incurring; or

(III) services that a person provides, purchases, or anticipates providing or purchasing,” or

a transaction or position that reduces risks attendant to a position resulting from a swap that was executed opposite a counterparty for which the transaction would qualify as a bona fide hedging transaction pursuant to the requirements above, or that reduces the risk attendant to a position resulting from a transaction that meets the requirements above.15

In the 2013 Proposed Rule, the CFTC proposed a new definition of “bona fide hedging position” that included the statutory language and two additional requirements not present in the statutory definition of “bona fide hedging position” in the CEA: an incidental test and an orderly trading requirement.16 The incidental test would have required that the risks offset by a commodity derivative position must be incidental to the position holder’s commercial operations. The orderly trading requirement would have required that a bona fide hedge position be established and liquidated in an orderly manner in accordance with sound commercial practices.

The Supplemental Proposal would eliminate the incidental test and the orderly trading requirement from the general definition of “bona fide hedging position.” Instead, the Supplemental Proposal would include a general definition of “bona fide hedging position” that incorporates only the standards of CEA section 4a(c). While the Supplemental Proposal proposes to eliminate the incidental test, the definition of bona fide hedging in the Supplemental Proposal still states that such position must be economically appropriate to the reduction of risks in the conduct and management of a commercial enterprise. The CFTC stated in the Supplemental Proposal that it interprets the economically appropriate test similarly to the requirements of the incidental test.17 While the economically appropriate test generally requires a reduction in the “risks” in the conduct and management of a commercial enterprise, the Supplemental

15 See CEA section 4a(c)(2). 16 These two tests originated in rule 1.3(z)(1), adopted in 1975 by the CFTC’s predecessor agency, defining bona fide hedging and requiring, among other requirements, that transactions or positions would not be classified as hedging unless their bona fide purpose was to offset price risks incidental to commercial cash or spot operations, and such positions were established and liquidated in an orderly manner and in accordance with sound commercial practices. The newly formed CFTC adopted the predecessor’s definition with minor changes as an interim definition of bona fide hedging transactions or positions, effective October 18, 1975. 17 The Commission adopted in 1977 a requirement that bona fide hedges be “economically appropriate” to the reduction of risks in the conduct and management of a commercial enterprise, but did not address whether this concept overlapped with the incidental test. The Supplemental Proposal states that the incidental test appears to have simply been left in the definition as a historical carryover. -7- CFTC Supplements Position Limits Proposal June 3, 2016

Proposal states that the CFTC interprets “risks” to mean “price risks,” consistent with the former interpretation of the incidental test. With respect to the orderly trading requirement, the Supplemental Proposal states that the meaning of the orderly trading requirement is unclear in the context of the over- the-counter swap market and in the context of permitted off-exchange transactions. The CFTC also notes in the Supplemental Proposal that it has separate authority under CEA section 4c(a)(6) to prohibit the intentional or reckless disregard for the orderly execution of transactions on a registered entity.18 According to the Supplemental Proposal, the new language more closely conforms the proposed definition of bona fide hedging to the CEA’s statutory language, lessens the redundancy regarding an incidental test, and mitigates confusion surrounding an orderly trading requirement.19

The definition of “bona fide hedging position” in the Supplemental Proposal includes exceptions to position limits (1) for eight enumerated bona fide hedging positions; (2) for offsets of “pass-through swaps”; (3) for certain cross-commodity hedges and, (4) as supplemented by the Supplemental Rule, for positions recognized to be NEBFHs by an Exchange in accordance with the Supplemental Rule. The specific language proposed for the definition of “bona fide hedging position,” as revised by the Supplemental Proposal, is contained in Appendix A to this Memorandum.

Futures Equivalent. The Supplemental Proposal also proposes changes to the definitions of “futures- equivalent,” “intermarket spread position” and “intramarket spread position.” With respect to the definition of “futures-equivalent,” the amendments to CEA section 4a made by Dodd-Frank direct the CFTC to apply aggregate federal position limits to physical commodity futures contracts and to swaps contracts that are economically equivalent to such physical commodity futures contracts on which the CFTC has established limits. In order to aggregate positions in futures, options and swaps contracts, the CFTC determined it was necessary to adjust the position sizes through the creation of a futures-equivalent concept, since such contracts may have varying units of trade. The Supplemental Proposal clarifies that the term “futures-equivalent” in proposed section 150.1 of the CFTC’s regulations includes a futures contract which has been converted to an economically equivalent amount of an open position in a core referenced futures contract. This clarification mirrors the definition of “futures-equivalent” in the 2013 Proposed Rule as it would pertain to swaps. Additionally, the Supplemental Proposal provides that, for purposes of calculating futures equivalents, an option contract must also be converted to an economically equivalent amount of an open position in a core referenced futures contract. The Supplemental Proposal states that this clarification addresses situations, for example, in which the unit of trading underlying an option contract may differ from the unit of trading underlying a core referenced futures contract.

18 See CEA sections 4c(a)(5) and 4c(a)(6). 19 See Supplemental Proposal at 100. -8- CFTC Supplements Position Limits Proposal June 3, 2016

Intermarket Spread Position. The CFTC’s existing and proposed position limit rules include exemptions for certain spread positions.20 The CEA amendments passed in Dodd-Frank require the CFTC to apply position limits on an aggregate basis to contracts based on the same underlying commodity across certain markets. The CFTC defined the term “intermarket spread position” in the 2013 Proposed Rule to mean “a long position in a commodity derivative contract in a particular commodity at a particular designated contract market or swap execution facility and a short position in another commodity derivative contract in that same commodity away from that particular designated contract market or swap execution facility.” The CFTC stated in the release accompanying the 2013 Proposed Rule that this term would simplify the proposed changes to the position limit rules in proposed section 150, which provide acceptable exemptions Exchanges may choose to grant from speculative position limits. The Supplemental Proposal proposes to define an “intermarket spread position” to mean a “long (short) position in one or more commodity derivative contracts in a particular commodity, or its products or its by- products, at a particular designated contract market, and a short (long) position in one or more commodity derivative contracts in that same, or similar, commodity, or its products or its by-products, away from that particular designated contract market.” The expanded definition would take into account that a market participant may take positions in multiple commodity derivative contracts to establish an intermarket spread position, and that such spread positions may be established by taking positions in derivative contracts in the same commodity, in similar commodities, or in the products or by-products of the same or similar commodities.

Intramarket Spread Position. The CFTC proposed similar modifications to the language of the definition of an “intramarket spread position” to broaden the definition to include more positions that may include derivative contracts. The Supplemental Proposal defines “intramarket spread position” to mean “a long position in one or more commodity derivative contracts in a particular commodity, or its products or its by- products, and a short position in one or more commodity derivative contracts in the same, or similar, commodity, or its products or its by-products, on the same designated contract market or swap execution facility.”

C. THE DELAY IN THE REQUIREMENT FOR EXCHANGES TO MONITOR SWAP POSITION LIMITS

The Supplemental Proposal would delay the implementation of Exchange-set limits for swaps for SEFs that are Exchanges without sufficient swap position information. In the Supplemental Proposal, the CFTC noted its belief that most Exchanges do not have access to sufficient swap position information to effectively monitor swap position limits. Once the Exchange has sufficient swap position information, the guidance would no longer be applicable, and the Exchange would be required to file rules with the CFTC to implement the relevant position limits and demonstrate compliance with the rules requiring DCMs and SEFs, as applicable, to implement, and monitor position limits for swaps. The Supplemental Proposal

20 See, e.g., 17 C.F.R. section 150.3(a)(3) providing an exemption for spread (or arbitrage) positions. -9- CFTC Supplements Position Limits Proposal June 3, 2016

stated that an Exchange would have or could have access to sufficient swap position information to effectively monitor position limits if, for example, (1) it had access to daily information about its market participants’ open swap positions; or (2) it knows that its market participants regularly engage on its Exchange in large volumes of speculative trading activity, that would cause reasonable surveillance personnel at an Exchange to inquire further about a market participant’s intentions and total open swap positions. Despite the proposed delay, federal position limits would still apply to swaps that are economically equivalent to futures contracts subject to federal position limits.

OTHER NOTES The Supplemental Rule, passed unanimously by the CFTC commissioners, together with the 2013 Proposed Rule, will bring significant changes for commercial end users and other market participants that will become subject to the CFTC’s new position limits rules, once finalized. In addition, the Supplemental Proposal also represents a significant new approach to the applicability and availability of exemptions from federal position limits for bona fide hedging positions. In a statement released with the Supplemental Proposal, Commissioner J. Christopher Giancarlo noted that the proposal “appears responsive to a broad range of public comments” and is “a positive step forward in devising a final rule that will take into account certain practical realities associated with administering a workable position limits regime.” With respect to timing, CFTC Chairman Timothy Massad stated that the CFTC was working to complete the new position limit rule in 2016. As a reminder, comments on the Supplemental Proposal will be due 30 days after it is published in the Federal Register.

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APPENDIX A: PROPOSED DEFINITION OF “BONA FIDE HEDGING POSITION” AS REVISED BY THE SUPPLEMENTAL PROPOSAL “Bona fide hedging position” means

(1) Hedges of an excluded commodity. For a position in commodity derivative contracts in an excluded commodity, as that term is defined in section 1a(19) of the Act:

(i) Such position is economically appropriate to the reduction of risks in the conduct and management of a commercial enterprise; and

(ii) (A) Is enumerated in paragraph (3), (4) or (5) of this definition; or

(B) Is recognized as a bona fide hedging position by the designated contract market or swap execution facility that is a trading facility, pursuant to such market’s rules submitted to the Commission, which rules may include risk management exemptions consistent with Appendix A of this part; and

(2) Hedges of a physical commodity. For a position in commodity derivative contracts in a physical commodity:

(i) Such position:

(A) Represents a substitute for transactions made or to be made, or positions taken or to be taken, at a later time in a physical marketing channel;

(B) Is economically appropriate to the reduction of risks in the conduct and management of a commercial enterprise;

(C) Arises from the potential change in the value of –

(1) Assets which a person owns, produces, manufactures, processes, or merchandises or anticipates owning, producing, manufacturing, processing, or merchandising;

(2) Liabilities which a person owes or anticipates incurring; or

(3) Services that a person provides, purchases, or anticipates providing or purchasing; and

(D) Is –

(1) Enumerated in paragraph (3), (4) or (5) of this definition; or

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(2) Recognized as shown to be a non-enumerated bona fide hedges by either a designated contract market or swap execution facility, each in accordance with § 150.9(a); or by the Commission; or

(ii) (A) Pass-through swap offsets. Such position reduces risks attendant to a position resulting from a swap in the same physical commodity that was executed opposite a counterparty for which the position at the time of the transaction would qualify as a bona fide hedging position pursuant to paragraph (2)(i) of this definition (a pass- through swap counterparty), provided that no such risk-reducing position is maintained in any physical-delivery commodity derivative contract during the lesser of the last five days of trading or the time period for the spot month in such physical-delivery commodity derivative contract; and

(B) Pass-through swaps. Such swap position was executed opposite a pass- through swap counterparty and to the extent such swap position has been offset pursuant to paragraph (2)(ii)(A) of this definition.

(3) Enumerated hedging positions. A bona fide hedging position includes any of the following specific positions:

(i) Hedges of inventory and cash commodity purchase contracts. Short positions in commodity derivative contracts that do not exceed in quantity ownership or fixed-price purchase contracts in the contract’s underlying cash commodity by the same person.

(ii) Hedges of cash commodity sales contracts. Long positions in commodity derivative contracts that do not exceed in quantity the fixed-price sales contracts in the contract’s underlying cash commodity by the same person and the quantity equivalent of fixed-price sales contracts of the cash products and by-products of such commodity by the same person.

(iii) Hedges of unfilled anticipated requirements. Provided that such positions in a physical-delivery commodity derivative contract, during the lesser of the last five days of trading or the time period for the spot month in such physical-delivery contract, do not exceed the person’s unfilled anticipated requirements of the same cash commodity for that month and for the next succeeding month:

(A) Long positions in commodity derivative contracts that do not exceed in quantity unfilled anticipated requirements of the same cash commodity, and that do not exceed twelve months for an agricultural commodity, for processing, manufacturing, or use by the same person; and

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(B) Long positions in commodity derivative contracts that do not exceed in quantity unfilled anticipated requirements of the same cash commodity for resale by a utility that is required or encouraged to hedge by its public utility commission on behalf of its customers’ anticipated use.

(iv) Hedges by agents. Long or short positions in commodity derivative contracts by an agent who does not own or has not contracted to sell or purchase the offsetting cash commodity at a fixed price, provided that the agent is responsible for merchandising the cash positions that are being offset in commodity derivative contracts and the agent has a contractual arrangement with the person who owns the commodity or holds the cash market commitment being offset.

(4) Other enumerated hedging positions. A bona fide hedging position also includes the following specific positions, provided that no such position is maintained in any physical-delivery commodity derivative contract during the lesser of the last five days of trading or the time period for the spot month in such physical-delivery contract:

(i) Hedges of unsold anticipated production. Short positions in commodity derivative contracts that do not exceed in quantity unsold anticipated production of the same commodity, and that do not exceed twelve months of production for an agricultural commodity, by the same person.

(ii) Hedges of offsetting unfixed-price cash commodity sales and purchases. Short and long positions in commodity derivative contracts that do not exceed in quantity that amount of the same cash commodity that has been bought and sold by the same person at unfixed prices:

(A) Basis different delivery months in the same commodity derivative contract; or

(B) Basis different commodity derivative contracts in the same commodity, regardless of whether the commodity derivative contracts are in the same calendar month.

(iii) Hedges of anticipated royalties. Short positions in commodity derivative contracts offset by the anticipated change in value of mineral royalty rights that are owned by the same person, provided that the royalty rights arise out of the production of the commodity underlying the commodity derivative contract.

(iv) Hedges of services. Short or long positions in commodity derivative contracts offset by the anticipated change in value of receipts or payments due or expected to be due under an executed contract for services held by the same person, provided that the

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contract for services arises out of the production, manufacturing, processing, use, or transportation of the commodity underlying the commodity derivative contract, and which may not exceed one year for agricultural commodities.

(5) Cross-commodity hedges. Positions in commodity derivative contracts described in paragraph (2)(ii), paragraphs (3)(i) through (iv) and paragraphs (4)(i) through (iv) of this definition may also be used to offset the risks arising from a commodity other than the same cash commodity underlying a commodity derivative contract, provided that the fluctuations in value of the position in the commodity derivative contract, or the commodity underlying the commodity derivative contract, are substantially related to the fluctuations in value of the actual or anticipated cash position or pass-through swap and no such position is maintained in any physical-delivery commodity derivative contract during the lesser of the last five days of trading or the time period for the spot month in such physical-delivery contract.

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