[Federal Register Volume 64, Number 86 (Wednesday, May 5, 1999)]
[Rules and Regulations]
[Pages 24038-24049]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-11066]



[[Page 24038]]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 1, 17, 18 and 150


Revision of Federal Speculative Position Limits and Associated 
Rules

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rules.

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SUMMARY: The Commodity Futures Trading Commission (Commission) has long 
established and enforced speculative position limits for futures 
contracts on various agricultural commodities. On April 7, 1993, the 
Commission promulgated interim final rules amending Federal speculative 
position limits. The interim amendments generally maintained the 
existing speculative position limit levels for the delivery months and 
increased limit levels for the deferred months at levels below the 
levels originally proposed. The Commission, as proposed on July 17, 
1998, is raising the speculative position limit levels to the levels 
originally proposed.

EFFECTIVE DATE: July 6, 1999.

FOR FURTHER INFORMATION CONTACT:  Paul M. Architzel, Chief Counsel, 
Division of Economic Analysis, Commodity Futures Trading Commission, 
Three Lafayette Centre, 1155 21st Street, N.W., Washington, D.C. 20581, 
(202) 418-5260, or electronically, [PArchitzel@cftc,gov].

SUPPLEMENTARY INFORMATION: In addition, the Commission is codifying 
various policies relating to the requirement that exchanges set 
speculative position limits as required by rule 1.61, 17 CFR 1.61. 
These relate to the levels which the Commission has approved for such 
rules and to various exemptions from the general requirement that 
exchanges set speculative position limits for all contract markets. 
Specifically, the Commission is codifying an exemption permitting 
exchanges to substitute position accountability rules for position 
limits for high volume and liquid markets.
    The Commission is also amending the applicability of the limited 
exemption from nonspot month speculative position limits under 
Commission rule 150.3, 17 CFR 150.3, for entities that authorize 
independent account controllers to trade on their behalf. Specifically, 
the Commission is amending the definition of entities eligible for this 
relief under Commission rule 150.1(d), 17 CFR 150.1(d), to expand the 
categories of eligible entities and to extend it to the separately 
organized affiliates of an eligible entity.
    Finally, the Commission is amending its rule on aggregation. In 
particular, the Commission is requiring that limited partners with 
greater than a 25% ownership interest in a commodity pool the operator 
of which is exempt from the requirement to register as a commodity pool 
operator under Commission rule 4.13 aggregate their positions with the 
pool's. However, the Commission is also amending rule 150.3 to make 
such a limited partner eligible for relief from speculative position 
limit levels during nonspot months. The Commission is also amending its 
rules to clarify that a commodity pool operator's principals and its 
affiliates are treated the same as the commodity pool operator itself 
for purposes of the Commission's aggregation rule unless they maintain 
and enforce procedures for keeping their trading separate and 
independent from the pool's.

I. Background

    Speculative position limits have been a tool for regulation of 
futures markets for over sixty years. Since the Commodity Exchange Act 
of 1936, Congress consistently has expressed confidence in the use of 
speculative position limits as an effective means of preventing 
unreasonable or unwarranted price fluctuations.\1\
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    \1\ See, H.R. Rep. No. 421, 74th Cong., 1st Sess. 1 (1935). See 
also, H.R. Rep. No. 624, 99th Cong., 2d Sess. 44 (1986). Section 
4a(1) of the Commodity Exchange Act (Act), 7 U.S.C. 6a(1), makes the 
explicit finding that:
    (e)xcessive speculation in any commodity under contracts of sale 
of such commodity for future delivery made on or subject to the 
rules of contract markets causing sudden or unreasonable 
fluctuations or unwarranted changes in the price of such commodity, 
is an undue and unnecessary burden on interstate commerce in such 
commodity * * *.
    and provides the Commission with authority to:
    fix such limits on the amount of trading which may be done or 
positions which may be held by any person under contracts of sale of 
such commodity for future delivery on or subject to the rules of any 
contract market as the Commission finds are necessary to diminish, 
eliminate, or prevent such burden.
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    The Commission directly administers speculative position limits on 
futures contracts for most of the domestic agricultural commodities 
listed in section 2(a)(1) of the Commodity Exchange Act (Act), 7 U.S.C. 
1 et seq. See, 17 CFR part 150. Prior to the Act's amendment in 1974 
which expanded its scope to all ``services, rights and interests'' in 
which futures contracts are traded, only these listed commodities were 
regulated. Both prior to and after the 1974 amendments to the Act, 
futures markets which traded commodities not so listed applied 
speculative position limits by exchange rule, if at all. In 1981 the 
Commission promulgated rule 1.61, requiring exchanges to adopt rules 
setting speculative position limits for all contract markets not 
subject to Commission-set speculative position limits. Since then, all 
contract markets have been subject to speculative position limits set 
by the Commission or an exchange.\2\ The Commission and the exchanges 
share responsibility for enforcement of speculative position limits.\3\
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    \2\ Commission rule 1.61, 17 CFR 1.61, requires that, absent an 
exemption, exchanges adopt and enforce speculative position limits 
for all contract markets which are not subject to Commission-set 
limits. In addition, Commission rule 1.61 permits exchanges to adopt 
and enforce their own speculative position limits for those 
contracts which have Federal speculative position limits, as long as 
the exchange limits are not higher than the Commission's.
    \3\ Section 4a(e) provides that a violation of a speculative 
position limit established by a Commission-approved exchange rule is 
also a violation of the Act. Thus, the Commission can directly take 
enforcement actions against violations of exchange-set speculative 
position limits as well as those provided under Commission rules.
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    The Commission periodically has reviewed its policies and rules 
pertaining to each of the three elements of the regulatory framework 
for speculative position limits--the levels of the limits, the 
exemptions from them (in particular, for hedgers), and the policy on 
aggregating accounts.\4\ Most recently, the Commission proposed to 
raise the levels of Commission-set speculative position limits, to 
codify a number of broad exemptions from the requirement of rule 1.61 
that exchanges establish speculative position limits for

[[Page 24039]]

all contracts not subject to Commission-set limits, to broaden its 
speculative position limit exemption under rule 150.3 for independent 
account controllers and to codify its aggregation policy. 63 FR 38525 
(July 17, 1998).
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    \4\ Initially, for example, the Commission redefined ``hedging'' 
(42 FR 42748 (August 24, 1977)), raised speculative position limits 
in wheat (41 FR 35060 (August 19, 1976)), and issued its statement 
of policy on aggregation of accounts and adoption of related 
reporting rules (1979 Aggregation Policy), 44 FR 33839 (June 13, 
1979).
    Subsequently, the Commission modified and updated speculative 
position limits by issuing a clarification of its hedging definition 
with regard to the ``temporary substitute'' and ``incidental'' tests 
(52 FR 27195 (July 20, 1987)) and guidelines regarding the exemption 
of risk-management positions from exchange-set speculative position 
limits in financial futures contracts. 52 FR 34633 (September 14, 
1987). Moreover, in 1988, the Commission promulgated Commission rule 
150.3(a)(4), an exemption from speculative position limits for the 
position of multi-advisor commodity pools and other similar entities 
that use independent account controllers. The Commission 
subsequently amended Commission rule 150.3(a)(4), broadening its 
applicability to commodity trading advisors and simplifying and 
streamlining the application process. 56 FR 14308 (April 12, 1991).
    In 1991, the Commission solicited public comment on, and 
subsequently approved, exchange requests for exemptions for futures 
and option contracts on certain financial instruments from the 
Commission rule 1.61 requirement that speculative position limits be 
specified for all contracts. 56 FR 51687 (October 15, 1991).
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    The comment period, after a thirty-day extension (63 FR 49883 
(Sept. 18, 1998)), closed on October 19, 1998. The nine commenters 
included three futures exchanges, four industry associations, a 
professional association and an investment bank. All of the commenters 
favored expansion of the Commission's speculative position limits to 
the levels proposed. They expressed a range of opinions, however, about 
the other rule proposals. Those comments are discussed in greater 
detail below.

II. Commission Speculative Position Limit Levels

    As the Commission noted in its notice of proposed rulemaking, it 
has updated Commission speculative position limits periodically. In 
1992, the Commission last proposed major revisions to both the 
structure and levels of Commission-set speculative position limits. 57 
FR 12766 (April 13, 1992). Departing from its previous practice, the 
Commission proposed to increase speculative position limit levels based 
upon the size of a contract market's open interest, in addition to the 
traditional standard of distribution of speculative traders in the 
market.\5\ 63 FR at 38527. Specifically, the Commission proposed 
combined futures and option speculative position limits for both a 
single month and for all-months-combined at the level of 10% of open 
interest up to an open interest of 25,000 contracts, with a marginal 
increase of 2.5% thereafter. The Commisson also reiterated its view 
that spot-month speculative position limit levels are ``based most 
appropriately on an analysis of current deliverable supplies and the 
history of various spot-month expirations.'' Id.
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    \5\ In proposing these increases to the limit levels, the 
Commission reasoned that, as the total open interest of a futures 
market increased, speculative position limit levels could be raised. 
The Commission therefore applied the open interest criterion by 
using a formula that specified appropriate increases to the limit 
level as a percentage of open interest.
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    The Commission received 63 comments in response to the 1992 
proposed rules.\6\ Typically, commodity pool operators, commodity 
trading advisors and futures commission merchants strongly favored the 
amendments. Most agricultural producers and their representative 
organizations strongly opposed any increase to the speculative position 
limits. Others, however, recommended that the Commission proceed, but 
in a more cautious manner. In particular, they recommended that the 
Commission raise speculative position limits on a phased or test basis. 
These commenters advocate taking additional time to study the need for, 
and the possible effects of, further increasing speculative position 
limits; in their view, the trial implementation of expanded speculative 
limits would provide such an additional opportunity.
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    \6\ Those commenters included three futures exchanges; a futures 
industry association; four futures commission merchants; 26 
commodity pool operators, commodity trading advisors or associations 
of such entities; 20 groups of firms representing agricultural 
interests; eight individual agricultural producers; and one exchange 
member. In addition, the proposed rules were a topic of discussion 
at the October 19, 1992, meeting of the Commission's Agricultural 
Advisory Committee.
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    Based on its consideration of the comments received and its 
favorable administrative experience with the rule's prior amendment, 
the Commission in April 1993 adopted interim final rules on Commission-
set speculative position limits. These interim amendments increased the 
position limit levels by half of the increase originally proposed, in 
two steps. 58 FR 18057 (April 7, 1993).
    As recounted in the 1998 notice of proposed rulemaking, the 
administrative experience with the interim rules was positive. 63 FR 
38528. Moreover, Commission staff undertook an in-depth study of the 
possible effects of increasing the speculative position limit levels in 
these markets and concluded that ``overall the impact of the interim 
final rules on actual, observed large trader positions was modest, and 
that any changes in market performance were most likely attributable to 
factors other than to changes in the rules.'' Id.
    On July 17, 1998, the Commission again proposed to raise 
speculative position limit levels for the deferred trading months to 
the levels originally proposed. The Commission took this action based 
on the growth in open interest and the size of large traders' positions 
in these markets. 63 FR 38528.
    The commenters uniformly supported the Commission's proposal to 
raise the speculative position limit levels for the deferred trading 
months. Based upon the positive administrative experience with the 
limits at their current levels, the growth in the contract's open 
interest and distribution of large trader positions, a staff study and 
analysis finding no adverse effects from the previous increase to the 
speculative position limit levels, and the consensus of the commenters, 
the Commission is increasing the speculative position limit levels for 
the deferred months as initially proposed in 1992 and as recently 
reproposed.\7\
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    \7\ The Board of Trade of the City of Chicago commented that, in 
its view, granting ``the exchanges sole responsibility to establish 
and monitor speculative limits subject to Commission oversight'' 
would ``result in limits which better reflect and are more 
responsive to the dynamics of the markets.'' The Commission believes 
that this suggestion may merit future consideration.
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    Despite agreeing that the limit levels should be increased, the 
Board of Trade of the City of Chicago (CBT) urged the Commission to 
modify its spread exemption to include spreads between single months 
across crop-years. The CBT stated that:

    By normalizing inter-crop spread limits with the limits 
presently permitted for intra-crop spreads, noncommercial traders 
would be in a position to provide greater market liquidity in 
deferred new crops and eliminate a possible cause for the reduced 
liquidity that occurs near the end of a crop year.

Although recognizing that the CBT has been granted ``no-action'' 
letters by Division of Economic Analysis regarding the prohibition on 
inter-crop year spreads when the relationship between crop years so 
warranted, the exchange stated that ``the Commission has refrained from 
granting `no actions' generally'' and that, in any event, the no-action 
process is ``cumbersome, unnecessary, causes confusion and uncertainty 
for market participants, * * * (and is) necessarily reactive and 
therefore ineffective because they are initiated only after the spreads 
have experienced significant price movement.''
    As the Commission noted in adopting the interim final rules in 
1933,

    Historically, the reason for including the spread exemption in 
the structure of speculative position limits was the relatively low 
limit for individual-month limits, especially in comparison to the 
all-moneys limits. Generally, individual-months limits were set at 
the same level as the spot-month limits in these contracts. 
Accordingly, the spread exemption may have been an important means 
for traders to exceed the relatively low individual-month limit.
    The Commission remains unconvinced that the exemption for inter-
month spreads should be modified at this time to permit generally 
such spreads across crop-years in excess of the speculative position 
limits which are being greatly expanded herein. The Commission 
remains concerned that depending upon conditions in the underlying 
case market, the separate legs of inter-crop year spreads may act 
more like separate outright positions than a spread within the same 
crop-year. In light of the increases to the limits being adopted 
herein, the Commission believes that such a modification of the 
spread exemption should be * * * based upon a demonstrated need for 
such additional relief.


[[Page 24040]]


58 FR 17981.
    The Commission believes that the reasons for its policy of 
permitting a spread exemption only for positions within the same crop 
year remain sound (see, e.g., Division of Economic Analysis Statement 
of Guidance [1994-1996 Transfer Binder], Comm. Fut. L. Rep. (CCH) para. 
26 691 (May 15, 1996)), and that none of the reasons advanced by the 
CBT's comment warrants a reversal of that policy. To the contrary, a 
number of markets during the intervening years exhibited the very risks 
that concerned the Commission. In these markets, the risk associated 
with the individual legs of inter-crop year spread positions did in 
fact act more like that associated with separate outright positions 
than that of a spread. Moreover, the Division of Economic Analysis 
remains flexible in its willingness to entertain requests for ``no-
action'' letters relating to inter-crop year spread positions when the 
economic conditions during a particular crop year so warrant.\8\
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    \8\ Although the last no action letter issued concerning the 
prohibition on inter-crop year spreads was a number of years ago, 
the Division of Economic Analysis noted that ``no-action'' relief is 
appropriate when the spreads between old and new crop year are 
stable and in full-carry and there is a large crop carryover 
expected, and requests for future no-action treatment would be 
considered during crop years that meet these criteria.
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    Another futures exchange, the Minneapolis Grain Exchange (MGE), 
noted that it was ``particularly pleased the CFTC determined to 
maintain a parity of limit levels for the major wheat contract at each 
domestic exchange which trades such.'' However, the exchange noted that 
the Commission did not propose an increase for the limit levels for its 
white wheat contract. Although the exchange was ``not aware of any 
curtailment of white wheat futures trade activity because of the 
current speculative position limits,'' it nevertheless noted that 
activity in the contract might increase with improvements in the Asian 
economies and therefore ``requests that the CFTC consider at least 
expanding the deferred white wheat limits proportionally as done with 
the Hard Red Spring Wheat futures contract.'' The exchange also noted 
that the durum wheat contract did not have Commission speculative 
position limits.
    The Commission originally proposed the speculative position limit 
level for each wheat contract market based on the open interest and the 
distribution of large traders' positions specific to the contract 
market. 57 FR 12770. Subsequently, in 1993, the Commission's interim 
final rules provided for parity of levels, but only for each of the 
domestic futures exchanges' major wheat contacts. The Commission will 
consider future increases to the speculative position limit levels for 
the MGE white wheat contract and for all other contracts as open 
interest or large traders' positions increase. Of course, an exchange 
may petition the Commission for rulemaking any time that a contract 
meets the criteria supporting an increase in the levels.\9\ See, 17 CFR 
13.2.
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    \9\ The Commission did not propose to establish a Commission-set 
speculative position limit for the durum contract because that 
contract was designated after the promulgation of rule 1.61, which 
requires that designated contract markets set and enforce 
speculative position limits for contracts not subject to the 
Commission-set limits. Since then, the Commission has preferred to 
rely upon the exchanges to set and enforce speculative position 
limits and has adopted new Commission speculative position limits 
only for soybean meal and soybean oil. As the Commission explained 
previously, because of an historical anomaly, only these two 
contracts among those in the soybean complex were not included under 
Commission-set limits. 52 FR 38914 (October 20, 1987).
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III. Exchange Speculative Position Limit and Exemption Rules

    As discussed above, Commission rule 1.61 requires that, absent an 
exemption, exchanges adopt and enforce rules setting speculative 
position limits for all contract markets not subject to Commission 
speculative position limit rules.\10\ See, 17 CFR Sec. 1.61. The 
Commission proposed to simplify and reorganize its rules by relocating 
the substance of rule 1.61's requirements to Part 150 of the 
Commission's rules, thereby incorporating within that Part all 
Commission rules relating to speculative position limits. Moreover, the 
Commission proposed explicitly to incorporate within the rule a number 
of administrative practices that have developed over time. These 
included the speculative position limit levels that the staff routinely 
has recommended be approved by the Commission for newly designated 
futures and option contracts.
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    \10\ For contract markets that have Commission-set speculative 
position limits, section 4a(e) of the Act permits exchanges to adopt 
and enforce their own speculative position limits as long as the 
exchange limits are not higher than the Commission's.
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    In addition, the Commission proposed to clarify the magnitude of 
increases to the limit levels that it would approve for traded 
contracts. As the Commission explained in the notice of proposed 
rulemaking, the open-interest criterion and numeric formula used by the 
Commission in its 1991 proposed amendment of Commission-set speculative 
position limits provided the most definitive guidance by the Commission 
on acceptable levels for speculative position limits for tangible 
commodities and, along with several other commonly accepted measures, 
has been widely followed as a matter of administrative practice when 
reviewing proposed exchange speculative position limits under 
Commission rule 1.61.\11\ Although rule 1.61 did not include specific 
criteria for determining acceptable limit levels for new contracts, 
promulgating the prior administrative practice as a rule will make the 
applicable standard more transparent and thereby make compliance easier 
to achieve. Moreover, as noted in the notice of proposed rulemaking, 
``promulgating these policies within a single section of the 
Commission's rules will increase significantly their accessibility and 
clarify their terms.'' 63 FR 38536.
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    \11\ In addition, in reviewing applications for contract 
designation for tangible commodities, the staff has relied upon the 
Commission's formulation providing for a minimum level of 1,000 
contracts for nonspot-month speculative position limits. Moreover, 
the Commission has routinely approved a level of 5,000 contracts for 
nonspot months in applications for designation of financial futures 
and energy contracts, and that level has become a rule of thumb as a 
matter of administrative practice.
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    Specifically, proposed rule 150.5(a) tracks the provisions of rule 
1.61(a) and clarifies that exchange speculative position limits are not 
required for futures and option contracts on major foreign currencies. 
Proposed rule 150.5(b) makes explicit the speculative position limit 
levels which the Commission finds appropriate for new contract market 
designations. As noted in the notice of proposed rulemaking, the 
proposed limit levels for new contract designations, which are based 
upon the formula and associated minimum levels used by the Commission 
in its 1992 proposed rulemaking, have long been used as a matter of 
informal administrative practice. 63 FR 38530.
    The New York Mercantile Exchange (NYMEX) commented generally that 
the Commission should ``reexamine the appropriate roles of the 
Commission and the exchanges in pursuing their shared goal of market 
integrity'' and suggested further that ``futures exchanges are best 
positioned to establish speculative position limits for their markets 
and should be given sole responsibility to do so.'' NYMEX expressed 
concern that:

    Codification of informal practices in proposed new regulation 
Sec. 150.5 would appear to remove the flexibility that was perceived 
to be available under the informal procedures. Therefore even if the 
Commission determines not to undertake an assessment at this time of 
the appropriate degree of self-regulatory organization 
responsibilities for speculative position limits, the CFTC, at a 
minimum, should

[[Page 24041]]

consider revising proposed new Regulation Sec. 150.5 to provide 
exchanges with sufficient flexibility to address the differing 
conditions in their respective markets.

    Specifically, NYMEX, joined by the CBT, questioned reliance on the 
sole criterion that the speculative position limit not exceed one-
quarter of the deliverable supply during the spot month. NYMEX reasoned 
that the Commission has recognized that the limits that may be 
appropriate for one commodity may not be appropriate for another.
    Guideline No. 1, 17 CFR part 5, appendix A, requires that, in order 
to become and to remain a designated contract market, the futures 
contract's ``terms and conditions, as a whole, will result in a 
deliverable supply which will not be conducive to price manipulation or 
distortion.'' 17 CFR part 5, appendix A(a)(2)(ii). Administrative 
practice has long interpreted this provision as requiring a deliverable 
supply that is at least four times the spot month speculative position 
limit. 62 FR 60831, 60838 (November 13, 1997). A spot month speculative 
position limit that exceeds this amount enhances the susceptibility of 
the contract to market manipulation, price distortion or 
congestion.\12\
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    \12\ In 1997 the Commission conducted a section 5a(a)(10) 
proceeding requiring CBT to amend the delivery terms of its corn and 
soybean futures contracts. In commencing the action, the Commission 
found that deliverable stocks under the contract terms as then 
specified frequently had dropped to levels near or below the maximum 
number of contracts a single speculative trader may hold during the 
delivery periods of expiring trading months. 61 FR 67998, 68012 
(December 26, 1996). The Commission found that, where a single 
speculator could control all of the deliverable stocks during a 
contract's delivery month, the contract fails to meet the Act's 
requirement that its contract's terms ``will tend to prevent or 
diminish price manipulation, market congestion or the abnormal 
movement of such commodity in interstate commerce.'' See, section 
5a(a)(10) of the Act.
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    NYMEX suggests that this standard may not be appropriate for 
nonagricultural tangible or intangible commodities. However, except for 
cash-settled contracts,\13\ Commission staff have used this standard to 
review every application for contract market designation or proposals 
to increase existing exchange speculative position limits since 1981, 
when rule 1.61 was issued.\14\ Experience has demonstrated that many 
commodities, particularly intangible commodities, have sufficiently 
large deliverable supplies to meet this standard without requiring a 
spot month level that is lower than the individual month level. For 
other commodities, however, especially commodities having strong 
seasonal characteristics, spot month speculative position limits are 
required to be set at a level lower than the individual month limit for 
all or some trading months.\15\ Accordingly, codification of this 
standard only makes explicit the standard which, since 1981, has been 
applied to, and met by, every physical delivery futures contract at the 
time of initial designation and upon subsequent increases to the spot 
month speculative position limit.
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    \13\ Current Guideline No. 1 requires that the contract terms 
for cash settled contracts not be ``subject to the manipulation or 
distortion.'' 17 CFR part 5, appendix A(a)(2)(iii). Because some 
types of commodities which are cash settled may not have deliverable 
supplies per se, the Commission is modifying the spot month 
requirement to provide that the spot month level for cash-settled 
contracts must be set ``no greater than necessary to minimize the 
potential for manipulation or distortion of the contract's or the 
underlying commodity's price.''
    \14\ CBT commented that the proposed spot month rule was 
arbitrary, having been ``reversed engineered'' as part of the corn 
and soybean section 5a(a)(10) proceeding. To the contrary, as 
discussed above, the proposed rule is based upon long-standing 
administrative practice and experience. The appropriate measures of 
adequacy of deliverable supply in a section 5a(a)(10) proceeding, 
which is initiated upon an affirmative finding that the contracts 
violate that section of the Act, were discussed in the Commission's 
orders in that proceeding and should not be confused with the 
standard of review for new contract applications. 62 FR at 60838.
    CBT also commented that, ``before codifying its `rule-of-thumb' 
standard for determining speculative position limits for the 
respective delivery months, the Commission should include in a 
release for pubic comment a substantive description of the 
methodology it used to establish the basis for its proposed 
formula.'' As CBT recognized in its comment, however, the 
Commission's notice of proposed rulemaking on Guideline No. 1, a 
companion notice which was referred to in the notice of proposed 
rulemaking on speculative position limits, noted that the twenty-
five percent criterion was based on the Commission's long-standing 
administrative practice and experience. 63 FR 38537, 38539 (July 17, 
1998).
    \15\ The CBT objects that basing the spot month speculative 
position limits on an estimate of deliverable supplies which has 
been calculated separately for each trading month will result in 
``different spot month speculative limit levels for each of the 
months * * * (and) will be extremely confusing and cumbersome to the 
marketplace.'' However, the rule does not require that the spot 
month level vary from one trading month to the next, but only that 
it not exceed one-quarter of estimated deliverable supplies. An 
exchange can choose how it wishes to structure its limits, whether 
preferring to have the same limit apply to all months or to have 
different levels for particular trading months. It is not uncommon 
today for exchanges to apply lower spot month speculative position 
limits to selected trading months where there are strong seasonal 
variations in a contract's potential deliverable supplies.
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    CBT also suggests that the proposed rule define the methodology for 
estimating the deliverable supply and that, in proposing such a 
definition, ``the Commission discuss how deliverable supply is 
measured; who determines deliverable supply; what constitutes 
deliverable supply; and when deliverable supply should be measured for 
the purpose of the rule.'' As noted by CBT, the Commission proposed 
such a definition as part of the proposed amendments to Guideline No. 
1. 63 FR 38537 (July 17, 1998). Guideline No. 1 details the information 
that an application for contact market designation should include in 
order to demonstrate compliance with the applicable legal requirements, 
including the requirement of rule 1.61 that exchanges set speculative 
position limits. As the Commission discussed at length in that notice 
of proposed rulemaking, the Commission is proposing explicitly to 
require exchanges to estimate deliverable supplies for the specified 
delivery months of a proposed contract. Id. at 38539. Moreover, the 
Commission explained that the exchange should describe the methodology 
it uses to derive the estimate and should base its estimate ``on 
statistical data when reasonably available covering an historical 
period that is representative of actual patterns of production and 
consumption of the commodity.'' \16\ Id.
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    \16\ Although CBT complains that the Commission's definition is 
``far from conclusive'' and ``subjective,'' its comment suggests, 
not that the requirement is undefined, but rather that CBT disagreed 
with the Commission's exclusion of certain stocks and inventories of 
corn and soybeans from estimated deliverable supplies in the 1998 
section 5a(a)(10) proceeding.
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    In addition to providing greater clarity regarding the speculative 
position limit levels required at initial designation, proposed rule 
150.5(b) would make explicit the conditions for subsequent increases to 
the deferred trading month levels. The proposed rule includes both a 
numeric formula for determining the permissible limit level and a 
descriptive standard. The descriptive standard tracks the standard of 
Commission rule 1.61--that the level be set ``based on position sizes 
customarily held by speculative traders on the contract market, the 
breadth and liquidity of the cash market and the opportunity for 
arbitrage between the futures market and the cash market.'' Compare, 
proposed rule 150.5(c)(2) and rule 1.61(a)(2). As noted above, the 
numeric formula is based upon the formula first used by the Commission 
in 1992 for proposing the speculative position limit levels now being 
considered.
    The Commission proposed that adjustments to a contract market's 
speculative position limit could be made one year after its initial 
listing based on either the proposed formula or the descriptive 
standard. NYMEX suggests that the provision that adjustments be made 
only after one year

[[Page 24042]]

from a contract's listing ``would severely limit an exchange's ability 
to respond to changing market conditions during the first year after 
listing.'' Although few futures contracts have achieved the levels of 
open interest to qualify for increasing speculative position limits 
levels under the rule sooner than a year after listing, the Commission 
agrees that the rule should not foreclose the possibility of a new 
contract's qualifying the adjustment. Accordingly, the Commission is 
modifying the final rule to permit an exchange to adjust nonspot month 
limits based upon the proposed rule's descriptive standard at any time 
after initial listing. The formula for adjustments to levels, for 
simplicity, will be based on data for the previous calendar year, as 
proposed.\17\
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    \17\ NYMEX's comment may misapprehend how the formula is 
applied. It should be noted that the maximum allowable speculative 
limit for nonspot individual months is not based on the data for any 
one particular individual month; instead, the applicable level is 
derived by computing the 12-month average level of month-end open 
interest for the most recent one-year period in any (usually the 
next to expire) contract month, considering futures and delta-
adjusted options combined.
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    Several commenters suggested that the proposed position 
accountability rules actually narrowed the prior grants of exemptive 
relief. The Managed Funds Association (MFA) suggested that, by not 
proposing an exemptive category for commodities with virtually 
inexhaustible deliverable supplies, a category which would apply to 
foreign currency futures contracts, the Commission was foreclosing new 
contracts from potential eligibility for this relief.\18\ It also noted 
that the exemptive relief for position accountability was not 
restricted on its face to contracts that has been trading for at least 
a year. In addition, CBT expressed concern that one of its contracts 
that qualifies for exemption due to a highly liquid cash market would 
not meet the requirements of the proposed rule. NYMEX suggested that, 
through Commission codification of the past exemptive categories, 
exchanges would lose the flexibility to ``justify that an exception was 
warranted for a particular contract.''
---------------------------------------------------------------------------

    \18\ Because the proposed rules make clear that neither a 
speculative position limit nor the position accountability rule is 
required for a designed contract market in ``major foreign 
currency,'' the Commisson proposed to reduce to three the number of 
exemptive categories. No exchange contracts other than the existing 
futures contracts on such foreign currencies have met the existing 
first exemptive criterion since this relief was first permitted. 
``Major foreign currencies'' are defined in the Commission's fast-
track designation rule. 17 CFR 5.1(a)(2)(i). The Commission proposed 
that contract markets in other, less liquid foreign currencies be 
treated as a futures or option contract on any other financial 
instrument or product.
---------------------------------------------------------------------------

    Application of the rule is prospective only. No currently exempt 
contract market will lose its exemption as long as it remains actively 
traded under its current designation.\19\ Moreover, with one minor 
exception, position accountability rules have been approved only for 
contracts with significant trading histories.\20\ In addition, proposed 
rule 150.5(f) would permit a contract market to ``propose such other 
exemptions from its position limits consistent with the purposes of 
this section'' for Commission consideration. This provision is found in 
existing rule 1.61 and is the authority for the current trader 
accountability rules that the Commission is proposing to codify in this 
rulemaking. The Commission is modifying the final rule to clarify that 
the right to petition the Commission for exemption extends to all of 
the section's provisions, including the requirements for exemption that 
are being codified. Accordingly, these rules do not foreclose the 
Commission from considering in appropriate circumstances petitions for 
individual exemptions from the required levels for setting exchange 
speculative position limits and from the requirement that exchanges 
adopt speculative position limits for all futures contracts.
---------------------------------------------------------------------------

    \19\ The Commission specifically noted in the notice of proposed 
rulemaking, 63 FR 38530, n. 21, that although the policy provided 
that position accountability could be based on either a liquid 
futures market or a liquid cash market, the Commission was proposing 
to require that both the cash and futures markets be liquid and that 
a contract market would have to establish a trading history. The 
Commission continued, however, by noting that the rule would apply 
prospectively and that any contracts (or pending applications) that 
have position accountability rules in place in reliance on the 
liquidity of the cash market alone may continue to rely on the 
policy.
    \20\ As noted by the Commission in the notice of proposed 
rulemaking, the only instances where position accountability rules 
were permitted in the absence of a prior trading history was where 
the contracts were spread contracts on contracts for which position 
accountability rules had already been approved. The only other 
instances where exemptions from speculative position limits were 
approved at contract designation were for major foreign currency 
contracts, a category that the Commission proposed to exclude from 
the requirement altogether.
---------------------------------------------------------------------------

IV. Issues Relating to Exemption From Nonspot Speculative Position 
Limits for Independently Controlled Accounts

    In response to the growth of professionally managed futures trading 
accounts and pooled futures investments, the Commission in 1988 
promulgated rule 150.3, 17 CFR 150.3, an exemption from speculative 
position limits for commodity pools or similar entities which use 
independent account controller.\21\ 53 FR 41563 (October 24, 1988). In 
1991 the Commission extended eligibility for this exemption to 
commodity trading advisors and greatly streamlined the application 
procedure, subsequently making it self-executing.\22\ 57 FR 44492 
(September 28, 1992).
---------------------------------------------------------------------------

    \21\ Commodity pools, pension funds, and other similar entities 
are required to aggregate their positions as the owner of the 
trading accounts, even if those accounts are traded independently by 
multiple independent account controllers. Commission rule 150.3 
exempted such entities that use independent account controllers from 
speculative position limits outside of the spot-month. The exemption 
permits the total positions of the trading entity or vehicle to 
exceed speculative limits during nonspot months, but requires that 
each independent account controller trading on the entity's behalf 
comply with the applicable limits. During the spot month, all 
positions of the entity are required to be aggregated and are 
subject to the spot-month speculative position limit level.
    \22\ Under the exemption as originally promulgated, those 
seeking exemptive treatment were required to file an application 
with the Commission and to document the independence of their 
account controllers.
---------------------------------------------------------------------------

    Commission rule 150.3 generally has worked well. It has provided 
flexibility to the markets, accommodating the continuing trend toward 
professional management of speculative trading accounts, while at the 
same time protecting the markets from the undue accumulation of large 
speculative positions owned by a single person or entity in the spot 
month. Since its amendment in 1991, most questions concerning rule 
150.3 have related to its application in the context of integrated 
financial services companies. However, presently only commodity pool 
operators and commodity trading advisors meet the rule's eligibility 
requirement.
    In light of the successful operation of the exemption since it was 
issued, the Commission proposed to extend eligibility for the exemption 
to banks, trust companies, savings associations, insurance companies 
and their separately incorporated affiliates. These additional 
categories were suggested for inclusion by some commenters when the 
Commission last proposed to revise rule 150.3.\23\
---------------------------------------------------------------------------

    \23\ Commenters, in connection with the 1991 proposed amendments 
to the rule 150.3 exemption, suggested that, in addition to 
commodity trading advisors, the exemption be extended to others, 
including investment banks, other financial intermediaries, parent/
affiliate firms, separately managed divisions of a single 
corporation, commercial banks, merchant banks, and insurance 
companies.
---------------------------------------------------------------------------

    Generally, commenters favored broadening the definition of eligible 
entities under rule 150.1(d). Several, but not all, commenters agreed 
that the trends toward greater professional management of futures 
trading and the

[[Page 24043]]

consolidation of financial services companies support expanding the 
category of entities eligible for the exemption. Although supporting 
expanding the categories for eligibility, the Futures Industry 
Association (FIA) suggested that the Commission modify the phrase 
``separately incorporated affiliates'' to read ``separately organized 
---------------------------------------------------------------------------
affiliates.'' The FIA explained that the modified language

would clarify that the exemption applies to affiliates whether they 
are organized as corporations or not. For example, an affiliate may 
be organized as a partnership, business trust or limited liability 
business organization to achieve certain tax objectives. Under 
applicable law, any such entity would still have a separate 
identity, ownership and management structure and should be treated 
in the same manner as an affiliate which is organized as a 
corporation. Also, entities organized outside the United States may 
not technically be incorporated under local law but should be 
eligible as affiliates under the proposed revision as long as they 
are separately organized under applicable foreign law.

The MFA also favored expansion of the definition of eligible entities 
in Sec. 150.1(d), but suggested that it be modified ``to * * * refer to 
trusts, financial intermediaries, corporate divisions and other 
similarly organized entities or associations.''
    One commenter opposed expanding the categories of eligible entity, 
reasoning that:

    The expansion of rule 150.3 proposed in the release would 
include the separately incorporated affiliates of various specified 
financial services companies, including banks, insurance companies, 
and FCMs. We are deeply concerned that this proposal is intended to 
codify the view that rule 150.3 provides the exclusive basis under 
which relief from aggregation of positions is available for such 
entities rather than a nonexclusive exemption.

    Rule 150.3, however, is an exemption from speculative position 
limit levels and does not itself restrict or expand the aggregation 
requirements. In this regard, several commenters expressed the view 
that, because futures commission merchants (FCMs) are exempt from 
aggregating certain types of accounts under proposed rule 150.4(d), 
they need not be included as eligible for exemption under Commission 
rule 150.3.
    The Commission agrees with commenters that modifying the language 
of the final rule to apply to ``separately organized affiliates'' is 
appropriate in light of the wide variety of forms of business 
organization used by those active in the markets today and that 
removing FCMs from the list of entities eligible for rule 150.3 
exemption may reduce unnecessary confusion.\24\ Accordingly, the 
Commission is modifying proposed rule 150.1(d) as they suggest. 
However, the Commission is of the view that the rule 150.3 exemption 
should not be extended to the other recommended categories, such as 
corporate divisions and their separately organized affiliates. Such an 
extension may be overly broad and should not be undertaken without 
careful consideration. Nevertheless, the Commission remains receptive 
to considering further expansion of the categories of eligible 
institutions as market developments warrant.\25\
---------------------------------------------------------------------------

    \24\ Moreover, broadening the definition of ``eligible 
entities'' to the separately organized affiliates of the entities 
listed in rule 150.1(d) in no way restricts the applicability of 
rule 150.4(d) (which applies to an FCM and its affiliates) because 
an FCM also happens to be an affiliate of a rule 150.1(d) ``eligible 
entity.''
    \25\ The Commission is also expanding the category of entities 
which are eligible for the exemption to the limited partners of 
pools, the operators of which are exempt from registration under 
rule 4.13 by virtue of having fewer than fifteen participants in the 
pools and less than $200,000 in capital contributions. As discussed 
in greater detail below, the Commission is of the view that the 
trading of certain of these limited partnerships should not be 
disaggregated from trading by the limited partner(s). However, the 
Commission believes that trading for the limited partners can be 
included appropriately within the exemption from speculative 
position limits for the nonspot month limits under Commission rule 
150.3 if such trading meets the conditions of the rule.
---------------------------------------------------------------------------

V. Aggregation of Accounts

    The Commission also proposed a number of amendments to its rules 
relating to the aggregation of accounts. These proposed amendments were 
intended to respond to the continuing trend toward mergers and 
consolidation in the financial services sector, to clarify issues of 
rule interpretation that have arisen as a consequence of changing 
industry practice and to increase the accessibility of the applicable 
law by recodifying various related rules in one section of the Code of 
Federal Regulations and by codifying existing interpretations and 
policies.
    Section 4a of the Act provides that, in determining whether a 
position exceeds the speculative position limits,

the positions held and trading done by any persons directly or 
indirectly controlled by such person shall be included with the 
positions held and trading done by such person; and further, such 
limits upon positions and trading shall apply to positions held by, 
and trading done by, two or more persons acting pursuant to an 
expressed or implied agreement or understanding, the same as if the 
positions were held by, or the trading were done by, a single 
person.

    As the Commission explained in the notice of rulemaking, it 
interprets the ``held or control'' criteria as applying separately to 
ownership of positions or to control of trading decisions.\26\ Rule 
150.4(a), which the Commission is adopting as proposed, restates the 
general aggregation requirement of section 4a of the Act. Following the 
general rule in Sec. 150.4(a), proposed Sec. 150.4(b) would detail the 
nature of a financial interest which would trigger application of the 
ownership criterion, proposed Sec. 150.4(c) would impose conditions on 
exceptions from aggregation for limited partners, and proposed 
Sec. 150.4(d) would codify the existing policy exempting FCMs from 
aggregating positions in customer discretionary accounts or guided 
account programs controlled by independent traders.
---------------------------------------------------------------------------

    \26\ See e.g., Commission rule 18.01 (``holds, has a financial 
interest in or controls''). As the Commission discussed in the 
notice of proposed rulemaking, the Commission's routine large trader 
reporting system is set up so that it does not double count 
positions which may be controlled by one and traded for the 
beneficial ownership of another. In such circumstances, although the 
routine reporting system will aggregate the positions reported by 
FCMs using only the control criterion, the staff may determine that 
certain accounts or positions should also be aggregated using the 
ownership criterion or may by special call receive reports directly 
from a trader.
---------------------------------------------------------------------------

    Compliance with the Commission's speculative position limit rules 
is often dependent upon the proper aggregation of positions. A central 
feature of the proposed rules is the codification of the aggregation 
standard itself. As the Commission stated in the notice of proposed 
rulemaking, the requirements relating to aggregation of positions, 
including the exceptions provided in the Commission's ``Statement of 
Policy on Aggregation of Accounts,'' 44 FR 83839 (June 13, 1979) (1979 
Aggregation Policy), currently are included implicitly in the 
Commission's large-trader reporting rules. 63 FR 38532. The Commission 
proposed to codify the aggregation rules and Commission policies in the 
same part of the Code of Federal Regulations as the speculative 
position limit rules for ease of reference and to increase their 
accessibility to the general public.\27\
---------------------------------------------------------------------------

    \27\ The Commission also proposed conforming amendments to rules 
18.01 and 17.00(b), which specify the manner of identifying accounts 
for reporting purposes.
---------------------------------------------------------------------------

    The 1979 Aggregation Policy sets forth an exception from the 
general aggregation principle providing that an FCM need not aggregate 
the discretionary trading accounts or customer trading programs through 
which a trader affiliated with, but independent of, the FCM directs 
trading of customer-owned positions or

[[Page 24044]]

accounts.\28\ In creating this exception, the Commission took an 
important step in recognizing the structural changes made by the 
futures industry to respond to the increased acceptance of professional 
management of trading accounts. Proposed rule 150.4(d) was intended 
merely to codify the substance of this policy.
---------------------------------------------------------------------------

    \28\ The 1979 Aggregation Policy also offered guidance on the 
criteria considered in determining whether the trader exercises 
independent control over the trading decisions of the customer 
discretionary accounts or trading programs. These included the 
customer account agreement, advertising, the agreements between the 
FCM and its employee or other trader, the degree of supervision, the 
confidentiality of the program's trading decisions, reliance of the 
FCM for market information, financial investment by the FCM in the 
program greater than 10% and common trading patterns. Id. at 33844.
---------------------------------------------------------------------------

    Several commenters, including the MFA, FIA, the Committee on 
Futures Regulation of the Association of the Bar of the City of New 
York (NY Bar), and Goldman, Sachs & Co. (GS) expressed concern, 
however, that codification of the 1979 Aggregation Policy in the manner 
proposed might narrow its current application. The FIA suggested that:

The 1979 Aggregation Policy, which is proposed to be adopted as Rule 
150.4(d), should be extended to affiliates of the FCM and not 
limited to the FCM's independent traders * * *. (W)e note that the 
Commission has already accepted this position in terms of affiliates 
of FCMs pursuant to CFTC Interpretive Letter No. 92-15. CCH 
Commodity Futures Law Reporter, 1990-1992 Transfer Binder, para 
25831 at page 39,285. Proposed Rule 150.4(d) should be revised to 
specifically include affiliates of the FCM so it remains consistent 
with the Commission's current interpretation of the Aggregation 
Policy.

    By proposing to codify the substance of the 1979 Aggregation 
Policy, the Commission did not intend to narrow its interpretation or 
application. In this regard, Commission staff since 1991 has 
interpreted the policy as applying to an FCM's affiliates. 
Interpretative Letter 92-15, supra. Specifically, Commission staff 
opined that, where a diversified financial services holding company is 
the common parent of a commodity pool operator (CPO) or a commodity 
trading advisor (CTA) and an FCM and the entities' trading arrangements 
meet the 1979 Aggregation Policy's indicia of independence, the CPO/CTA 
``may calculate its trading positions for determining compliance with 
speculative position limits and reporting requirements separate from 
the proprietary positions held by, or on behalf of, the parent.'' Id. 
at p. 39286.
    In reaching this conclusion, the letter reasoned that ``the 1979 
Aggregation Policy clearly would have been applicable, on its face, had 
[the parent] undertaken the same, or a similar, program through * * * 
its subsidiary which is a registered FCM, rather than through a 
separate affiliate * * *, the customer trading program directed by the 
(CPO/CTA) is kept independent * * * from the (parent's) other trading, 
including that of the other affiliates, nor does it appear * * * (that) 
assign(ing) these functions to separate affiliates is intended to 
circumvent speculative limits and reporting requirements.'' Id. at 
39,285.
    It is the Commission's intent in issuing rule 150.4(d) merely to 
codify the 1979 Aggregation Policy, including the continued efficacy of 
the 1991 interpretative letter, and not to modify the current state of 
the law on this issue. At the suggestion of various commenters, the 
Commission is making that intent clear by modifying the language of 
proposed rule 150.4(d) to include explicit reference to affiliates of 
an FCM.
    The Commission also proposed to amend the limited partner exception 
of Commission rule 18.01.\29\ Commission rule 18.01 defines account 
owners as those having a 10% or greater financial interest in the 
account, except for limited partners. Limited partners are exempt from 
being defined as owners on the assumption that limited partners, even 
if holding greater than a 10% ownership interest, are prohibited from 
exercising control over the partnership's trading activities. The 
Commission noted in the notice of proposed rulemaking, however, that it 
had become concerned by the trading by certain single-investor 
commodity pools. Accordingly, the Commission proposed that, when there 
were 10 or fewer limited partners or when a limited partner has an 
ownership interest of 25% or greater, the limited partner be required 
to aggregate the partnership's positions with his or her other 
positions. The Commission specifically noted that it did not intend 
this proposal to modify the general treatment of limited partners or 
shareholders \30\ in typical commodity pools and requested that 
commenters address the typical organization for pools and whether the 
proposed levels would affect only unusual forms of ownership. 63 FR 
38533.
---------------------------------------------------------------------------

    \29\ In counterpoint to this proposal, the Commission also 
proposed to include within the exemption from speculative position 
limits under Commission rule 150.3 the limited partners of small 
commodity pools the operators of which are exempt from CPO 
registration.
    \30\ The Commission also proposed to clarify that for this 
purpose other similar types of pool participant are treated the same 
as limited partners or shareholders. These include pool participants 
in other categories of limited liability business organizations, 
such as members of limited liability companies or beneficiaries of 
certain types of trusts. No commenters opposed this clarification 
and the final rules incorporate this change.
---------------------------------------------------------------------------

    A number of commenters advised the Commission that the proposed 
criteria would affect a number of typical forms of commodity pool 
organization. The FIA, MFA, NY Bar and GS all expressed the view that 
the Commission's proposed criteria ``casts too wide a net,'' noting 
that single investor pools are used today by institutional investors 
for a variety of legitimate purposes. For example, the FIA commented 
that:

    FIA's members are aware that many single investor pools, such as 
ERISA funds, are formed for reasons having nothing to do with the 
investor's desire to control or have input in the pool's trading 
decisions.
    Many such pools are formed to address the unique regulatory 
concerns that a larger pool faces or for other reasons, such as to 
maintain limited liability or to implement unique investment goals 
or fee structures.

These commenters also noted that the 25% ownership criterion could be 
exceeded routinely in start up or seed money situations. As GS 
explained:

    Even though the purported focus of the proposal is on the 
operators of small pools who are exempt from CPO registration 
pursuant to rule 4.13, the numerical criteria would reach many funds 
privately offered by registered CPOs. For example, in seed money 
situations where an affiliate of the CPO wishes to demonstrate to 
potential clients that the affiliate is committing its own capital 
to a particular strategy, its percentage share could well exceed 
25%. It is also common for the initial offering of a pool to close 
and for the pool to begin trading after one or two large investments 
have been made. Such situations would run afoul of both criteria.

    As the Commission noted in the notice of proposed rulemaking, its 
primary concern in proposing this change to the general exemption for 
limited partners was to address certain patterns of pool formation and 
trading that it had observed in connection with commodity pools the 
operators of which are exempt from CPO registration under Commission 
rule 4.13. Such trading patterns were not evidenced where the CPO was 
registered with the Commission or where greater than a 25% ownership 
interest was the result of a seed money or start up investment. 
Accordingly, the commission is modifying the final rule to apply only 
to limited partners participating in a pool the operator of which is 
exempt from registration under rule 4.13. The Commission is retaining 
the numeric criteria, so the aggregation requirement will apply only to 
limited partners having a 25% or greater ownership interest in 
commodity pools operated by

[[Page 24045]]

such an exempt commodity pool operator. Moreover, as explained above, 
the Commission also is amending rule 150.1(d) to include such limited 
partners as entities eligible for rule 150.3 relief under the exemption 
from speculative position limit levels for nonspot trading months. The 
Commission believes that as modified the rule will address its 
regulatory concern without unduly impacting legitimate market activity 
or otherwise burdening financial flexibility or innovation.
    Commenters also objected to the Commission's proposed rule revising 
the limited partnership exemption to make explicit the Commission's 
understanding that the current rule treats the principals or affiliates 
of a commodity pool operator the same as the pool operator itself for 
aggregation purposes. Under current rules, a pool operator's having a 
greater than 10% financial interest in a pool requires the aggregation 
of the pool's positions with those of the pool operator. The Commission 
proposed a rule amendment to clarify that the principals or affiliates 
of a commodity pool operator which invest in the operator's pool as 
limited partners have a financial interest which requires them to 
aggregate their positions if their ownership interest in the pool is 
ten percent or greater.
    The commenters suggested that the ability of affiliates or 
principals of a commodity pool operator to invest in its commodity 
pools is important to the formation of new pools. They maintained that 
such investment in the pools is often integral to their efforts to 
attract outside investors. They further maintained that the requirement 
that principals or affiliates aggregate the pool's position, even if 
only during the spot month, will include such investment. One commenter 
stated that:

(i)t is more often the case that the affiliates of a commodity pool 
operator or commodity trading advisor will maintain a beneficial 
interest in the pool. Frequently, this structure is essential to 
initially form and capitalize the entity or to align the operator's 
interest with those of its investors, which is frequently not only 
beneficial to, but is demanded by, the entity's investors. In many 
cases, the commodity pool operator is insufficiently funded to 
maintain such an interest and, accordingly, affiliates meet the 
funding requirement.

    The commenters further suggested that as a practical matter 
aggregating such partnership positions is exceedingly difficult. The 
commenters suggested that commodity pool operators or commodity trading 
advisors that are independent traders would not share information with 
limited partners on individual pool positions, viewing such information 
as proprietary. In their view, therefore, it would be difficult, if not 
impossible, for limited partners to obtain the information necessary to 
aggregate positions. GS noted that:

    Because limited partners or shareholders of a pool do not 
ordinarily receive position information on a real time basis, or 
otherwise, presumably it would be necessary for the pool's CPO to 
provide that information to them on a timely basis. However, CTAs 
view this information as confidential and proprietary, so that 
maintaining the confidentiality of this information is typically a 
heavily negotiated issue in management agreements entered into 
between pools and their CTAs. For this reason, CTAs frequently 
prefer to trade pooled accounts rather [than] individual managed 
accounts.

    As many of the commenters recognized, the Commission intended by 
the proposed amendments to provide relief from the aggregation 
requirement for the pool operator's principals or affiliates under the 
rule 150.3 exemption from speculative position limits for nonspot 
trading months. The Commission has observed that commodity pools 
generally refrain from trading activity during a contract's spot 
months. The Commission therefore assumed that, coupled with relief 
under rule 150.3, the aggregation requirement would not impose an undue 
burden on the entities involved. The comments maintained, however, that 
the relative burden of compliance is greater than the Commission 
anticipated.
    Accordingly, the Commission is modifying the requirement as 
proposed that principals or affiliates of a commodity pool operator 
with greater than a 10% limited partnership ownership interest 
aggregate their positions. The final rule provides that such limited 
partners or shareholders need not aggregate their positions with the 
pool's positions if the limited partner does not have direct 
supervisory authority over the pool's trading, the commodity pool 
operator maintains and enforces written procedures to preclude the 
limited partner from having knowledge of, or access to, information 
concerning the pool's positions or trading decisions and that the 
limited partner, if a principal of the pool operator, exercises only 
the minimum degree of supervision of the pool's trading consistent with 
a principal's duty of supervision. The final rule also provides that 
such entities must provide information to the Commission upon special 
call supporting their claim to relief from aggregation requirements 
under this provision.

VI. Other Matters

A. Paperwork Reduction Act

    When publishing proposed rules, the Paperwork Reduction Act of 1995 
(Pub. L. 104-13 (May 13, 1996)) imposes certain requirements on federal 
agencies (including the Commission) in connection with their conducting 
or sponsoring any collection of information as defined by the Paperwork 
Reduction Act. In compliance with the Act, the Commission solicited 
comments to: (1) Evaluate whether the proposed collection of 
information is necessary for the proper performance of the functions of 
the agency, including the validity of the methodology and assumptions 
used; (2) evaluate the accuracy of the agency's estimate of the burden 
of the proposed collection of information including the validity of the 
methodology and assumptions used; (3) enhance the quality, utility, and 
clarity of the information to be collected; and (4) minimize the burden 
of the collection of the information on those who are to respond, 
including through the use of appropriate automated, electronic, 
mechanical, or other technological collection techniques or other forms 
of information technology, e.g., permitting electronic submission of 
responses.
    The Commission previously submitted these rules in proposed form 
and its associated information collection requirements to the Office of 
Management and Budget (OMB). OMB approved the collection of information 
associated with these rules on March 10, 1999 and on July 26, 1996 and 
assigned OMB control numbers 3038-0013 and 3038-0009, respectively, to 
these rules. The burdens associated with these rules are as follows:

                       Collection No. (3038-0013)
------------------------------------------------------------------------
Average burden hours per response........  6
Number of respondents....................  12
Frequency of response....................  On occasion.
------------------------------------------------------------------------
                        Collection No. 3038-0009
------------------------------------------------------------------------
Average burden hours per response........  4.74
Number of respondents....................  3709
Frequency of response....................  On occasion.
------------------------------------------------------------------------

    Persons wishing to comment on the information which would be 
required by these final rules should contact the Desk Officer, CFTC, 
Office of Management and Budget, Room 10202, NEOB, Washington, DC 
20503, (202) 395-7340. Copies of the information collection submission 
to OMB are

[[Page 24046]]

available from the CFTC Clearance Officer, 1155 21st St NW, Washington, 
DC 20581, (202) 418-5160.
    Copies of the OMB-approved information collection package 
associated with this rulemaking may be obtained from Desk Officer, 
Commodity Futures Trading Commission, Office of Management and Budget, 
Room 10202, NEOB Washington, DC 20503, (202) 395-7340.

B. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA), 5 U.S.C. 601 et seq., 
requires that agencies consider the impact of those rules on small 
businesses. The Commission has previously determined that large traders 
are not small entities for purposes of the RFA.\31\ The Commission 
believes that the rule amendments to raise Federal speculative position 
limits will only impact large traders. In addition, the Commission is 
of the opinion that the amendments to Commission rule 150.3, under 
which certain eligible entities will be exempted from speculative 
limits (except in the spot-month), will apply exclusively to large 
traders, as will rule 150.4 codifying its policies on aggregation. The 
Chairperson, on behalf of the Commission, hereby certifies, pursuant to 
5 U.S.C. 605(b), that the action taken herein will not have a 
significant economic impact on a substantial number of small entities. 
This certification is based on the fact that the rules will lift 
speculative limit levels, extend exemptive relief from speculative 
limits (except in the spot-month) to certain eligible entities and 
codify the Commission policies on aggregation, including its rules on 
aggregating positions for speculative limit compliance. The rules 
permitting such transactions subject to the specified conditions, 
therefore, remove a burden for all entities, regardless of size.
---------------------------------------------------------------------------

    \31\ 47 FR 18618 (April 30, 1982).
---------------------------------------------------------------------------

List of Subjects

17 CFR Part 1

    Brokers, Commodity futures, Consumer protection, Reporting and 
recordkeeping requirements, Segregation requirements.

17 CFR Part 17

    Brokers, Commodity futures, Reporting and recordkeeping 
requirements.

17 CFR Part 18

    Brokers, Commodity futures, Reporting and recordkeeping 
requirements.

17 CFR Part 150

    Agricultural commodities, Bona fide hedge positions, Position 
limits, Spread exemptions.

    In consideration of the foregoing, and pursuant to the authority 
contained in the Act, and in particular sections 2(a) (1), 2(a) (2), 
4a, 4c, 4f, 4g, 4i, 4n, 5, 5a, 6b, 6c, 8a, and 15, 7 U.S.C. 2, 6a, 6c, 
6f, 6g, 6i, 6n, 7, 7a, 12a, 13a, 13a-1, and 19, the Commission amends 
parts 1, 17, 18, and 150 of chapter I of title 17 of the Code of 
Federal Regulations as follows:

PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

    1. The authority citation for part 1 continues to read as follows:

    Authority: 7 U.S.C. 1a, 2, 2a, 4, 4a, 6, 6a, 6b, 6c, 6d, 6e, 6f, 
6g, 6h, 6i, 6j, 6k, 6l, 6m, 6n, 6o, 6p, 7, 7a, 7b, 8, 9, 12, 12a, 
12c, 13a, 13a-1, 16, 16a, 19, 21, 23, and 24.


Sec. 1.61  [Removed and reserved]

    2. Section 1.61 is removed and reserved.

PART 17--REPORTS BY FUTURES COMMISSION MERCHANTS, MEMBERS OF 
CONTRACT MARKETS AND FOREIGN BROKERS

    3. The authority citation for part 17 continues to read as follows:

    Authority: 7 U.S.C. 6a, 6d, 6f, 6g, 6i, 7, and 12a.

    4. Section 17.00 is amended by revising paragraph (b)(1), 
introductory text, by removing paragraphs (b) (2) and (c), by 
redesignating paragraphs (b) (1) (i) and (b) (1) (ii) as paragraphs (b) 
(1) and (b) (2), respectively, and by adding paragraph (b)(3) to read 
as follows:


Sec. 17.00  Information to be furnished by futures commission 
merchants, clearing members and foreign brokers.

* * * * *
    (b) Interest in or control of several accounts. Except as otherwise 
instructed by the Commission or its designee and as specifically 
provided in Sec. 150.4 of this chapter, if any person holds or has a 
financial interest in or controls more than one account, all such 
accounts shall be considered by the futures commission merchant, 
clearing member or foreign broker as a single account for the purpose 
of determining special account status and for reporting purposes. For 
purposes of this section, the following shall apply:
* * * * *
    (3) Account ownership. Multiple accounts owned by a trader shall be 
considered a single account as provided under Secs. 150.4(b), (c) and 
(d) of this chapter.

PART 18--REPORTS BY TRADERS

    5. The authority citation for part 18 continues to read as follows:

    Authority: 7 U.S.C. 2, 4, 6a, 6c, 6f, 6g, 6i, 6k, 6m, 6n, 12a, 
and 19; 5 U.S.C. 552 and 552(b) unless otherwise noted.

    6. Section 18.01 is revised to read as follows:


Sec. 18.01   Interest in or control of several accounts.

    If any trader holds, has a financial interest in or controls 
positions in more than one account, whether carried with the same or 
with different futures commission merchants or foreign brokers, all 
such positions and accounts shall be considered as a single account for 
the purpose of determing whether such trader has a reportable position 
and, unless instructed otherwise in the special call to report under 
Sec. 18.00 of this part, for the purpose of reporting.

PART 150--LIMITS ON POSITIONS

    7. The authority citation for part 150 continues to read as 
follows:

    Authority: 7 U.S.C. 6a, 6c and 12a(5).

    8. In Sec. 150.1 the introductory text of paragraph (d), and 
paragraph (d)(2), (e)(2) and (e)(5) are revised to read as follows:


Sec. 150.1  Definitions.

* * * * *
    (d) Eligible entity means--
    A commodity pool operator, the operator of a trading vehicle which 
is excluded or who itself has qualified for exclusion from the 
definition of the term ``pool'' or commodity pool operator,'' 
respectively, under Sec. 4.5 of this chapter; the limited partner or 
shareholder in a commodity pool the operator of which is exempt from 
registration under Sec. 4.13 of this chapter; a commodity trading 
advisor; a bank or trust company; a savings association; an insurance 
company; or the separately organized affiliates of any of the above 
entities:
    (1) * * *
    (2) Which maintains:
    (i) Only such minimum control over the independent account 
controller as is consistent with its fiduciary responsibilities and 
necessary to fulfill its duty to supervise diligently the trading done 
on its behalf; or
    (ii) If a limited partner or shareholder of a commodity pool the 
operator of which is exempt from registration under Sec. 4.13 of this 
chapter, only such limited control as is consistent with its status.

[[Page 24047]]

    (e) Independent account controller means a person--
* * * * *
    (2) Over whose trading the eligible entity maintains only such 
minimum control as is consistent with its fiduciary responsibilities to 
fulfill its duty to supervise diligently the trading done on its behalf 
or as is consistent with such other legal rights or obligations which 
may be incumbent upon the eligible entity to fulfill;
* * * * *
    (5) Who is registered as a futures commission merchant, an 
introducing broker, a commodity trading advisor, an associated person 
or any such registrant, or is a general partner of a commodity pool the 
operator of which is exempt from registration under Sec. 4.13 of this 
chapter.
* * * * *
    9. Section 150.2 is revised to read as follows:


Sec. 150.2  Position limits.

    No person may hold or control positions, separately or in 
combination, net long or net short, for the purchase or sale of a 
commodity for future delivery or, on a futures-equivalent basis, 
options thereon, in excess of the following:

                       Speculative Position Limits
                              [By contract]
------------------------------------------------------------------------
                                       Limits by number of contracts
                                  --------------------------------------
             Contract                              Single
                                    Spot month     month      All months
------------------------------------------------------------------------
                         Chicago Board of Trade
------------------------------------------------------------------------
Corn.............................          600        5,500        9,000
Oats.............................          600        1,000        1,500
Soybeans.........................          600        3,500        5,500
Wheat............................          600        3,000        4,000
Soybean Oil......................          540        3,000        4,000
Soybean Meal.....................          720        3,000        4,000
------------------------------------------------------------------------
                      MidAmerica Commodity Exchange
------------------------------------------------------------------------
Corn.............................        3,000        6,000        6,000
Oats.............................        2,000        2,000        2,000
Soybeans.........................        3,000        6,000        6,000
Wheat............................        3,000        6,000        6,000
Soybean Meal.....................          800          800          800
------------------------------------------------------------------------
                       Minneapolis Grain Exchange
------------------------------------------------------------------------
Hard Red Spring Wheat............          600        3,000        4,000
White Wheat......................          600        1,200        1,200
------------------------------------------------------------------------
                        New York Cotton Exchange
------------------------------------------------------------------------
Cotton No. 2.....................          300        2,500        3,500
------------------------------------------------------------------------
                       Kansas City Board of Trade
------------------------------------------------------------------------
Hard Winter Wheat................          600        3,000        4,000
------------------------------------------------------------------------

    10. Section 150.4 is revised to read as follows:


Sec. 150.4  Aggregation of positions.

    (a) Positions to be aggregated. The position limits set forth in 
Sec. 510.2 of this part shall apply to all positions in accounts for 
which any person by power of attorney or otherwise directly or 
indirectly holds positions or controls trading or to positions held by 
two or more persons acting pursuant to an expressed or implied 
agreement or understanding the same as if the positions were held by, 
or the trading of the position were done by, a single individual.
    (b) Ownership of accounts. For the purpose of applying the position 
limits set forth in Sec. 510.2, except for the ownership interest of 
limited partners, shareholders, members of a limited liability company, 
beneficiaries of a trust or similar type of pool participant in a 
commodity pool subject to the provisos set forth in paragraph (c) of 
this section, any trader holding positions in more than one account, or 
holding accounts or positions in which the trader by power of attorney 
or otherwise directly or indirectly has a 10% or greater ownership or 
equity interest, must aggregate all such accounts or positions.
    (c) Ownership by limited partners, shareholders or other pool 
participants. For the purpose of applying the position limits set forth 
in Sec. 150.2:
    (1) A commodity pool operator having ownership or equity interest 
of 10% or greater in an account or positions as a limited partner, 
shareholder or other similar type of pool participant must aggregate 
those accounts or positions with all other accounts or positions owned 
or controlled by the commodity pool operator;
    (2) A trader that is a limited partner, shareholder or other 
similar type of pool participant with an ownership or equity interest 
of 10% or greater in a pooled account or positions who is also a 
principal or affiliate of the operator of the pooled account must 
aggregate the pooled account or positions with all other accounts or 
positions owned or controlled by that trader, provided, however, that 
the trader need not aggregate such pooled positions or accounts if:

[[Page 24048]]

    (i) The pool operator has, and enforces, written procedures to 
preclude the trader from having knowledge of, gaining access to, or 
receiving data about the trading or positions of the pool;
    (ii) The trader does not have direct, day-to-day supervisory 
authority or control over the pool's trading decisions; and
    (iii) The trader, if a principal of the commodity pool operator, 
maintains only such minimum control over the commodity pool operator as 
is consistent with its responsibilities as a principal and necessary to 
fulfill its duty to supervise the trading activities of the commodity 
pool;
    (3) Each limited partner, shareholder, or other similar type of 
pool participant having an ownership or equity interest of 25% or 
greater in a commodity pool the operator of which is exempt from 
registration under Sec. 4.13 of this chapter must aggregate the pooled 
account or positions with all other accounts or positions owned or 
controlled by that trader.
    (d) Trading control by futures commission merchants. The position 
limits set forth in Sec. 150.2 of this part shall be construed to apply 
to all positions held by a futures commission merchant or its 
separately organized affiliates in a discretionary account, or in an 
account which is part of, or participates in, or receives trading 
advice from a customer trading program of a futures commission merchant 
or any of the officers, partners, or employees of such futures 
commission merchant or its separately organized affiliates, unless:
    (1) A trader other than the futures commission merchant or the 
afffilate directs trading in such an account;
    (2) The futures commission merchant or the affiliate maintains only 
such minimum control over the trading in such an account as is 
necessary to fulfill its duty to supervise diligently trading in the 
account; and
    (3) Each trading decision of the discretionary account or the 
customer trading program is determined independently of all trading 
decisions in other accounts which the futures commission merchant or 
the affiliate holds, has a financial interest of 10% or more in, or 
controls.
    (e) Call for information. Upon call by the Commission, the Director 
of the Division of Economic Analysis or the Director's delegatee, any 
person claiming an exemption under paragraphs (c) or (d) of this 
section must provide to the Commission such information as specified in 
the call relating to the positions owned or controlled by that person, 
trading done pursuant to the claimed exemption, or the relevant 
business relationships supporting a claim of exemption.
    11. New Sec. 150.5 is added to read as follows:


Sec. 150.5  Exchange-set speculative position limits.

    (a) Exchange limits. Each contract market as a condition of 
designation under part 5, appendix A, of this chapter shall be bylaw, 
rule, regulation, or resolution limit the maximum number of contracts a 
person may hold or control, separately or in combination, net long or 
net short, for the purchase or sale of a commodity for future delivery 
or, on a futures-equivalent basis, options thereon. This section shall 
not apply to a contract market for which position limits are set forth 
in Sec. 150.2 of this part or for a futures or option contract market 
on a major foreign currency, for which there is no legal impediment to 
delivery and for which there exists a highly liquid cash market. 
Nothing in this section shall be construed to prohibit a contract 
market from fixing different and separate position limits for different 
types of futures contracts based on the same commodity, or from fixing 
different position limits for different futures or for different 
delivery months, or from exempting positions which are normally known 
in the trade as ``spreads, straddles, or arbitrage,'' of from fixing 
limits which apply to such positions which are different from limits 
fixed for other positions.
    (b) Levels at designation. At the time of its initial designation, 
a contract market must provide for speculative position limit levels as 
follows:
    (1) For physical delivery contracts, the spot month limit level 
must be no greater than one-quarter of the estimated spot month 
deliverable supply, calculated separately for each month to be listed, 
and for cash settled contracts, the spot month limit level must be no 
greater than necessary to minimize the potential for manipulation or 
distortion of the contract's or the underlying commodity's price;
    (2) Individual nonspot or all-months-combined levels must be no 
greater than 1,000 contracts for tangible commodities other than energy 
products;
    (3) Individual nonspot or all-months-combined levels must be no 
greater than 5,000 contracts for energy products and nontangible 
commodities, including contracts on financial products.
    (c) Adjustments to levels. Contract markets may adjust their 
speculative limit levels as follows:
    (1) For physical delivery contracts, the spot month limit level 
must be no greater than one-quarter of the estimated spot month 
deliverable supply, calculated separately for each month to be listed, 
and for cash settled contracts, the spot month limit level must be no 
greater than necessary to minimize the potential for manipulation or 
distortion of the contract's or the underlying commodity's price; and
    (2) Individual nonspot or all-months-combined levels must be no 
greater than 10% of the average combined futures and delta-adjusted 
option month-end open interest for the most recent calendar year up to 
25,000 contracts with a marginal increase of 2.5% thereafter or be 
based on position sizes customarily held by speculative traders on the 
contract market, which shall not be extraordinarily large relative to 
total open positions in the contract, the breadth and liquidity of the 
cash market underlying each delivery month and the opportunity for 
arbitrage between the futures market and the cash market in the 
commodity underlying the futures contract.
    (d) Hedge exemption. (1) No exchange bylaw, rule, regulation, or 
resolution adopted pursuant to this section shall apply to bona fide 
hedging positions as defined by a contract market in accordance with 
Sec. 1.3(z)(1) of this chapter. Provided, however, that the contract 
market may limit bona fide hedging positions or any other positions 
which have been exempted pursuant to paragraph (e) of this section 
which it determines are not in accord with sound commercial practices 
or exceed an amount which may be established and liquidated in an 
orderly fashion.
    (2) Traders must apply to the contract market for exemption from 
its speculative position limit rules. In considering whether to grant 
such an application for exemption, contract markets must take into 
account the factors contained in paragraph (d)(1) of this section.
    (e) Trader accountability exemption. Twelve months after a contract 
market's initial listing for trading or at any time thereafter, 
contract markets may submit for Commission approval under section 
5a(a)(12) of the Act and Sec. 1.41(b) of this chapter a bylaw, rule, 
regulation, or resolution, substituting for the position limits 
required under paragraphs (a), (b) and (c) of this section an exchange 
rule requiring traders to be accountable for large positions as 
follows:
    (1) For futures and option contracts on a financial instrument or 
product having an average open interest of 50,000 contracts and an 
average daily trading volume of 100,000 contracts and

[[Page 24049]]

a very highly liquid cash market, an exchange bylaw, regulation or 
resolution requiring traders to provide information about their 
position upon request by the exchange;
    (2) For futures and option contracts on a financial instrument or 
product or on an intangible commodity having an average moth-end open 
interest of 50,000 and an average daily volume of 25,000 contracts and 
a highly liquid cash market, an exchange bylaw, regulation or 
resolution requiring traders to provide information about their 
position upon request by the exchange and to consent to halt increasing 
further a trader's positions if so ordered by the exchange;
    (3) For futures and option contracts on a tangible commodity, 
including but not limited to metals, energy products, or international 
soft agricultural products, having an average month-end open interest 
of 50,000 contracts and an average daily volume of 5,000 contracts and 
a liquid cash market, an exchange bylaw, regulation or resolution 
requiring traders to provide information about their position upon 
request by the exchange and to consent to halt increasing further a 
trader's positions if so ordered by the exchange, provided, however, 
such contract markets are not exempt from the requirement of paragraphs 
(b) or (c) that they adopt an exchange bylaw, regulation or resolution 
setting a spot month speculative position limit with a level no grater 
than one quarter of the estimated spot month deliverable supply;
    (4) For purposes of this paragraph, trading volume and open 
interest shall be calculated by combining the month-end futures and its 
related option contract, on a delta-adjusted basis, for all months 
listed during the most recent calendar year.
    (f) Other exemptions. Exchange speculative position limits adopted 
pursuant to this section shall not apply to any position acquired in 
good faith prior to the effective date of any bylaw, rule, regulation, 
or resolution which specifies such limit or to a person that is 
registered as a futures commission merchant or as a floor broker under 
authority of the Act except to the extent that transactions made by 
such person are made on behalf of or for the account or benefit of such 
person. In addition to the express exemptions specified in this 
section, a contract market may propose such other exemptions from the 
requirements of this section consistent with the purposes of this 
section and shall submit such rules Commission review under section 
5a(1)(12) of the Act and Sec. 1.41(b) of this chapter.
    (g) Aggregation. In determining whether any person has exceeded the 
limits established under this section, all positions in accounts for 
which such person by power of attorney or otherwise directly or 
indirectly controls trading shall be included with the positions held 
by such person; such limits upon positions shall apply to positions 
held by two or more person acting pursuant to an express or implied 
agreement or understanding, the same as if the positions were held by a 
single person.

    Issued by the Commission this 27th day of April, 1999, in 
Washington, DC.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 99-11066 Filed 5-4-99; 8:45 am]
BILLING CODE 6351-01-M