[Federal Register Volume 72, Number 227 (Tuesday, November 27, 2007)]
[Proposed Rules]
[Pages 66097-66103]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-22992]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 150

RIN 3038-AC40


Risk Management Exemption From Federal Speculative Position 
Limits

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of proposed rulemaking.

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SUMMARY: Section 150.2 of the Commodity Futures Trading Commission's 
(``Commission'') regulations imposes limits on the size of speculative 
positions that traders may hold or control in futures and futures 
equivalent option contracts on certain designated agricultural 
commodities named therein. Section 150.3 lists certain types of 
positions that may be exempted from these Federal speculative position 
limits. The Commission is proposing to provide an additional exemption 
for ``risk management positions.'' A risk management position would be 
defined as a futures or futures equivalent position, held as part of a 
broadly diversified portfolio of long-only or short-only futures or 
futures equivalent positions, that is based upon either: A fiduciary 
obligation to match or track the results of a broadly diversified index 
that includes the same commodity markets in fundamentally the same 
proportions as the futures or futures equivalent position; or a 
portfolio diversification plan that has, among other substantial asset 
classes, an exposure to a broadly diversified index that includes the 
same commodity markets in fundamentally the same proportions as the 
futures or futures equivalent position. The exemption would be subject 
to conditions, including that the positions must be passively managed, 
must be unleveraged, and may not be carried into the spot month.

DATES: Comments must be received on or before January 28, 2008.

ADDRESSES: Comments should be submitted to David Stawick, Secretary, 
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st 
Street, NW., Washington, DC 20581. Comments also may be sent by 
facsimile to (202) 418-5521, or by electronic mail to 
[email protected]. Reference should be made to ``Proposed Risk 
Management Exemption from Federal Speculative Position Limits.'' 
Comments may also be submitted by connecting to the Federal eRulemaking 
Portal at http://www.regulations.gov and following comment submission 
instructions.

FOR FURTHER INFORMATION CONTACT: Donald Heitman, Senior Special 
Counsel, Division of Market Oversight, Commodity Futures Trading 
Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington, 
DC 20581, telephone (202) 418-5041, facsimile number (202) 418-5507, 
electronic mail [email protected]; or John Fenton, Director of 
Surveillance, Division of Market Oversight, telephone (202) 418-5298, 
facsimile number (202) 418-5507, electronic mail [email protected].

SUPPLEMENTARY INFORMATION:

[[Page 66098]]

I. Background

A. Statutory Framework

    Speculative position limits have been a tool for the regulation of 
the U.S. futures markets since the adoption of the Commodity Exchange 
Act of 1936. Section 4a(a) of the Commodity Exchange Act (``Act''), 7 
U.S.C. 6a(a), states that:

    Excessive speculation in any commodity under contracts of sale 
of such commodity for future delivery made on or subject to the 
rules of contract markets or derivatives transaction execution 
facilities 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.

    Accordingly, section 4a(a) of the Act provides the Commission with 
the authority to:

    Fix such limits on the amounts 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 or derivatives transaction execution facility as the 
Commission finds are necessary to diminish, eliminate, or prevent 
such burden.

    This longstanding statutory framework providing for Federal 
speculative position limits was supplemented with the passage of the 
Futures Trading Act of 1982, which acknowledged the role of exchanges 
in setting their own speculative position limits. The 1982 legislation 
also provided, under section 4a(e) of the Act, that limits set by 
exchanges and approved by the Commission were subject to Commission 
enforcement.
    Finally, the Commodity Futures Modernization Act of 2000 (``CFMA'') 
established designation criteria and core principles with which a 
designated contract market (``DCM'') must comply to receive and 
maintain designation. Among these, Core Principle 5 in section 5(d) of 
the Act states:

    Position Limitations or Accountability--To reduce the potential 
threat of market manipulation or congestion, especially during 
trading in the delivery month, the board of trade shall adopt 
position limitations or position accountability for speculators, 
where necessary and appropriate.

B. Regulatory Framework

    The regulatory structure based upon these statutory provisions 
consists of three elements, the levels of the speculative position 
limits, certain exemptions from the limits (for hedging, spreading/
arbitrage, and other positions), and the policy on aggregating commonly 
owned or controlled accounts for purposes of applying the limits. This 
regulatory structure is administered under a two-pronged framework. 
Under the first prong, the Commission establishes and enforces 
speculative position limits for futures contracts on a limited group of 
agricultural commodities. These Federal limits are enumerated in 
Commission regulation 150.2, and apply to the following futures and 
option markets: Chicago Board of Trade (``CBOT'') corn, oats, soybeans, 
wheat, soybean oil, and soybean meal; Minneapolis Grain Exchange 
(``MGE'') hard red spring wheat and white wheat; ICE Futures U.S. 
(formerly the New York Board of Trade) cotton No. 2; and Kansas City 
Board of Trade (``KCBOT'') hard winter wheat. Under the second prong, 
individual DCMs establish and enforce their own speculative position 
limits or position accountability provisions (including exemption and 
aggregation rules), subject to Commission oversight and separate 
authority to enforce exchange-set speculative position limits approved 
by the Commission. Thus, responsibility for enforcement of speculative 
position limits is shared by the Commission and the DCMs.\1\
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    \1\ Provisions regarding the establishment of exchange-set 
speculative position limits were originally set forth in CFTC 
regulation 1.61. In 1999, the Commission simplified and reorganized 
its rules by relocating the substance of regulation 1.61's 
requirements to part 150 of the Commission's rules, thereby 
incorporating within part 150 provisions for both Federal 
speculative position limits and exchange-set speculative position 
limits (see 64 FR 24038, May 5, 1999). With the passage of the 
Commodity Futures Modernization Act in 2000 and the Commission's 
subsequent adoption of the Part 38 regulations covering DCMs in 2001 
(66 FR 42256, August 10, 2001), Part 150's approach to exchange-set 
speculative position limits was incorporated as an acceptable 
practice under DCM Core Principle 5--Position Limitations and 
Accountability. Section 4a(e) provides that a violation of a 
speculative position limit set by a Commission-approved exchange 
rule is also a violation of the Act. Thus, the Commission can 
enforce directly violations of exchange-set speculative position 
limits as well as those provided under Commission rules.
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    Commission regulation 150.3, ``Exemptions,'' lists certain types of 
positions that may be exempted from (and thus may exceed) the Federal 
speculative position limits. For example, under Sec.  150.3(a)(1), bona 
fide hedging transactions, as defined in Sec.  1.3(z) of the 
Commission's regulations, may exceed the limits. The Commission has 
periodically amended the exemptive rules applicable to Federal 
speculative position limits in response to changing conditions and 
practices in futures markets. These amendments have included an 
exemption from speculative position limits for the positions of multi-
advisor commodity pools and other similar entities that use independent 
account controllers,\2\ and an amendment to extend the exemption for 
positions that have a common owner but are independently controlled to 
include certain commodity trading advisors.\3\ In 1987, the Commission 
also issued an agency interpretation clarifying certain aspects of the 
hedging definition.\4\ The Commission has also issued guidance with 
respect to exchange speculative limits, including guidelines regarding 
the exemption of risk-management positions from exchange-set 
speculative position limits in financial futures contracts.\5\ However, 
the last significant amendment to the Commission's exemptive rules was 
implemented in 1991.
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    \2\ 53 FR 41563 (October 24, 1988).
    \3\ 56 FR 14308 (April 9, 1991).
    \4\ 52 FR 27195 (July 20, 1987).
    \5\ 52 FR 34633 (September 14, 1987).
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C. Changes in Trading Practices

    The intervening 16 years have seen significant changes in trading 
patterns and practices in derivatives markets, thus prompting the 
Commission to reassess its policies regarding exemptions from the 
Federal speculative position limits. These changes primarily involve 
trading strategies and programs based on commodity indexes. In 
particular, pension funds and other investors (including individual 
investors participating in commodity index-based funds or trading 
programs) have become interested in taking on commodity price exposure 
as a way of diversifying portfolios that might otherwise be limited to 
stocks and interest rate instruments. Financial research has shown that 
the risk/return performance of a portfolio is improved by acquiring 
uncorrelated or negatively correlated assets, and commodities 
(including agricultural commodities) generally perform that role in a 
portfolio of other financial assets.\6\
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    \6\ The argument has also been made that commodities act as a 
general hedge of liability obligations that are linked to inflation.
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    The components of a commodity index-based investment might include 
energy commodities, metals (both precious metals and industrial 
metals), agricultural commodities that are subject to exchange limits 
(including coffee, sugar, cocoa, and orange juice, as well as livestock 
and meat), and those agricultural commodities named above that are 
subject to Federal speculative position limits (grains, the soybean 
complex and cotton). With respect to agricultural commodities subject 
to Federal limits, the Commission has responded to various instances 
where

[[Page 66099]]

index-based positions in such commodities exceed (or might grow to 
exceed) the Federal speculative position limits. In certain cases, the 
Commission has granted exemptive or no-action relief from Federal 
speculative position limits. In granting such relief, the Commission 
has included conditions to protect the market from the potential for 
the sudden or unreasonable fluctuations or unwarranted changes in 
prices that speculative limits are designed to prevent.
    For example, in 1991, the Commission received a request from a 
large commodity merchandising firm that engaged in commodity related 
swaps \7\ as a part of a commercial line of business. The firm, through 
an affiliate, wished to enter into an OTC swap transaction with a 
qualified counterparty (a large pension fund) involving an index based 
on the returns afforded by investments in exchange-traded futures 
contracts on certain non-financial commodities meeting specified 
criteria. The commodities making up the index included wheat, corn and 
soybeans, all of which were (and still are) subject to Federal 
speculative position limits. As a result of the swap, the swap dealing 
firm would, in effect, be going short the index. In other words, it 
would be required to make payments to the pension fund counterparty if 
the value of the index was higher at the end of the swap payment period 
than at the beginning. In order to hedge itself against this risk, the 
swap dealer planned to establish a portfolio of long futures positions 
in the commodities making up the index, in such amounts as would 
replicate its exposure under the swap transaction. By design, the index 
did not include contract months that had entered the delivery period 
and the swap dealer, in replicating the index, stated that it would not 
maintain futures positions based on index-related swap activity into 
the spot month (when physical commodity markets are most vulnerable to 
manipulation and attendant unreasonable price fluctuations). The result 
of the hedge was that the composite return on the futures portfolio 
would offset the net payments the swap dealer would be required to make 
to the pension fund counterparty.
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    \7\ A swap is a privately negotiated exchange of one asset or 
cash flow for another asset or cash flow. In a commodity swap, at 
least one of the assets or cash flows is related to the price of one 
or more commodities.
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    Because the futures positions the swap dealer would have to 
establish to hedge its exposure on the swap transaction would be in 
excess of the speculative position limits on wheat, corn and soybeans, 
it requested, and was granted, a hedge exemption for those positions. 
The swap transaction allowed the pension fund to add commodities 
exposure to its portfolio indirectly, through the OTC trade with the 
swap dealer--something it could have done directly, but only in a 
limited fashion.\8\
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    \8\ The pension fund would have been limited in its ability to 
take on this commodities exposure directly, by putting on the long 
futures position itself, because the pension fund--having no 
offsetting price risk incidental to commercial cash or spot 
operations--would not have qualified for a hedge exemption with 
respect to the position. (See Sec.  1.3(z) of the Commission's 
regulations.)
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    Similar hedge exemptions were subsequently granted in other cases 
where the futures positions clearly offset risks related to swaps or 
similar OTC positions involving both individual commodities and 
commodity indexes. These non-traditional hedges were all subject to 
specific limitations to protect the marketplace from potential ill 
effects. The limitations included: (1) The futures positions must 
offset specific price risk; (2) the dollar value of the futures 
positions would be no greater than the dollar value of the underlying 
risk; and (3) the futures positions would not be carried into the spot 
month.
    The Commission's Division of Market Oversight (``Division'' or 
``DMO'') has also recently issued two no-action letters involving 
another type of index-based trading.\9\ Both cases involved trading 
that offered investors the opportunity to participate in a broadly 
diversified commodity index-based fund or program (``index fund''). The 
futures positions of these index funds differed from the futures 
positions taken by the swap dealers described above. The swap dealer 
positions were taken to offset OTC swaps exposure that was directly 
linked to the price of an index. For that reason, the Division granted 
hedge exemptions to these swap dealer positions. On the other hand, in 
the index fund positions described in the no-action letters, the price 
exposure results from a promise or obligation to track an index, rather 
than from holding an OTC swap position whose value is directly linked 
to the price of the index. The Division believed that this difference 
was significant enough that the index fund positions would not qualify 
for a hedge exemption. Nevertheless, because the index fund positions 
represented a legitimate and potentially useful investment strategy, 
the Division granted the index funds no-action relief, subject to 
certain conditions, described below, that were intended to protect the 
futures markets from potential ill effects.
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    \9\ CFTC Letter 06-09 (April 19, 2006); CFTC Letter 06-19 
(September 6, 2006).
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II. Proposed Amendment

A. Introduction

    In light of the changing trading practices and conditions described 
above, the Commission is now considering whether to amend its Part 150 
regulations to create a new exemption from Federal speculative position 
limits. In addition to the above-described policy of granting index-
based hedge exemptions to swap dealers, which policy would remain in 
effect, the proposal would create an additional risk management 
exemption. That exemption would apply to positions held by: (1) 
Intermediaries, such as index funds, who pass price risks on to their 
customers; and (2) pension funds and other institutional investors 
seeking to diversify risks in portfolios by including an allocation to 
commodity exposure. As noted above, pension funds can already benefit 
from a hedge exemption indirectly, by entering into an OTC position 
with a swap dealer who, in turn, puts on an offsetting futures position 
in reliance on the existing hedge exemption policy. The proposed rules 
would allow a pension fund to receive an exemption directly, by putting 
on a futures position itself pursuant to the new risk management 
exemption provision.
    In determining whether the new risk management exemption proposed 
herein is appropriate, it is important to recall that the purpose of 
position limits, as specified in Section 4a(a) of the Act, is to 
diminish, eliminate, or prevent sudden or unreasonable fluctuations or 
unwarranted changes in the prices of commodities. Within this 
constraint, it is appropriate that the Commission (and the exchanges) 
not unduly restrict trading activity. A position limit is a means to an 
end, not an end in itself. Accordingly, to the extent that a type of 
trading activity can be identified that is unlikely to cause sudden or 
unreasonable fluctuations or unwarranted changes in prices, it is a 
good candidate to qualify for an exemption from position limits. 
Commodity index-based trading has characteristics that recommend it on 
that score: (1) It is generally passively managed, so that positions 
tend not to be changed based on market news or short-term price 
volatility; (2) it is generally unleveraged, so that financial 
considerations should not cause rapid liquidation of positions; and (3) 
it is inherently diversified, in that futures positions are normally 
held in many

[[Page 66100]]

different markets, and its purpose typically is to diversify a 
portfolio containing assets with different risk profiles.

B. Conditions for the Exemption

    To be eligible for an exemption as a ``risk management position'' 
under the proposed amendments to Part 150, a futures position would 
need to comply with several conditions designed to protect the futures 
markets from sudden or unreasonable fluctuations or unwarranted changes 
in prices. First, Sec.  150.3(a) would be amended to add a requirement 
that all positions subject to the exemptive provisions must be 
``established and liquidated in an orderly manner.'' This requirement 
already applies to the positions referred to in Sec.  150.3(a)(1), 
which exempts bona fide hedging transactions, by virtue of similar 
language appearing in the bona fide hedging definition (see Sec.  
1.3(z)(1)). However, the proposed amendment would clarify that the same 
requirement would apply not only to the risk management positions to be 
exempted under proposed new Sec.  150.3(a)(2), but also to the spread 
or arbitrage positions already exempted under current Sec.  150.3(a)(3) 
and the positions carried in the separate account of an independent 
account controller already exempted under current Sec.  150.3(a)(4).
    Second, the proposed rules would define a ``risk management 
position'' as a futures or futures equivalent position, held as part of 
a broadly diversified portfolio of long-only or short-only \10\ futures 
or futures equivalent \11\ positions, that is based upon either: (1) A 
fiduciary obligation to match or track the results of a broadly 
diversified index that includes the same commodity markets in 
fundamentally the same proportions as the futures or futures equivalent 
position; or (2) a portfolio diversification plan that has, among other 
substantial asset classes, an exposure to a broadly diversified index 
that includes the same commodity markets in fundamentally the same 
proportions as the futures or futures equivalent position. The first of 
these alternatives covers positions held by index funds, such as those 
that were the subject of the Commission No-action letters discussed 
above. The second alternative covers positions held directly by pension 
funds and other institutional investors.
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    \10\ The long-only or short-only qualification would limit risk 
management positions to positions offsetting either a long index or 
portfolio or a short index or portfolio, and thus would not allow 
for spread or straddle positions. With respect to short-only 
positions, it should be noted that all the applications for index-
based trading relief received by the Commission to date, whether for 
hedge exemptions or no-action relief, have involved long-only 
futures positions. However, the proposed rules would also provide 
for an entity that might offer investors a ``bear market index.'' 
Such an index would require the offeror to be long opposite its 
customers. It would, therefore, need to offset that exposure with 
short futures positions.
    \11\ For example, a long call option combined with a short put 
option is equivalent to a long futures contract.
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    A ``broadly diversified index'' would be defined to limit the 
weighting of certain agricultural commodities in the index so that 
commodities subject to Federal speculative position limits would not 
comprise a disproportionate share of the index. Thus, a ``broadly 
diversified index'' would mean an index based on physical commodities 
in which: (1) not more than 15% of the index is composed of any single 
agricultural commodity named in Sec.  150.2 (for which purposes, wheat 
shall be regarded as a single commodity, so that positions in all 
varieties of wheat, on all exchanges, combined, may not exceed 15% of 
the index, and the soybean complex shall likewise be regarded as a 
single commodity, so that positions in soybeans, soybean oil and 
soybean meal, on all exchanges combined, may not exceed 15% of the 
index); and (2) not more than 50% of the index as a whole is composed 
of agricultural commodities named in Sec.  150.2. The Commission 
believes that a narrowly based index could be used to evade speculative 
position limits. For example, the grains all tend to have similar risk 
profiles--i.e, they tend to respond similarly to common market factors, 
such as weather. Therefore, the Commission is concerned that an index 
composed, for example, of 25% each of corn, wheat, oats and soybeans--
rather than constituting a means of portfolio diversification--could 
operate as a mechanism for evading speculative position limits in one 
or more of those commodities.
    Third, the positions subject to the exemption must be passively 
managed. The proposed rules would define a ``passively managed 
position'' as a futures or futures equivalent position that is part of 
a portfolio that tracks a broadly diversified index, which index is 
calculated, adjusted, and re-weighted pursuant to an objective, 
predetermined mathematical formula the application of which allows only 
limited discretion with respect to trading decisions. This definition 
contemplates a certain limited amount of discretion in the manner in 
which the futures position tracks the underlying index. For example, 
index funds generally provide rules or standards for periodically re-
weighting the index to account for price changes in the commodities 
that make up the index, or readjusting the composition of the index to 
account for changing economic or market factors. Such discretion would 
be permissible. However, the definition contemplates that the position 
holder's discretion would not extend to frequently or arbitrarily 
changing the composition of the index or the weighting of the 
commodities in the index. Such actions would indicate that the position 
was being actively managed with a view to taking advantage of short-
term market trends. The definition also contemplates that the position 
holder could exercise some discretion as to when to roll futures 
positions forward into the next delivery month without violating the 
``passively managed'' requirement (provided no positions were carried 
into the spot month). The Commission believes that limited discretion 
as to when a position must be rolled forward can mitigate the market 
impact that might otherwise result from large positions being rolled 
forward on a pre-determined date and, consequently, help to avoid 
liquidity problems.
    Fourth, the futures trading undertaken pursuant to the exemption 
must be unleveraged. An unleveraged position would be defined as a 
futures or futures equivalent position that is part of a portfolio of 
futures or futures equivalent positions directly relating to an 
underlying broadly diversified index, the notional value of which 
positions does not exceed the sum of the value of: (1) Cash set aside 
in an identifiable manner, or unencumbered short-term U.S. Treasury 
obligations so set aside, plus any funds deposited as margin on such 
position; and (2) accrued profits on such position held at the futures 
commission merchant. Because the futures positions would be fully 
offset by cash or profits on such positions, financial considerations 
(e.g., significant price changes) should not cause rapid liquidation of 
positions, which can cause sudden or unreasonable fluctuations or 
unwarranted changes in prices.
    Finally, positions may not be carried into the spot month, a period 
during which physical commodity markets are particularly vulnerable to 
manipulations, squeezes and sudden or unreasonable fluctuations or 
unwarranted changes in prices.
    Entities intending to hold risk management positions pursuant to 
the exemption in Sec.  150.3(a)(2) would be required to apply to the 
Commission and receive Commission approval in order to receive an 
exemption. The applicant would be required to provide the following 
information:

[[Page 66101]]

Application for a Risk Management Exemption as Defined in Sec.  
150.1(j)
    1. Initial application materials:
    A. For an exemption related to a ``fiduciary obligation''.
     A description of the underlying index or group of 
commodities, including the commodities, the weightings, the method and 
timing of re-weightings, the selection of futures months, and the 
timing and criteria for rolling from one futures month to another;
     A description of the ``fiduciary obligation;''
     The actual or anticipated value of the underlying funds to 
be invested in commodities within the next fiscal or calendar year and 
the method for calculating that value, as well as the equivalent 
numbers of futures contracts in each of the Sec.  150.2 markets for 
which the exemption is sought;
     A description of the manner in which the funds to be 
invested in commodities will be set aside;
     A statement certifying that the requirements of this 
exemption are met and will be observed at all times going forward and 
that the Commission will be notified promptly of any material changes 
in this information; and
     Such other information as the Commission may request.
    B. For an exemption based upon a ``portfolio diversification 
plan''.
     A description of the investment index or group of 
commodities, including the commodities, the weightings, the method and 
timing of re-weightings, the selection of futures months, and the 
timing and criteria for rolling from one futures month to another;
     A description of the entire portfolio, including the total 
size of the assets, the asset classes making up the portfolio, and a 
description of the allocation among the asset classes;
     The actual or anticipated value of the underlying funds to 
be invested in commodities and the method for calculating that value, 
as well as the equivalent numbers of futures contracts in each of the 
Sec.  150.2 markets for which the exemption is sought;
     A description of the manner in which the funds to be 
invested in commodities will be set aside;
     A statement certifying that the requirements of this 
exemption are met and will be observed at all times going forward and 
that the Commission will be notified promptly of any material changes 
in this information; and
     Such other information as the Commission may request.
    2. Supplemental Material: Whenever the purchases or sales that a 
person wishes to qualify under this risk management exemption shall 
exceed the amount provided in the person's most recent filing pursuant 
to this section, or the amount previously specified by the Commission 
pursuant to this section, such person shall file with the Commission a 
statement that updates the information provided in the person's most 
recent filing and provides the reasons for this change. Such statement 
shall be filed at least ten business days in advance of the date that 
such person wishes to exceed those amounts and if the notice filer is 
not notified otherwise by the Commission within the 10-day period, the 
exemption will continue to be effective. The Commission may, upon call, 
obtain such additional materials from the applicant or person availing 
themselves of this exemption as the Commission deems necessary to 
exercise due diligence with respect to granting and monitoring this 
exemption.
    Entities holding risk management positions pursuant to the 
exemption in Sec.  150.3(a)(2) would also be required to immediately 
report to the Commission in the event they know, or have reason to 
know,\12\ that any person holds a greater than 25% interest in such 
position. The reason for this requirement is to alert the Commission to 
the possibility that an individual might be attempting to use the 
exemption as a means of avoiding otherwise applicable speculative 
position limits.
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    \12\ The Commission understands that not every entity that might 
qualify for this exemption would necessarily know the identities of 
all of the participants in the position. For example, a fund based 
on a commodity index may qualify for the exemption but the entity 
operating the fund may not know the identities of the owners of 
outstanding shares and, therefore, may not know when any given 
person had acquired a 25% or more interest in the position held by 
the fund.
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C. Questions

    The Commission would welcome public comments on any aspect of the 
proposed risk management exemption from Federal speculative position 
limits. However, the Commission is particularly interested in the views 
of commenters on the following specific questions:
    (1) Are any of the proposed conditions for receiving a risk 
management exemption unnecessary and, if so, why? Alternatively, should 
any of the proposed conditions be modified and, if so, why?
    (2) Should any other conditions, in addition to those set out in 
these proposed rules, be imposed as a prerequisite for receiving a risk 
management exemption? If so, what is the rationale for such additional 
conditions (i.e., what potential harm would they address)?
    (3) Is there any type of index-based trading that should be covered 
by the proposed rules, but is not? If so, how should the proposed rules 
be revised to apply to such trading?
    (4) The proposed rules would allow for a risk management exemption 
in the case of short-only futures or futures equivalent positions used 
to manage risks in connection with a ``bear market index.'' Would any 
of the exemptive rules, as proposed, create potential problems as 
applied to such an index? For example, in applying the definition of 
``unleveraged position,'' would problems be encountered in comparing 
the notional value of an unleveraged short futures position to the 
value of the cash, margins and accrued profits on such position?
    (5) Should the proposed rules impose any restrictions or conditions 
regarding how broad- or narrow-based an index should be if a position 
based on the index is to qualify for an exemption? For example, with 
respect to narrow-based indices reflecting specific industry or 
commodity sectors, should the Commission be concerned that a narrow-
based index composed entirely of agricultural commodities--for example, 
25% each of corn, wheat, oats and soybeans--could operate as a 
mechanism for evading speculative position limits in one or more of 
those commodities?
    (6) The proposed rules list the information that must be provided 
in an application for a risk management exemption. Are the requirements 
set out in the proposed rules appropriate? Should the requirements be 
revised and, if so, how?

III. Related Matters

A. Cost Benefit Analysis

    Section 15(a) of the Act requires the Commission to consider the 
costs and benefits of its action before issuing a new regulation under 
the Act. By its terms, section 15(a) does not require the Commission to 
quantify the costs and benefits of a new regulation or to determine 
whether the benefits of the proposed regulation outweigh its costs. 
Rather, section 15(a) requires the Commission to ``consider the costs 
and benefits'' of the subject rule.
    Section 15(a) further specifies that the costs and benefits of the 
proposed rule shall be evaluated in light of five broad areas of market 
and public concern: (1) Protection of market participants and the 
public; (2) efficiency, competitiveness, and financial integrity of 
futures markets; (3) price discovery;

[[Page 66102]]

(4) sound risk management practices; and (5) other public interest 
considerations. The Commission may, in its discretion, give greater 
weight to any one of the five enumerated areas of concern and may, in 
its discretion, determine that, notwithstanding its costs, a particular 
rule is necessary or appropriate to protect the public interest or to 
effectuate any of the provisions or to accomplish any of the purposes 
of the Act.
    The proposed rules would provide for a risk management exemption 
from the Federal speculative position limits applicable to certain 
agricultural commodities, thus giving entities such as index funds and 
pension funds an opportunity to more effectively manage risks for their 
investors through greater diversification of their portfolios. The 
rules would seek to protect the futures markets from potential ill 
effects of such risk management positions by imposing conditions on the 
exemption and creating an application process (including a requirement 
to file updates as necessary) to assure those conditions are met. The 
Commission, in proposing these rules, has endeavored to impose the 
minimum requirements necessary consistent with its mandate to protect 
the markets and the public from ill effects.
    The Commission specifically invites public comment on its 
application of the cost benefits criteria of the Act. Commenters are 
also invited to submit any quantifiable data that they may have 
concerning the costs and benefits of the proposed rules with their 
comment letter.

B. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA''), 5 U.S.C. 601 et seq., 
requires Federal agencies, in proposing rules, to consider the impact 
of those rules on small businesses. The Commission believes that the 
proposed rule amendments to implement a new exemption from Federal 
speculative position limits would only affect large traders. The 
Commission has previously determined that large traders are not small 
entities for the purposes of the RFA.\13\ Therefore, the Chairman, 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.
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    \13\ 47 FR 18618 (April 30, 1982).
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C. Paperwork Reduction Act

    When publishing proposed rules, the Paperwork Reduction Act of 1995 
(44 U.S.C. 3507(d)) 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, through this 
rule proposal, solicits comment 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 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 has submitted the proposed rule and its associated 
information collection requirements to the Office of Management and 
Budget (``OMB'') for its review.
    Collection of Information: Rules Establishing Risk Management 
Exemption From Federal Speculative Position Limits, OMB Control Number.
    The estimated burden was calculated as follows:
    Estimated number of respondents: 6.
    Annual responses by each respondent: 1.
    Total annual responses: 6.
    Estimated average hours per response: 10.
    Annual reporting burden: 60 hours.

List of Subjects in 17 CFR Part 150

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

    In consideration of the foregoing, pursuant to the authority 
contained in the Commodity Exchange Act, the Commission hereby proposes 
to amend part 150 of chapter I of title 17 of the Code of Federal 
Regulations as follows:

PART 150--LIMITS ON POSITIONS

    1. The authority citation for part 150 is revised to read as 
follows:

    Authority: 7 U.S.C. 6a, 6c, and 12a(5), as amended by the 
Commodity Futures Modernization Act of 2000, Appendix E of Pub. L. 
106-554, 114 Stat. 2763 (2000).

    2. Section 150.1 is amended by adding new paragraphs (j) through 
(m) to read as follows:


Sec.  150.1  Definitions.

* * * * *
    (j) Risk management position, for the purposes of an exemption 
under Sec.  150.3(a)(2), means a futures or futures equivalent 
position, held as part of a broadly diversified portfolio of long-only 
or short-only futures or futures equivalent positions, that is based 
upon either:
    (1) A fiduciary obligation to match or track the results of a 
broadly diversified index that includes the same commodity markets in 
fundamentally the same proportions as the futures or futures equivalent 
position; or
    (2) A portfolio diversification plan that has, among other 
substantial asset classes, an exposure to a broadly diversified index 
that includes the same commodity markets in fundamentally the same 
proportions as the futures or futures equivalent position.
    (k) Broadly diversified index means an index based on physical 
commodities in which:
    (1) Not more than 15% of the index is composed of any single 
agricultural commodity named in Sec.  150.2 (for which purposes, wheat 
shall be regarded as a single commodity, so that positions in all 
varieties of wheat, on all exchanges combined, may not exceed 15% of 
the index, and the soybean complex shall be regarded as a single 
commodity, so that positions in soybeans, soybean oil and soybean meal, 
on all exchanges combined, may not exceed 15% of the index); and
    (2) Not more than 50% of the index as a whole is composed of 
agricultural commodities named in Sec.  150.2.
    (l) Passively managed position means a futures or futures 
equivalent position that is part of a portfolio that tracks a broadly 
diversified index, which index is calculated, adjusted, and re-weighted 
pursuant to an objective, predetermined mathematical formula the 
application of which allows only limited discretion with respect to 
trading decisions.
    (m) Unleveraged position means:
    (1) A futures or futures equivalent position that is part of a 
portfolio of futures or futures equivalent positions directly relating 
to an underlying broadly diversified index, the notional value of which 
positions does not exceed the sum of the value of:
    (i) Cash set aside in an identifiable manner, or unencumbered 
short-term U.S. Treasury obligations so set aside, plus any funds 
deposited as margin on such position; and

[[Page 66103]]

    (ii) Accrued profits on such position held at the futures 
commission merchant.
    (2) [Reserved]
    3. Section 150.3 is amended by revising paragraph (a) introductory 
text, adding a new paragraph (a)(2), and adding a new paragraph (c) to 
read as follows:


Sec.  150.3  Exemptions.

    (a) Positions which may exceed limits. The position limits set 
forth in Sec.  150.2 of this part may be exceeded to the extent such 
positions are established and liquidated in an orderly manner and are:
* * * * *
    (2) Risk management positions, as defined in Sec.  150.1(j), that 
fulfill the following requirements:
    (i) Such risk management positions must comply with the following 
conditions:
    (A) The positions must be passively managed;
    (B) The positions must be unleveraged; and
    (C) The positions must not be carried into the spot month.
    (ii) Entities intending to hold risk management positions pursuant 
to the exemption in Sec.  150.3(a)(2) must apply to the Commission and 
receive Commission approval. Such applications must include the 
following information:
    (A) In the case of an exemption based on a fiduciary obligation, as 
described in Sec.  150.1(j)(1), an application must include:
    (1) A description of the underlying index or group of commodities, 
including the commodities, the weightings, the method and timing of re-
weightings, the selection of futures months, and the timing and 
criteria for rolling from one futures month to another;
    (2) A description of the ``fiduciary obligation;''
    (3) The actual or anticipated value of the underlying funds to be 
invested in commodities within the next fiscal or calendar year and the 
method for calculating that value, as well as the equivalent numbers of 
futures contracts in each of the Sec.  150.2 markets for which the 
exemption is sought;
    (4) A description of the manner in which the funds to be invested 
in commodities will be set aside;
    (5) A statement certifying that the requirements of this exemption 
are met and will be observed at all times going forward and that the 
Commission will be notified promptly of any material changes in this 
information; and
    (6) Such other information as the Commission may request.
    (B) In the case of an exemption based on a portfolio 
diversification plan, as described in Sec.  150.1(j)(2), an application 
must include:
    (1) A description of the investment index or group of commodities, 
including the commodities, the weightings, the method and timing of re-
weightings, the selection of futures months, and the timing and 
criteria for rolling from one futures month to another;
    (2) A description of the entire portfolio, including the total size 
of the assets, the asset classes making up the portfolio, and a 
description of the allocation among the asset classes;
    (3) The actual or anticipated value of the underlying funds to be 
invested in commodities and the method for calculating that value, as 
well as the equivalent numbers of futures contracts in each of the 
Sec.  150.2 markets for which the exemption is sought;
    (4) A description of the manner in which the funds to be invested 
in commodities will be set aside;
    (5) A statement certifying that the requirements of this exemption 
are met and will be observed at all times going forward and that the 
Commission will be notified promptly of any material changes in this 
information; and
    (6) Such other information as the Commission may request.
    (iii) Whenever the purchases or sales that a person wishes to 
qualify under this risk management exemption shall exceed the amount 
provided in the person's most recent filing pursuant to this section, 
or the amount previously specified by the Commission pursuant to this 
section, such person shall file with the Commission a statement that 
updates the information provided in the person's most recent filing and 
provides the reasons for this change. Such statement shall be filed at 
least ten business days in advance of the date that such person wishes 
to exceed those amounts and if the notice filer is not notified 
otherwise by the Commission within the 10-day period, the exemption 
will continue to be effective. The Commission may, upon call, obtain 
such additional materials from the applicant or person availing 
themselves of this exemption as the Commission deems necessary to 
exercise due diligence with respect to granting and monitoring this 
exemption.
    (iv) Entities holding risk management positions pursuant to the 
exemption in Sec.  150.3(a)(2) shall immediately report to the 
Commission in the event that they know, or have reason to know, that 
any person holds a greater than 25% interest in such position.
* * * * *
    (c) The Commission hereby delegates, until such time as the 
Commission orders otherwise, to the Director of the Division of Market 
Oversight, or the Director's designee, the functions reserved to the 
Commission in Sec.  150.3(a)(2) of this chapter.

    Issued by the Commission this 20th day of November, 2007, in 
Washington, DC.
David Stawick,
Secretary of the Commission.
[FR Doc. E7-22992 Filed 11-26-07; 8:45 am]
BILLING CODE 6351-01-P