[Federal Register Volume 78, Number 239 (Thursday, December 12, 2013)]
[Proposed Rules]
[Pages 75680-75842]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-27200]



[[Page 75679]]

Vol. 78

Thursday,

No. 239

December 12, 2013

Part II





Commodity Futures Trading Commission





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17 CFR Parts 1, 15, 17, et al.





Position Limits for Derivatives; Proposed Rule

  Federal Register / Vol. 78 , No. 239 / Thursday, December 12, 2013 / 
Proposed Rules  

[[Page 75680]]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 1, 15, 17, 19, 32, 37, 38, 140, and 150

RIN 3038-AD99


Position Limits for Derivatives

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Commission proposes to amend regulations concerning 
speculative position limits to conform to the Wall Street Transparency 
and Accountability Act of 2010 (``Dodd-Frank Act'') amendments to the 
Commodity Exchange Act (``CEA'' or ``Act''). The Commission proposes to 
establish speculative position limits for 28 exempt and agricultural 
commodity futures and option contracts, and physical commodity swaps 
that are ``economically equivalent'' to such contracts. In connection 
with establishing these limits, the Commission proposes to update some 
relevant definitions; revise the exemptions from speculative position 
limits, including for bona fide hedging; and extend and update 
reporting requirements for persons claiming exemption from these 
limits. The Commission proposes appendices that would provide guidance 
on risk management exemptions for commodity derivative contracts in 
excluded commodities permitted under the proposed definition of bona 
fide hedging position; list core referenced futures contracts and 
commodities that would be substantially the same as a commodity 
underlying a core referenced futures contract for purposes of the 
proposed definition of basis contract; describe and analyze fourteen 
fact patterns that would satisfy the proposed definition of bona fide 
hedging position; and present the proposed speculative position limit 
levels in tabular form. In addition, the Commission proposes to update 
certain of its rules, guidance and acceptable practices for compliance 
with Designated Contract Market (``DCM'') core principle 5 and Swap 
Execution Facility (``SEF'') core principle 6 in respect of exchange-
set speculative position limits and position accountability levels.

DATES: Comments must be received on or before February 10, 2014.

ADDRESSES: You may submit comments, identified by RIN number 3038-AD99 
by any of the following methods:
     Agency Web site: http://comments.cftc.gov.
     Mail: Secretary of the Commission, Commodity Futures 
Trading Commission, Three Lafayette Centre, 1155 21st Street NW., 
Washington, DC 20581.
     Hand Delivery/Courier: Same as mail above.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow instructions for submitting comments.
    All comments must be submitted in English, or if not, accompanied 
by an English translation. Comments will be posted as received to 
www.cftc.gov. You should submit only information that you wish to make 
available publicly. If you wish the Commission to consider information 
that is exempt from disclosure under the Freedom of Information Act, a 
petition for confidential treatment of the exempt information may be 
submitted according to the procedure established in Sec.  145.9 of the 
Commission's regulations (17 CFR 145.9).
    The Commission reserves the right, but shall have no obligation, to 
review, pre-screen, filter, redact, refuse, or remove any or all of 
your submission from http://www.cftc.gov that it may deem to be 
inappropriate for publication, such as obscene language. All 
submissions that have been redacted or removed that contain comments on 
the merits of the rulemaking will be retained in the public comment 
file and will be considered as required under the Administrative 
Procedure Act and other applicable laws, and may be accessible under 
the Freedom of Information Act.

FOR FURTHER INFORMATION CONTACT: Stephen Sherrod, Senior Economist, 
Division of Market Oversight, at (202) 418-5452, [email protected]; 
Riva Spear Adriance, Senior Special Counsel, Division of Market 
Oversight, at (202) 418-5494, [email protected]; David N. Pepper, 
Attorney-Advisor, Division of Market Oversight, at (202) 418-5565, 
[email protected], Commodity Futures Trading Commission, Three Lafayette 
Centre, 1155 21st Street NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Position Limits for Physical Commodity Futures and Swaps
    A. Background
    1. CEA Section 4a
    2. The Commission Construes CEA Section 4a(a) To Mandate That 
the Commission Impose Position Limits
    3. Necessity Finding
    B. Proposed Rules
    1. Section 150.1--Definitions
    i. Various Definitions Found in Sec.  150.1
    ii. Bona Fide Hedging Definition
    2. Section 150.2--Position Limits
    i. Current Sec.  150.2
    ii. Proposed Sec.  150.2
    3. Section 150.3--Exemptions
    i. Current Sec.  150.3
    ii. Proposed Sec.  150.3
    4. Part 19--Reports by Persons Holding Bona Fide Hedge Positions 
Pursuant to Sec.  150.1 of This Chapter and by Merchants and Dealers 
in Cotton
    i. Current Part 19
    ii. Proposed Amendments to Part 19
    5. Sec.  150.7--Reporting Requirements for Anticipatory Hedging 
Positions
    i. Current Sec.  1.48
    ii. Proposed Sec.  150.7
    6. Miscellaneous Regulatory Amendments
    i. Proposed Sec.  150.6--Ongoing Responsibility of DCMs and SEFs
    ii. Proposed Sec.  150.8--Severability
    iii. Part 15--Reports--General Provisions
    iv. Part 17--Reports by Reporting Markets, Futures Commission 
Merchants, Clearing Members, and Foreign Brokers
II. Revision of Rules, Guidance, and Acceptable Practices Applicable 
to Exchange-Set Speculative Position Limits--Sec.  150.5
    A. Background
    B. The Current Regulatory Framework for Exchange-Set Position 
Limits
    1. Section 150.5
    2. The Commodity Futures Modernization Act of 2000 Caused 
Commission Sec.  150.5 To Become Guidance on and Acceptable 
Practices for Compliance with DCM Core Principle 5
    3. The CFTC Reauthorization Act of 2008
    4. The Dodd-Frank Act Amendments to CEA Section 5
    i. The Dodd-Frank Act Added Provisions That Permit the 
Commission To Override the Discretion of DCMs in Determining How To 
Comply With the Core Principles
    ii. The Dodd-Frank Act Established a Comprehensive New Statutory 
Framework for Swaps
    iii. The Dodd-Frank Act Added the Regulation of Swaps, Added 
Core Principles for SEFs, Including SEF Core Principle 6, and 
Amended DCM Core Principle 5
    5. Dodd-Frank Rulemaking
    i. Amended Part 38
    ii. Amended Part 37
    iii. Vacated Part 151
    C. Proposed Amendments to Sec.  150.5
    1. Proposed Amendments to Sec.  150.5 To Add References to Swaps 
and Swap Execution Facilities
    2. Proposed Sec.  150.5(a)--Requirements and Acceptable 
Practices for Commodity Derivative Contracts That Are Subject to 
Federal Position Limits
    3. Proposed Sec.  150.5(b)--Requirements and Acceptable 
Practices for Commodity Derivative Contracts That Are Not Subject to 
Federal Position Limits
III. Related Matters
    A. Considerations of Costs and Benefits
    1. Background
    i. Statutory Mandate To Consider Costs and Benefits
    2. Section 150.1--Definitions
    i. Bona Fide Hedging
    ii. Rule Summary
    iii. Benefits and Costs

[[Page 75681]]

    3. Section 150.2--Limits
    i. Rule Summary
    ii. Benefits
    iii. Costs
    iv. Consideration of Alternatives
    4. Section 150.3--Exemptions
    i. Rule Summary
    ii. Benefits
    iii. Costs
    iv. Consideration of Alternatives
    5. Section 150.5--Exchange-Set Speculative Position Limits
    i. Rule Summary
    ii. Benefits
    iii. Costs
    iv. Consideration of Alternatives
    6. Section 150.7--Reporting Requirements for Anticipatory 
Hedging Positions
    i. Benefits and Costs
    7. Part 19--Reports
    i. Rule Summary
    ii. Benefits
    iii. Costs
    iv. Consideration of Alternatives
    8. CEA Section 15(a)
    i. Protection of Market Participants and the Public
    ii. Efficiency, Competitiveness, and Financial Integrity of 
Markets
    iii. Price Discovery
    iv. Sound Risk Management
    v. Other Public Interest Considerations
    B. Paperwork Reduction Act
    1. Overview
    2. Methodology and Assumptions
    3. Information Provided by Reporting Entities/Persons and 
Recordkeeping Duties
    4. Comments on Information Collection
    C. Regulatory Flexibility Act
IV. Appendices
    A. Appendix A--Studies Relating to Position Limits Reviewed and 
Evaluated by the Commission

I. Position Limits for Physical Commodity Futures and Swaps

A. Background

1. CEA Section 4a
    Speculative position limits have been used as a tool to regulate 
futures markets for over seventy years. Since the Commodity Exchange 
Act of 1936,\1\ Congress has repeatedly expressed confidence in the use 
of speculative position limits as an effective means of preventing 
unreasonable and unwarranted price fluctuations.\2\
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    \1\ 7 U.S.C. 1 et seq.
    \2\ See, e.g., H.R. Rep. No. 421, 74th Cong., 1st Sess. 1 
(1935); H.R. Rep. No. 624, 99th Cong., 2d Sess. 44 (1986).
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    CEA section 4a, as amended by the Dodd-Frank Act, provides the 
Commission with broad authority to set position limits. When Congress 
created the Commission in 1974, it reiterated that the purpose of the 
CEA was to prevent fraud and manipulation and to control speculation. 
Later, the Commodity Futures Modernization Act of 2000 (``CFMA'') 
provided a statutory basis for exchanges to use pre-existing position 
accountability levels as an alternative means to limit the burdens of 
excessive speculative positions. Nevertheless, the CFMA did not weaken 
the Commission's authority in CEA section 4a to establish position 
limits to prevent such undue burdens on interstate commerce.\3\ More 
recently, in the CFTC Reauthorization Act of 2008, Congress gave the 
Commission expanded authority to set position limits for significant 
price discovery contracts on exempt commercial markets.\4\
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    \3\ See Commodity Futures Modernization Act of 2000, Public Law 
106-554, 114 Stat. 2763 (Dec. 21, 2000).
    \4\ See Food, Conservation and Energy Act of 2008, Public Law 
110-246, 122 Stat. 1624 (June 18, 2008).
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    In 2010, the Dodd-Frank Act expanded the Commission's authority to 
set position limits by amending CEA section 4a(a)(1) to authorize the 
Commission to establish position limits not just for futures and option 
contracts, but also for swaps that are economically equivalent to 
covered futures and options contracts,\5\ swaps traded on a DCM or SEF, 
swaps that are traded on or subject to the rules of a DCM or SEF, and 
swaps not traded on a DCM or SEF that perform or affect a significant 
price discovery function with respect to regulated entities (``SPDF 
Swaps'').\6\ CEA section 4a(a)(1) further declares the Congressional 
determination 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 or derivatives transaction 
execution facilities, or swaps that perform or affect a significant 
price discovery function with respect to registered entities 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.'' \7\
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    \5\ See infra discussion of economically equivalent.
    \6\ CEA section 4a(a)(1) (as amended 2010) ; 7 U.S.C. 6a(a)(1).
    \7\ Id.
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    As described below, amended CEA section 4a(a)(2), Congress 
directed, i.e., mandated, that the Commission ``shall'' establish 
limits on the amount of positions, as appropriate, that may be held by 
any person in agricultural and exempt commodity futures and options 
contracts traded on a DCM.\8\ Similarly, as described below, in amended 
CEA section 4a(a)(5),\9\ Congress mandated that the Commission impose 
position limits on swaps that are economically equivalent to the 
agricultural and exempt commodity derivatives for which it mandated 
position limits in CEA section 4a(a)(2).
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    \8\ CEA section 4a(a)(2); 7 U.S.C. 6a(a)(2).
    \9\ CEA section 4a(a)(5); 7 U.S.C. 6a(a)(5).
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    With respect to the position limits that the Commission is required 
to set, CEA section 4a(a)(3) guides the Commission in setting the level 
of those limits by providing several criteria for the Commission to 
address, namely: (i) To diminish, eliminate, or prevent excessive 
speculation as described under this section; (ii) to deter and prevent 
market manipulation, squeezes, and corners; (iii) to ensure sufficient 
market liquidity for bona fide hedgers; and (iv) to ensure that the 
price discovery function of the underlying market is not disrupted.\10\
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    \10\ CEA section 4a(a)(3); 7 U.S.C. 6a(a)(3).
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    CEA section 4a(a)(5) requires the Commission to establish, at an 
appropriate level, position limits for swaps that are economically 
equivalent to those futures and options that are subject to mandatory 
position limits pursuant to CEA section 4a(a)(2).\11\ CEA section 
4a(a)(5) also requires that the position limits on economically 
equivalent swaps be imposed at the same time as mandatory limits are 
imposed on futures and options.\12\
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    \11\ CEA section 4a(a)(5); 7 U.S.C. 6a(a)(5).
    \12\ See id.
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    CEA section 4a(a)(6) requires the Commission to apply position 
limits on an aggregate basis to contracts based on the same underlying 
commodity across: (1) Contracts listed by DCMs; (2) with respect to 
foreign boards of trade (``FBOTs''), contracts that are price-linked to 
a contract listed for trading on a registered entity and made available 
from within the United States via direct access; and (3) SPDF 
Swaps.\13\
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    \13\ CEA section 4a(a)(6); 7 U.S.C. 6a(a)(6).
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    Furthermore, under new CEA section 4a(a)(7), Congress gave the 
Commission authority to exempt persons or transactions from any 
position limits it establishes.\14\
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    \14\ CEA section 4a(a)(7); 7 U.S.C. 6a(a)(7).
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2. The Commission Construes CEA Section 4a(a) To Mandate That the 
Commission Impose Position Limits
    The Commission concludes that, based on its experience and 
expertise, when section 4a(a) of the Act is considered as an integrated 
whole, it is reasonable to construe that section to mandate that the 
Commission impose position limits. This mandate requires the Commission 
to impose limits on futures contracts, options, and certain swaps for 
agricultural and exempt commodities. The Commission also

[[Page 75682]]

concludes that the mandate requires it to impose such limits without 
first finding that any such limit is necessary to prevent excessive 
speculation in a particular market.
    In ISDA v. CFTC,\15\ the district court concluded that section 
4a(a)(1) of the Act ``unambiguously requires that, prior to imposing 
position limits, the Commission find that position limits are necessary 
to `diminish, eliminate, or prevent' the burden described in [section 
4a(a)(1) of the Act].'' \16\ But the court further concluded that, even 
if CEA section 4a(a)(1) standing alone required the Commission to make 
a necessity determination as a prerequisite to imposing position 
limits, it was plausible to conclude that sections 4a(a)(2), (3), and 
(5) of the Act, which were added by Dodd-Frank, constituted a mandate, 
requiring the Commission to impose position limits without making any 
findings of necessity. The court ultimately determined that the Dodd-
Frank amendments, and their relationship to section 4a(a)(1) of the 
Act, are ``ambiguous and lend themselves to more than one plausible 
interpretation.'' \17\ Thus, the court rejected the Commission's 
contention that section 4a(a) of the Act unambiguously mandated the 
imposition of position limits without any finding of necessity.
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    \15\ International Swaps and Derivatives Association v. United 
States Commodity Futures Trading Commission, 887 F. Supp. 2d 259 
(D.D.C. 2012).
    \16\ Id. at 270.
    \17\ Id. at 281.
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    Having concluded that section 4a(a) of the Act is ambiguous, the 
court could not rely on the Commission's interpretation to resolve the 
section's ambiguity. As the court observed, the D.C. Circuit has held 
that `` `deference to an agency's interpretation of a statute is not 
appropriate when the agency wrongly believes that interpretation is 
compelled by Congress.' '' \18\ The court further held that, pursuant 
to the law of the D.C. Circuit, it was required to remand the matter to 
the Commission so that it could ``fill in the gaps and resolve the 
ambiguities.'' \19\ The court cautioned the Commission that, in 
resolving the ambiguity of section 4a(a) of the Act, `` `it is 
incumbent upon the agency not to rest simply on its parsing of the 
statutory language.' '' \20\
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    \18\ Id. at 280-82, quoting Peter Pan Bus Lines, Inc. v. Fed. 
Motor Carrier Safety Admin., 471 F.3d 1350, 1354 (D.C. Cir. 2006).
    \19\ 887 F. Supp. 2d at 282.
    \20\ Id. at n.7, quoting PDK Labs. Inc. v. DEA, 362 F.3d 786, 
797 (D.C. Cir. 2004).
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    The Commission now undertakes the task assigned by the court: using 
its experience and expertise to resolve the ambiguity the district 
court perceived in section 4a(a) of the Act. The most important 
guidepost for the Commission in resolving the ambiguity is section 
4a(a)(2) of the Act. That section, which is captioned ``Establishment 
of Limitations,'' includes two sections that are critical to 
understanding congressional intent. Subsection 4a(a)(2)(A) provides 
that the Commission, in accordance with the standards set forth in 
section 4a(a)(1) of the Act, shall establish limits on the amount of 
positions, as appropriate, other than bona fide hedge positions that 
may be held by any person with respect to physical commodities other 
than excluded commodities.\21\ Subsection 4a(a)(2)(B) provides that for 
exempt commodities, the limits ``required'' under subsection 
4a(a)(2)(A) be established within 180 days of the enactment of section 
4a(a)(2)(B) and that for agricultural commodities, the limits 
``required'' under subsection 4a(a)(2)(A) be established within 270 
days of the enactment of section 4a(a)(2)(B).\22\
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    \21\ CEA section 4a(a)(2)(A); 7 U.S.C. 6a(a)(2)(A).
    \22\ CEA section 4a(a)(2)(B); 7 U.S.C. 6a(a)(2)(B).
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    The court concluded that this section was ambiguous as to whether 
the Commission had a mandate to impose position limits. The court 
focused on the opening phrase of subsection (A)--``[i]n accordance with 
the standards set forth in [section 4a(a)(1) of the Act].'' The court 
held that the term ``standards'' in section 4a(a)(2) of the Act was 
ambiguous and could refer to the requirement in section 4a(a)(1) of the 
Act that the Commission impose position limits ``as [it] finds are 
necessary to diminish, eliminate, or prevent'' an unnecessary burden on 
interstate commerce.\23\ Thus, the court held that it was plausible 
that section 4a(a)(2) of the Act required the Commission to make a 
finding of necessity as a precondition to imposing any position limit. 
But the court held that it was also plausible that the reference to 
``standards'' did not incorporate such a requirement.
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    \23\ 887 F. Supp. 2d at 274-76.
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    The Commission believes that it is reasonable to conclude from the 
Dodd-Frank amendments that Congress mandated limits and did not intend 
for the Commission to make a necessity finding as a prerequisite to the 
imposition of limits. The Commission's interpretation of its mandate is 
also based on congressional concerns that arose, and congressional 
actions taken, before the passage of the Dodd-Frank amendments. During 
the years leading up to the enactment, Congress conducted several 
investigations that concluded that excessive speculation accounted for 
significant volatility and price increases in physical commodity 
markets. A congressional investigation determined that prices of crude 
oil had risen precipitously and that ``[t]he traditional forces of 
supply and demand cannot fully account for these increases.'' \24\ The 
investigation found evidence suggesting that speculation was 
responsible for an increase of as much as $20-25 per barrel of crude 
oil, which was then at $70.\25\ Subsequently, Congress found similar 
price volatility stemming from excessive speculation in the natural gas 
market.\26\ Thus, these investigations had already gathered evidence 
regarding the impact of excessive speculation, and had concluded that 
such speculation imposed an undue burden on the economy. In light of 
these investigations and conclusions, it is reasonable for the 
Commission to conclude that Congress did not intend for it to duplicate 
investigations Congress had already conducted, and did not intend to 
leave it up to the Commission whether there should be federal limits. 
Instead, Congress set short deadlines for the limits it ``required,'' 
and directed the Commission to conduct a study of the limits after 
their imposition and to report to Congress promptly on their effects. 
Accordingly, the Commission believes that the better reading of the 
Dodd-Frank amendments, in light of the congressional investigations and 
findings made, is the Dodd-Frank amendments require the Commission to 
impose position limits on physical commodity derivatives as opposed to 
merely reaffirming the preexisting, discretionary authority the 
Commission has long had to impose limits as it finds necessary. 
Congress made the decision to impose limits, and it is for the 
Commission to carry that decision out, subject to close congressional 
oversight.
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    \24\ ``The Role of Market Speculation in Rising Oil and Gas 
Prices: A Need to Put the Cop Back on the Beat,'' Staff Report, 
Permanent Subcommittee on Investigations of the Senate Committee on 
Homeland Security and Governmental Affairs, U.S. Senate, S. Prt. No. 
109-65 at 1 (June 27, 2006).
    \25\ Id. at 12; see also ``Excessive Speculation in the Natural 
Gas Market,'' Staff Report, Permanent Subcommittee on Investigations 
of the Senate Committee on Homeland Security and Governmental 
Affairs, U.S. Senate at 1 (June 25, 2007) available at http://www.levin.senate.gov/imo/media/doc/supporting/2007/PSI.Amaranth.062507.pdf (last visited Mar. 18, 2013) (``Gas 
Report'').
    \26\ Gas Report at 1-2.
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    Based on its experience, the Commission concludes that Congress 
could not have contemplated that, as a prerequisite to imposing limits, 
the Commission would first make the sort of

[[Page 75683]]

necessity determination that the plaintiffs in ISDA v. CFTC argue 
section 4a(a)(2) of the Act requires--i.e., a finding that, before 
imposing any limit in any particular market, there is a reasonable 
likelihood that excessive speculation will pose a problem in that 
market, and that position limits are likely to curtail that excessive 
speculation without imposing undue costs.\27\ As the district court 
noted, for 45 years after passage of the CEA, the Commission's 
predecessor agency made findings of necessity in its rulemakings 
establishing position limits.\28\ During that period, the Commission 
had jurisdiction over only a limited number of agricultural 
commodities. The court cited several orders issued by the Commodity 
Exchange Commission (``CEC'') between 1940 and 1956 establishing 
position limits, and in each of those orders, the CEC stated that the 
limits it was imposing were necessary. Each of those orders involved no 
more than a small number of commodities. But it took the CEC many 
months to make those findings. For example, in 1938, the CEC imposed 
position limits on six grain products.\29\ Proceedings leading up to 
the establishment of the limits commenced more than 13 months earlier, 
when the CEC issued a notice of hearings regarding the limits.\30\ 
Similarly, in September 1939, the CEC issued a Notice of Hearing with 
respect to position limits for cotton, but it was not until August 1940 
that the CEC finally promulgated such limits.\31\ And the CEC began the 
process of imposing limits on soybeans and eggs in January 1951, but 
did not complete the process until more than seven months later.\32\
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    \27\ See 887 F. Supp. 2d at 273.
    \28\ Id. at 269.
    \29\ See 3 FR 3145, Dec. 24, 1938.
    \30\ See 2 FR 2460, Nov. 12, 1937.
    \31\ See 4 FR 3903, Sep. 14, 1939; 5 FR 3198, Aug. 28, 1940.
    \32\ See 16 FR 321, Jan. 12, 1951; 16 FR 8106, Aug. 16, 1951; 
see also 17 FR 6055, Jul. 4, 1952 (notice of hearing regarding 
proposed position limits for cottonseed oil, soybean oil, and lard); 
18 FR 443, Jan. 22, 1953 (orders setting limits for cottonseed oil, 
soybean oil, and lard); 21 FR 1838, Mar. 24, 1956 (notice of hearing 
regarding proposed position limits for onions), 21 FR 5575, Jul. 25, 
1956 (order setting position limits for onions).
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    In the Commission's experience (i.e., in the experience of its 
predecessor agency), it took at least four months to make a necessity 
finding with respect to one commodity. The process of making the sort 
of necessity findings that plaintiffs urged upon the court with respect 
to all agricultural commodities and all exempt commodities would be far 
more lengthy than the time allowed by section 4a(a)(3) of the Act, 
i.e., 180 or 270 days.
    Dodd-Frank requires the Commission to impose position limits on all 
exempt commodities within 180 days after enactment, and on all 
agricultural commodities within 270 days.\33\ Because of these 
stringent time limits, the Commission concludes that Congress did not 
intend for the Commission to delay the imposition of limits until it 
has first made antecedent, contract-by-contract necessity findings.\34\
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    \33\ Although the Commission did not meet these deadlines in its 
first position limits rulemaking, it completed the task (in which 
the Commission received and addressed more than 15,000 comments) as 
expeditiously as possible under the circumstances.
    \34\ Even if there were no mandate, the Commission would not 
need to make the sort of particularized necessity findings advocated 
by the plaintiffs in ISDA v. CFTC, and discussed by the district 
court. When the Commission imposed limits pre-Dodd-Frank, it only 
had to determine that excessive speculation is harmful to the market 
and that limits on speculative positions are a reasonable means of 
preventing price disruptions in the marketplace that place an undue 
burden on interstate commerce. That is the determination that the 
Commission made in 1981 when it required the exchanges to establish 
position limits on all futures contracts, regardless of the 
characteristics of a particular contract market. See 46 FR 50940 
(``[I]t is the Commission's view that this objective [``the 
prevention of large and/or abrupt price movements which are 
attributable to extraordinarily large speculative positions''] is 
enhanced by speculative position limits since it appears that the 
capacity of any contract market to absorb the establishment and 
liquidation of large speculative positions in an orderly manner is 
related to the relative size of such positions, i.e., the capacity 
of the market is not unlimited.''). In the immediate wake of that 
decision, Congress enacted legislation to give the Commission the 
specific authority to enforce those omnibus limits. See CEA section 
4a(e); 7 U.S.C. 6a(e).
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    Additional experience of the Commission confirms this 
interpretation. The Commission has found, historically, that 
speculative position limits are a beneficial tool to prevent, among 
other things, manipulation of prices. Limits do so by restricting the 
size of positions held by noncommercial entities that do not have 
hedging needs in the underlying physical markets. In other words, 
markets that have underlying physical commodities with finite supplies 
benefit from the protections offered by position limits. This will be 
discussed further, below.
    For example, in 1981, the Commission, acting expressly pursuant to, 
inter alia, what was then CEA Section 4a(1) (predecessor to CEA section 
4a(a)(1)), adopted what was then Sec.  1.61.\35\ This rule required 
speculative position limits for ``for each separate type of contract 
for which delivery months are listed to trade'' on any DCM, including 
``contracts for future delivery of any commodity subject to the rules 
of such contract market.'' \36\ The Commission explained that this 
action was necessary in order to ``close the existing regulatory gap 
whereby some but not all contract markets [we]re subject to a specified 
speculative position limit.'' \37\ Like the Dodd-Frank Act, the 1981 
final rule established (and the rule release described) that such 
limits ``shall'' be established according to what the Commission termed 
``standards.'' \38\ As used in the 1981 final rule and release, 
``standards'' meant the criteria for determining how the required 
limits would be set.\39\ ``Standards'' did not include the antecedent 
judgment of whether to order limits at all. The Commission had already 
made the antecedent judgment in the rule that ``speculative limits are 
appropriate for all contract markets irrespective of the 
characteristics of the underlying market.'' \40\ It further concluded 
that, with respect to any particular market, the ``existence of 
historical trading data'' showing excessive speculation or other 
burdens on that market is not ``an essential prerequisite to the 
establishment of a speculative limit.'' \41\ The Commission thus 
directed the exchanges to set limits for all futures contracts 
``pursuant to the . . . standards of rule 1.61[.]'' \42\ And Sec.  1.61 
incorporated the standards from then-CEA-section 4a(1)--an 
``Aggregation Standard'' (46 FR at 50943) for applying the limits to 
positions both held and controlled by a trader and a flexibility 
standard, allowing the exchanges to set ``different and separate 
position limits for different types of futures contracts, or for 
different delivery months, or from exempting positions which are 
normally known in the trade as `spreads, straddles or arbitrage' or 
from fixing limits which apply to such positions which are different 
from limits fixed for other positions.'' \43\
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    \35\ 46 FR 50938, 50944-45, Oct. 16, 1981. The rule adopted in 
1981 tracked, in significant part, the language of Section 4a(1). 
Compare 17 CFR 1.61(a)(1) (1982) with 7 U.S.C. 6a(1) (1976).
    \36\ 46 FR 50945.
    \37\ Id. 50939; see also id. 50938 (``to ensure that each 
futures and options contract traded on a designated contract market 
will be subject to speculative position limits'').
    \38\ Compare id. at 50941-42, 50945 with 7 U.S.C. 6a(a)(2)(A).
    \39\ 46 FR 50941-42, 50945.
    \40\ Id. at 50941.
    \42\ Id. at 50942.
    \43\  Id. at 50945 (Sec.  1.61(a)). Compare 7 U.S.C. 6a(1) 
(1976).
---------------------------------------------------------------------------

    The language that ultimately became section 737 of the Dodd-Frank 
Act, amending CEA section 4a(a), originated in substantially final form 
in H.R. 977, introduced by Representative Peterson,

[[Page 75684]]

who was then Chairman of the House Agriculture Committee and who would 
ultimately be a member of the Dodd-Frank conference committee.\44\ H.R. 
977 appears influenced by the Commission's 1981 rulemaking, 
establishing that there ``shall'' be position limits in accordance with 
the ``standards'' identified in CEA section 4a(a).\45\ Like the 1981 
rule, H.R. 977 established (and the Dodd-Frank Act ultimately adopted) 
a ``good faith'' exception for positions acquired prior to the 
effective date of the mandated limits.\46\ The committee report 
accompanying H.R. 977 described it as ``Mandat[ing] the CFTC to set 
speculative position limits'' and the section-by-section analysis 
stated that the legislation ``requires the CFTC to set appropriate 
position limits for all physical commodities other than excluded 
commodities.'' \47\ This closely resembles the omnibus prophylactic 
approach the Commission took in 1981, when the Commission required the 
establishment of position limits on all futures contracts according to 
``standards'' it borrowed from CEA section 4a(1), and the Commission 
finds the history and interplay of the 1981 rule and Dodd-Frank section 
737 to be further evidence that Congress intended to follow much the 
same approach as the Commission did in 1981, mandating position limits 
as to all physical commodities.\48\
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    \44\ H.R. 977, 11th Cong. (2009).
    \45\ 7 U.S.C. 6.
    \46\ Compare H.R. 977, 11th Cong. (2009) with 46 FR 50944.
    \47\ H.Rept. 111-385, at 15, 19 (Dec. 19, 2009).
    \48\ See Union Carbide Corp. & Subsidiaries v. Comm'r of 
Internal Revenue, 697 F.3d 104, (2d Cir. 2012) (explaining that when 
an agency must resolve a statutory ambiguity, to do so `` `with the 
aid of reliable legislative history is rational and prudent' '' 
(quoting Robert A. Katzman, Madison Lecture: Statutes, 87 N.Y.U. L. 
Rev. 637, 659 (2012)).
---------------------------------------------------------------------------

    Consistent with this interpretation, which is based on the 
Commission's experience, CEA section 4a(a)(2)(A)'s phrase ``[i]n 
accordance with the standards set forth in [CEA section 4a(a)(1)]'' 
does not require a finding of necessity as a prerequisite to the 
imposition of position limits, but rather has a different meaning. 
Section 4a(a)(1) of the Act lists ``standards'' that the Commission 
must consider, and has historically considered, when it imposes 
position limits. It contains an aggregation standard, which provides 
that, if one person controls the positions of another, or if those 
persons coordinate their trading, then those positions must be 
aggregated. And it contains a flexibility standard, providing the 
Commission with the flexibility to impose different position limits for 
different commodities, markets, delivery months, etc.\49\ Because the 
Commission concludes that, when Congress amended section 4a(a) of the 
Act and directed the Commission to establish the ``required'' limits, 
it did not want, much less require the Commission to make an antecedent 
finding of necessity for every position limit it imposes, the 
``standards'' the Commission must apply in imposing the limits required 
by section 4a(a)(2) of the Act consist of the aggregation standard and 
the flexibility standard of CEA section 4a(a)(1), the same standards 
the Commission required the exchanges to apply the last time there was 
a mandatory, prophylactic position limits regime.\50\
---------------------------------------------------------------------------

    \49\ In its 1981 rulemaking in which the Commission required 
exchanges to impose position limits, the Commission interpreted the 
term ``standards,'' to not require exchanges to make any finding of 
necessity with respect to imposing position limits. See 46 FR. 
50941-42 (preamble), 50945 (text of Sec.  1.61(a)(2)).
    \50\ The District Court expressed concern that, unless CEA 
section 4a(a)(2) incorporated a necessity finding, then the language 
referring to such a finding in CEA section 4a(a)(1) might be 
rendered surplusage. 887 F. Supp. 2d at 274-75. That is, the court 
believed that, unless a necessity finding were incorporated into any 
limits required by CEA section 4a(a)(2), then the ``finds as 
necessary'' language would serve no purpose in the CEA. But there is 
no surplusage because CEA section 4a(a) only mandates position 
limits with respect to physical commodity derivatives (i.e., 
agricultural commodities and exempt commodities). The mandate does 
not apply to excluded commodities (i.e., intangible commodities such 
as interest rates, exchange rates, or indexes, see CEA section 
1a(19) (defining the term ``excluded commodity''). As a result, 
although a necessity finding does not apply with respect to physical 
commodities as to which the Dodd-Frank Congress mandated position 
limits, it still applies to any limits the Commission may choose to 
impose with respect to excluded commodities. Thus, the mandate of 
CEA section 4a(a) does not render the necessity language surplusage.
---------------------------------------------------------------------------

    In addition, section 719 of the Dodd-Frank Act (codified at 15 
U.S.C. 8307) provides that the Commission ``shall conduct a study of 
the effects (if any) of the position limits imposed'' pursuant to CEA 
section 4a(a)(2), that ``[w]ithin 12 months after the imposition of 
position limits,'' the Commission ``shall'' submit a report of the 
results of that study to Congress, and that, within 30 days of the 
receipt of that report, Congress ``shall'' hold hearings regarding the 
findings of that report. As explained above, if, as a precondition to 
imposing position limits, the Commission were required to make the sort 
of necessity determinations apparently contemplated by the district 
court, the Commission would have to conduct time-consuming studies and 
then determine as a matter of discretion whether a limit was necessary. 
The Commission believes that, to comply with section 719 of the Dodd-
Frank Act, the Commission would then, within one year, have to conduct 
another round of studies with respect to each contract as to which it 
had imposed limits. The Commission does not believe that Congress would 
have imposed such burdensome and duplicative requirements on the 
Commission. Moreover, Congress would not have required the Commission 
to conduct a study of the effects, ``if any,'' of position limits, and 
would not have imposed a hearing requirement on itself, if the 
Commission had the discretion to not impose any position limits at 
all.\51\
---------------------------------------------------------------------------

    \51\ When Congress requires an agency to promulgate a rule, it 
frequently requires the agency to provide it with a report regarding 
the impact of that rule. See, e.g., 15 U.S.C. 6502, 6506 (provisions 
of the Children's Online Privacy Protection Act, requiring the FTC 
to promulgate implementing rules, and to report as to the impact 
thereof); 47 U.S.C. 227(b), (h) (requiring the FCC to implement 
rules restricting unsolicited fax advertising, and to report on 
enforcement); 15 U.S.C. 78m(p) (requiring the SEC to issue rules 
requiring disclosures regarding the use of certain ``conflict 
minerals'' obtained from the Democratic Republic of Congo), and 
section 1502(d) of the Dodd-Frank Act (requiring the Comptroller 
General to report regarding the effectiveness of the conflict 
minerals rule).
---------------------------------------------------------------------------

    Further, Congress was careful to make clear that its mandate only 
extends to agricultural and exempt commodities. If there were no 
mandate, then the same standards that apply to position limits for 
excluded commodities would also apply to agricultural and exempt 
commodities and, basically, the Commission would have only permissive 
authority to promulgate position limits for any commodity--the same 
permissive authority that existed prior to the Dodd-Frank Act. Finding 
that a mandate exists is the only way to give effect to the distinction 
that Congress drew.
    The legislative history of the Dodd-Frank amendments to CEA section 
4a(a) confirms that Congress intended to make position limits mandatory 
for agricultural and exempt commodities. As initially introduced, the 
House version of the bill that became Dodd-Frank provided the 
Commission with discretionary authority to issue position limits by 
stating that the Commission ``may'' impose them.\52\ However, by the 
time the bill passed the House, it dispensed with the permissive 
approach in favor of a mandate, stating that the Commission ``shall'' 
impose limits, and

[[Page 75685]]

in addition, the House added two new subsections, mandating the 
imposition of limits for agricultural and exempt commodities with the 
tight deadlines described above.\53\ Similarly, it was only after the 
initial bill was amended to make position limits mandatory that the 
House bill referred to the limits for agricultural and exempt 
commodities as ``required'' in one instance.\54\ Furthermore, Congress 
decided to include the requirement that the Commission conduct studies 
on the ``effects (if any) of position limits imposed'' \55\ to 
determine if the required position limits were harming US markets only 
after position limits went from discretionary to mandatory.\56\ To 
remove all doubt, the House Report accompanying the House Bill also 
made clear that the House amendments to the position limits bill 
``required'' the Commission to impose limits.\57\ The Conference 
Committee adopted the provisions of the House bill with regard to 
position limits and then strengthened them by referring to the position 
limits as ``required'' an additional three times so that CEA section 
4a(a), as enacted referred, to position limits as ``required'' a total 
of four times.\58\
---------------------------------------------------------------------------

    \52\ Initially, the House used the word ``may'' to permit the 
Commission to impose aggregate positions on contracts based upon the 
same underlying commodity. See H.R. 4173, 11th Cong. section 
3113(a)(2) (as introduced in the House, Dec. 2, 2009) (``Introduced 
Bill''); see also Brief of Senator Levin et al as Amicus Curiae at 
10-11, ISDA v. CFTC, no. 12-5362 (D.C. Cir. Apr. 22, 2013), Document 
No. 1432046 (hereafter ``Levin Br.'').
    \53\ Levin Br. at 11 (citing H.R. 4173, 111th Cong. section 
3113(a)(5)(2), (7) (as passed by the House Dec. 11, 2009) 
(``Engrossed Bill'')).
    \54\ Id. at 12. (citing Engrossed Bill at section 
3113(a)(5)(3)).
    \55\ 15 U.S.C. 8307.
    \56\ See Levin Br. at 13-17; see also DVD: October 21, 2009 
Business Meeting (House Agriculture Committee 2009), ISDA v. CFTC, 
Dkt. 37-2 Exh. B (Apr. 13, 2012) at 59:55-1:02:18.
    \57\ Levin Br. at 23 (citing H.R. Rep. No. 111-373 at 11 
(2009)).
    \58\ Levin Br. at 17-18.
---------------------------------------------------------------------------

    Considering the text, purpose and legislative history of section 
4a(a) as a whole, along with its own experience and expertise, the 
Commission believes that it is reasonable to conclude that Congress--
notwithstanding the ambiguity the district court found to arise from 
some of the words in the statute--decided that position limits were 
necessary with respect to physical commodities, mandated the Commission 
to impose them on physical commodities, and required that the 
Commission do so expeditiously.\59\
---------------------------------------------------------------------------

    \59\ The district court noted that CEA sections 4a(a)(2), (3), 
and (5)(A) contain the words ``as appropriate.'' The court held that 
it was ambiguous whether those words referred to the Commission's 
obligation to impose limits (i.e., the Commission shall, ``as 
appropriate,'' impose limits), or to the level of the limits the 
Commission is to impose. Because, as explained above, the Commission 
believes it is reasonable to interpret CEA section 4a(a) to mandate 
the imposition of limits, the words ``as appropriate'' must refer to 
the level of limits, i.e., the Commission must set limits at an 
appropriate level. Thus, while Congress made the threshold decision 
to impose position limits on physical commodity futures and options 
and economically equivalent swaps, Congress at the same time 
delegated to the Commission the task of setting the limits at levels 
that would maximize Congress' objectives. See CEA sections 
4a(a)(3)(A)-(B).
---------------------------------------------------------------------------

3. Necessity Finding
    As explained above, the Commission concludes that the CEA mandates 
the imposition of speculative position limits. Because of this mandate, 
the Commission need not make a prerequisite finding that such limits 
are necessary ``to diminish, eliminate or prevent excessive speculation 
causing sudden or unreasonable fluctuations or unwarranted changes in 
the prices of'' commodities under pre-Dodd-Frank CEA section 4a(a)(1). 
Nonetheless, out of an abundance of caution in light of the district 
court decision in ISDA v. CFTC, and without prejudice to any argument 
the Commission may advance in any forum, the Commission proposes, as a 
separate and independent basis for the proposed Rule, a preliminary 
finding herein that such limits are necessary to achieve their 
statutory purposes.\60\
---------------------------------------------------------------------------

    \60\ The CEA does not define ``excessive speculation.'' But the 
Commission has historically associated it with extraordinarily large 
speculative positions. 76 FR at 71629 (referring to 
``extraordinarily large speculative positions'').
---------------------------------------------------------------------------

    Historically, speculative position limits have been one of the 
tools used by the Commission to prevent, among other things, 
manipulation of prices. Limits do so by restricting the size of 
positions held by noncommercial entities that do not have hedging needs 
in the underlying physical markets. By capping the size of speculative 
positions, limits lessen the likelihood that a trader can obtain a 
large enough position to potentially manipulate prices, engage in 
corners or squeezes or other forms of price manipulation. The position 
limits in this proposal are necessary as a prophylactic measure to 
lessen the likelihood that a trader will accumulate excessively large 
speculative positions that can result in corners, squeezes, or other 
forms of manipulation that cause unwarranted or unreasonable price 
fluctuations. In the Commission's experience, position limits are also 
necessary as a prophylactic measure because excessively large 
speculative positions may cause sudden or unreasonable price 
fluctuations even if not accompanied by manipulative conduct. Two 
examples that inform the Commission's determinations are the silver 
crisis of 1979-80 and events in the natural gas markets in 2006.\61\
---------------------------------------------------------------------------

    \61\ Since the 1920's, Congressional and other official 
governmental investigations and reports have identified other 
instances of sudden or unreasonable fluctuations or unwarranted 
changes in the price of commodities. See discussion below.
---------------------------------------------------------------------------

    Position limits would help to deter and prevent manipulative 
corners and squeezes, such as the silver price spike caused by the Hunt 
brothers and their cohorts in 1979-80.
    A market is ``cornered'' when an individual or group of individuals 
acting in concert acquire a controlling or ownership interest in a 
commodity that is so dominant that the individual or group of 
individuals can set or manipulate the price of that commodity.\62\ In a 
short squeeze, an excess of demand for a commodity together with a lack 
of supply for that commodity forces the price of that commodity upward. 
During a short squeeze, individuals holding short positions, i.e., 
sales for future delivery of a commodity,\63\ are typically forced to 
purchase that commodity in situations where the price increases 
rapidly, in order to exit their short position and/or cover,\64\ i.e., 
be able to deliver the commodity in accordance with the terms of the 
sale.\65\
---------------------------------------------------------------------------

    \62\ See CFTC Glossary, A Guide to the Language of the Futures 
Industry (``CFTC Glossary''), available at http://www.cftc.gov/ConsumerProtection/EducationCenter/CFTCGlossary/glossary, which 
defines a corner as ``(1) [s]ecuring such relative control of a 
commodity that its price can be manipulated, that is, can be 
controlled by the creator of the corner; or (2) in the extreme 
situation, obtaining contracts requiring the delivery of more 
commodities than are available for delivery.''
    \63\ See CFTC Glossary, which defines a ``short'' as ``(1) [t]he 
selling side of an open futures contract; (2) a trader whose net 
position in the futures market shows an excess of open sales over 
open purchases.''
    \64\ See CFTC Glossary, which defines ``cover'' as ``(1) 
[p]urchasing futures to offset a short position (same as Short 
Covering); . . . (2) to have in hand the physical commodity when a 
short futures sale is made, or to acquire the commodity that might 
be deliverable on a short sale'' and offset as ``[l]iquidating a 
purchase of futures contracts through the sale of an equal number of 
contracts of the same delivery month, or liquidating a short sale of 
futures through the purchase of an equal number of contracts of the 
same delivery month.''
    \65\ See CFTC Glossary, which defines a ``squeeze'' as ``[a] 
market situation in which the lack of supplies tends to force shorts 
to cover their positions by offset at higher prices.''
---------------------------------------------------------------------------

    A rapid rise and subsequent sharp decline in silver prices occurred 
from the second half of 1979 to the first half of 1980 when the Hunt 
brothers \66\ and colluding syndicates \67\ attempted to corner the 
silver market by hoarding silver and executing a short squeeze. Prices 
deflated only after the Commodity Exchange, Inc. (``COMEX'')

[[Page 75686]]

and the Chicago Board of Trade (``CBOT'') imposed a series of emergency 
rules imposing at various times position limits, increased margin 
requirements, and trading for liquidation only on U.S. silver futures. 
It was the consensus view of staffs of the Commission, the Board of 
Governors of the Federal Reserve System, the Department of the Treasury 
and the Securities and Exchange Commission articulated in an 
interagency task force study of events in the silver market during that 
period that ``[r]easonable speculative position limits, if they had 
been in place before the buildup of large positions occurred, would 
have helped prevent the accumulation of such large positions and the 
resultant dislocations created when the holders of those positions 
stood for delivery.'' \68\ That is, speculative position limits would 
have helped to prevent the buildup of the silver price spike of 1979-
80. The Commission believes that this conclusion remains correct. 
``Moreover, by limiting the ability of one person or group to obtain 
extraordinarily large positions, speculative limits diminish the 
possibility of accentuating price swings if large positions must be 
liquidated abruptly in the face of adverse price movements or for other 
reasons.'' \69\
---------------------------------------------------------------------------

    \66\ The primary silver traders in the Hunt family were Nelson 
Bunker Hunt, William Herbert Hunt, and Lamar Hunt.
    \67\ A group of individuals and firms trading through 
ContiCommodity Services, Inc. and ACLI International Commodity 
Services, Inc., both of which were FCMs.
    \68\ Commodity Futures Trading Commission, Report To The 
Congress In Response To Section 21 Of The Commodity Exchange Act, 
May 29, 1981, Part Two, A Study of the Silver Market, at 173 
(``Interagency Silver Study'').
    \69\ Speculative Position Limits, 45 FR 79831, 79833, Dec. 2, 
1980.
---------------------------------------------------------------------------

    The Hunt brothers were speculators \70\ who neither produced, 
distributed, processed nor consumed silver. The corner began in early 
1979, when the Hunt brothers accumulated large physical holdings of 
silver by purchasing silver futures and taking physical delivery of 
silver.\71\ By the fall of 1979, they had accumulated over 43 million 
ounces of physical silver.\72\ In addition to their physical holdings, 
in the fall of 1979 the Hunts and their cohorts held over 12 thousand 
contracts for March delivery, representing a potential future delivery 
to the hoard of another 60 million ounces of silver.\73\ In general, 
the larger a position held by a trader, the greater is the potential 
that the position may affect the price of the contract. Throughout late 
1979, the Hunts continued to stand for delivery and took care to ensure 
that their own holdings were not re-delivered back to them when 
outstanding futures contracts settled.\74\ Thus, through this period, 
silver prices climbed as the Hunts accumulated more financial and 
physical positions and the available supply of silver decreased. As the 
interagency working group observed, ``[t]he biggest single source of 
the change in demand for silver bullion during the last half of 1979 
and the first quarter of 1980 came from the silver acquisitions of Hunt 
family members and other large traders.'' \75\
---------------------------------------------------------------------------

    \70\ Speculators seek to profit by anticipating the price 
movement of a commodity in which a futures position has been 
established. See CFTC Glossary, which defines a speculator as, 
``[i]n commodity futures, a trader who does not hedge, but who 
trades with the objective of achieving profits through the 
successful anticipation of price movements.'' In contrast, a hedger 
is ``[a] trader who enters into positions in a futures market 
opposite to positions held in the cash market to minimize the risk 
of financial loss from an adverse price change; or who purchases or 
sells futures as a temporary substitute for a cash transaction that 
will occur later. One can hedge either a long cash market position 
(e.g., one owns the cash commodity) or a short cash market position 
(e.g., one plans on buying the cash commodity in the future).'' The 
Hunts had no apparent industrial use for silver, although some 
attribute their early activities in the silver market to an attempt 
to hedge against Carter-era inflation and a defense against 
potential confiscation of precious metals in the event of a national 
crisis.
    \71\ Typically, delivery occurs in only a small percentage of 
futures transactions. The vast majority of contracts are liquidated 
by offsetting transactions.
    \72\ See, e.g., Matonis, Jon, Hunt Brothers Demanded Physical 
Silver Delivery Too, available at http://www.rapidtrends.com/hunt-brothers-demanded-physical-silver-delivery-too/. To provide context, 
at this time COMEX and CBOT warehouses held 120 million ounces of 
silver.
    \73\ Interagency Silver Study at 18.
    \74\ It has been reported that they moved vast quantities of 
silver to warehouses in Switzerland to prevent this possibility.
    \75\ Interagency Silver Study at 77.
---------------------------------------------------------------------------

    The exchanges and regulators were slow to react to events in the 
silver market. However, to correct by then evident market imbalances, 
in late 1979 the CBOT introduced position limits of 3 million ounces of 
silver (i.e., 600 contracts) per trader and raised margin requirements. 
Contracts over 3 million ounces were to be liquidated by February of 
1980. On January 7, 1980, the larger COMEX instituted position limits 
of 10 million ounces of silver (i.e., 2,000 contracts) per trader, with 
contracts over that amount to be liquidated by February 18. Then, on 
January 21, COMEX suspended trading in silver and announced that it 
would only accept liquidation orders. The price of silver began to 
decline. When the price of a commodity starts to move against the 
cornerer, attempts by the cornerer to sell would tend to fuel a further 
price move against the cornerer resulting in a vicious cycle of price 
decline. The Hunts were eventually unable to meet their margin calls 
and took a huge loss on their positions. The interagency working group 
concluded that the data relating to the episode ``support the 
hypothesis that the deliveries and potential deliveries to large long 
participants in the silver futures markets contributed to the rise and 
fall in silver prices in both the cash and futures markets. The rise 
appears to have been caused in part by the conversion of silver futures 
contracts to actual physical silver. The subsequent fall in prices was 
then exacerbated by the anticipated selling of some of the Hunt's 
physical silver by FCMs as well as the liquidation of Hunt group and 
possibly . . . [other large traders'] futures positions.'' \76\
---------------------------------------------------------------------------

    \76\ Interagency Silver Study at 133.
---------------------------------------------------------------------------

    Figure 1 illustrates the rapid rise and sharp decline in the price 
of silver during the period in question.\77\ In January of 1979, the 
settlement price of silver was approximately $6.00 per troy ounce. By 
August, the price had risen to over $9.00, an increase of over 50 
percent. Through most of October and November 1979, silver traded 
within a range of $15.00-$17.50 per troy ounce. On November 28, the 
closing price rose above $18.00. In December of 1979, the price rose 
above $30.00 and continued to climb until mid-January. On January 17, 
1980, the closing price of silver reached its apex at $48.70 per troy 
ounce, more than five times the August price. On January 21, the price 
declined to $44.00; on January 22 the closing price slid to $34.00 per 
troy ounce. Through March 7, 1980, silver traded in an approximate 
range of $30.00-$40.00 per troy ounce. On March 10, silver closed below 
$30.00. On March 17 and 18, silver closed below $20.00. After a brief 
rebound above $22.00, by March 26 the price dropped to $15.80. On March 
27, the price of silver hit a low of $10.80 per troy ounce, less than a 
quarter of the high of $48.70 two months earlier. ``After March 28, 
silver prices stabilized for a while in the $12-$15 range. . . . During 
April through December 1980, silver prices moved generally in a range 
between $12 and $20 per ounce.'' \78\
---------------------------------------------------------------------------

    \77\ See CFTC Glossary, which defines ``spot price'' as ``[t]he 
price at which a physical commodity for immediate delivery is 
selling at a given time and place.'' The prompt month is the nearest 
month to the expiration date of a futures contract.
    \78\ Interagency Silver Study at 35-36.

---------------------------------------------------------------------------

[[Page 75687]]

[GRAPHIC] [TIFF OMITTED] TP12DE13.000

    Figure 2 shows the distortion in the price of silver futures 
contracts due to the short squeeze during the run-up to the January 17 
high and the effect of ``burying the corpse'' after the squeeze ended. 
In January 1980, due to the hoarding of the Hunts and their cohorts, 
physical supplies of silver were tight and the physical commodity was 
expensive to deliver. Scarcity in the physical market for silver 
distorted prices in the silver futures markets. The degree to which the 
value of the front month contract exceeded the value of other contracts 
was exaggerated. By April of 1980, because the Hunts and their cohorts 
were forced to sell, physical supply had increased and silver was 
comparatively cheaper to deliver. The front month contract was then 
worth substantially less than other contracts. In contrast, assuming 
equilibrium in production, use, and storage of silver, one would expect 
the charted price spreads to look comparatively much flatter. That is, 
there should not be that much difference between the price of the front 
month contract and other contracts because silver should not be subject 
to seasonality such as would affect crops. Moreover, because silver is 
relatively cheap to store, the difference in the price of the front 
month and other contracts should also be less sensitive to the cost of 
carry.

[[Page 75688]]

[GRAPHIC] [TIFF OMITTED] TP12DE13.001

    In section 4a(a)(1) of the Act, Congress identifies ``sudden or 
unreasonable fluctuations or unwarranted changes in the price of such 
commodity'' \79\ as an indication that excessive speculation may be 
present in a market for a commodity. The rapid rise and sharp decline 
in the price of silver that commenced in August 1979 and was spent by 
the end of March 1980 certainly fits the description advanced by 
Congress. Nevertheless, the Commission, based on its experience and 
expertise, does not believe that the burdens on interstate commerce are 
limited solely to the temporary and unwarranted changes in price such 
as those exhibited during the silver price spike that resulted, at 
least in part, from the deliberate behavior of the Hunt brothers and 
their cohorts.\80\ Indirect burdens on interstate commerce may arise as 
a result of unwarranted changes in price such as occurred in this case. 
Such burdens arise due to manipulation or attempted manipulation, or 
they may result from the excessive size and disorderly trading of a 
speculative, i.e., non-hedging, position.
---------------------------------------------------------------------------

    \79\ 7 U.S.C. 6a(a)(1).
    \80\ The Interagency Silver Study identified three main factors 
contributing to the price increases in silver at the time.
    First, the state of the economy during the period in question 
affected all precious metals including silver. . . .
    Second, changes in the supply and demand of physical silver 
affected the price of silver. . . .
    Third, the accumulation of large amounts of both physical silver 
and silver futures by individuals such as the Hunt family of Dallas, 
Texas, had an effect on the price of silver directly and on the 
expectations of others who became aware of these actions.
    Interagency Silver Study at 2.
---------------------------------------------------------------------------

    Sudden or unreasonable fluctuations or unwarranted changes in the 
price of a commodity derivative contract may be caused by a trader 
establishing, maintaining or liquidating an extraordinarily large 
position whether in a physical-delivery or cash-settled contract. 
Prices for commodity derivative contracts reflect expectations about 
the price of the underlying commodity at a future date and, thus, 
reflect expectations about supply and demand for that underlying 
commodity. In contrast, the supply of a commodity derivative contract 
itself is not limited to the supply of the underlying commodity. 
Rather, the supply of a commodity derivative contract is a function of 
the ability of a trader to induce a counterparty to take the opposite 
side of the transaction.\81\ Thus, the capacity of the market (i.e., 
all participants) to absorb purchase or sale orders for commodity 
derivative contracts is limited by the number of participants that are 
willing to provide liquidity, i.e., take the other side of the order at 
a given price. For example, a trader that demands immediacy in 
establishing a long position larger than the amount of pending offers 
to sell by market participants may cause the commodity derivative 
contract price to increase, as market participants may demand a higher 
price when entering new offers to sell. It follows that an 
extraordinarily large position, relative to the size of other 
participants' positions, may cause an unwarranted price fluctuation.
---------------------------------------------------------------------------

    \81\ In a commodity derivative contract, the two parties to the 
contract have opposite positions. That is, for every long position 
in a commodity derivative contract held by one trader, there is a 
short position that another trader must hold.
---------------------------------------------------------------------------

    In the spot month for a physical-delivery commodity derivative 
contract, concerns regarding sudden or unreasonable fluctuations or 
unwarranted changes in the price of that contract are heighted because 
open positions in such a contract either: Must be satisfied by delivery 
of the underlying commodity (which is of limited supply and, thus, 
susceptible to corners or squeezes); or must be offset before delivery 
obligations attach (that requires trading with another participant to 
offset the open position).\82\ For example, a trader

[[Page 75689]]

holding an extraordinarily large long position, absent position limits, 
could maintain a long position (requiring delivery beyond the limited 
supply of the physical commodity) deep into the spot month. By 
maintaining such an extraordinarily large position, such a trader may 
cause an unwarranted increase in the price of the commodity derivative 
contract, as holders of short positions attempt to induce a 
counterparty to offset their position.
---------------------------------------------------------------------------

    \82\ Regarding cash-settled commodity derivative contracts, 
there are a variety of methods for determining the final cash 
settlement price, such as by reference to (i) a survey price of cash 
market transactions, or (ii) the final (or daily) settlement price 
of a physical-delivery futures contract. For example, in the case of 
a trader who holds an extraordinarily large position in a cash-
settled contract based on a survey of prices of cash market 
transactions, where the price of the spot month cash-settled 
contract is used by cash market participants in determining or 
setting their cash market transaction prices, then an unwarranted 
price fluctuation in that cash-settled commodity derivative contract 
could result in distorted prices in cash market transactions and, 
thus, an artificial final cash settlement price from a survey of 
such distorted cash market transaction prices. Alternatively, for 
example, in the case of a trader who holds an extraordinarily large 
position in a cash-settled contract based on the final settlement 
price of a physical-delivery futures contract, then a trader has an 
incentive to mark the close of that physical-delivery futures 
contract to benefit her position in the cash-settled contract.
---------------------------------------------------------------------------

    Prices that deviate from the natural forces of supply and demand, 
i.e., artificial prices, may occur when there is hoarding of a physical 
commodity in an attempted or perfected manipulative activity (such as a 
corner). If a price of a commodity is artificial, resources will be 
inefficiently allocated during the time that the artificial price 
exists. Similarly, prices that are unduly influenced by the size of a 
very large speculative position, or trading that increases or reduces 
the size of such very large speculative position, may lead to an 
inefficient allocation of resources to the extent that such prices do 
not allocate resources to their highest and best use. These burdens 
were present during the Hunt brothers episode. The Interagency Silver 
Study concluded that ``the volatile conditions in silver markets and 
the much higher price levels . . . affected the industrial and 
commercial sectors of the economy to a greater extent than would have 
been the case if silver price changes had been less turbulent.'' \83\ 
The Interagency Silver Study described several negative consequences of 
resource misallocations that occurred during the silver price spike.
---------------------------------------------------------------------------

    \83\ Id. at 150.
---------------------------------------------------------------------------

    Significant changes took place in the use of silver as an 
industrial input during silver's price oscillation in 1979-80. In the 
photography industry, the consumption of silver from the first quarter 
of 1979 to the first quarter of 1980 fell by nearly one third. 
Similarly, the use of silver in the production of silverware declined 
by over one half in this period. In addition, numerous other uses of 
silver exhibited sharp usage declines equivalent to or in excess of 
these examples. These sharp reductions in silver use are indicative of 
the general disruption caused by the sharp rise in silver prices. Since 
the demand for silver in many of these uses is relatively price 
inelastic, the substantial decline registered in the use of silver for 
industrial purposes underscores the sizable magnitude of silver price 
increases and the consequent disruption experienced by the industry.
    Individual commercial operations using silver were also disrupted. 
To illustrate, a major producer of X-ray film discontinued production 
purportedly as a result of the sharply increased and erratic behavior 
of the price of silver. In addition, there were reports that trading 
firms failed financially in early 1980 due to losses incurred in silver 
markets. Finally, the financial condition of small firms dependent on 
silver products (hearing aid batteries, printing supplies, etc.) 
deteriorated as a result of high silver prices and limited 
supplies.\84\
---------------------------------------------------------------------------

    \84\ Id. (footnotes omitted). James M. Stone, formerly Chairman 
of the Commission, maintained that the negative effects of the price 
spike on commercials were borne out in employment figures: ``In the 
case of silver, the employment impacts fell hardest upon the makers 
of consumer products. According to the Department of Labor's Bureau 
of Labor Statistics some 6000 jobs in the jewelry, silverware and 
plateware industries were lost between November of 1979 and February 
of 1980.'' Additional Comments on the Interagency Silver Study at 9 
(``Stone Comments'').
---------------------------------------------------------------------------

    Moreover, after the settlement price of silver peaked in mid-
January 1980, the ensuing ``rapid decline of silver prices subjected 
several FCMs and their parent companies to considerable financial 
stress.'' \85\ In the view of the Commission and other regulators, 
``[w]hile all FCMs carrying silver positions appear to have remained 
solvent during the period in question, the potential for insolvency was 
significant.'' \86\ The Interagency Silver Study described a cascade of 
undesirable events;
---------------------------------------------------------------------------

    \85\ Id. at 135.
    \86\ Id. at 140.

    Falling prices reduced the equity in the accounts of some large, 
net long silver futures positions, necessitating margin calls. 
Responsibility for the financial obligations of some of these 
positions had to be assumed by FCMs when large margin calls went 
unmet. A significant proportion of the loans to major silver longs, 
collateralized by silver, had been made by some FCMs acting for 
their parent companies. A major portion of this collateral was 
rehypothecated for bank loans by these companies. The FCMs and their 
parent companies were thus exposed to two related problems that 
threatened them with insolvency--the losses on customer accounts and 
the possibility that silver prices would fall to a point which would 
cause the banks to demand payment on the hypothecated loans. . . . 
The FCM was not only vulnerable because of its customers' losses on 
the futures contracts, but also because of the potential for a 
decline in the value of loan collateral.\87\
---------------------------------------------------------------------------

    \87\ Id. at 135-6 (footnote omitted).

    The failure of an FCM with large silver exposures could have 
adversely affected clients without positions in silver and potentially 
other participants in the futures markets. The failure of a large FCM 
could have negatively affected the various exchanges and potentially 
the clearinghouses.\88\ The solvency of FCMs and other Commission 
registrants crucial to properly functioning futures markets is clearly 
within the Commission's regulatory ambit. The failure of a commission 
registrant in the context of unwarranted price spikes would be a burden 
on interstate commerce.
---------------------------------------------------------------------------

    \88\ See id. at 140-41. ``Although the clearinghouses have 
contingency plans to deal with insolvent members, to date these 
plans have covered only the collapse of small FCMs. Conceivably, a 
major default could result in assessments of members that might, in 
turn, result in the insolvency of some members and the collapse of 
the exchange.''
---------------------------------------------------------------------------

    Fallout from the silver price spike in late 1979-early 1980 
extended beyond the silver markets. ``Banks, by extending credit for 
futures market activity while accepting silver as collateral, exposed 
themselves to higher than normal risks.'' \89\ Unusual activity was 
also observed in other futures markets, such as precious metals and 
commodities other than silver in which the Hunts were thought to have 
had positions.\90\ ``On March 27, 1980, the date on which the price of 
silver dropped to its lowest point, $10.80 an ounce, a combination of 
factors, including news of the Hunts' problems in meeting margin calls, 
the efforts of the Hunts to sell positions in various exchange-listed 
securities in order to meet those calls, and the actions of the SEC in 
suspending trading in Bache Group stock, appeared to have a direct 
impact on the securities markets.'' \91\ Commenters noted the marked 
changes in the rate of inflation concomitant with the rapid rise and 
fall of the price of silver.\92\ Potential bank

[[Page 75690]]

failures, disruptions in other futures markets, disruptions in the 
securities markets and volatile inflation rates would be additional 
burdens on interstate commerce. In highlighting the ability of market 
participants to accumulate extraordinarily large speculative positions, 
thereby demoralizing the silver markets to the injury of producers and 
consumers, the entirety of the Hunt brothers silver episode called into 
question the adequacy of futures regulation generally and the integrity 
of the futures markets.
---------------------------------------------------------------------------

    \89\ Interagency Silver Study at 145. ``Bank loans to major 
silver traders were made both directly and indirectly through FCMs. 
. . . Default on a major portion of these loans could have had a 
significant effect on the overall banking industry, but particularly 
on those banks where the loan concentration was the greatest.'' 
Testimony of Philip McBride Johnson, Chairman, Commodity Futures 
Trading Commission, Before the Subcommittee on Conservation, Credit 
and Rural Development, Committee on Agriculture, U.S. House of 
Representatives, Oct. 1, 1981, at 19 (``Johnson Testimony'').
    \90\ See Interagency Silver Study at 147-8. See also Johnson 
Testimony at 18-21.
    \91\ Interagency Silver Study at 148.
    \92\ See Stone Comments at 9; Johnson Testimony at 20. Contra 
Philip Cagan, ``Financial Futures Markets: Is More Regulation 
Needed?,'' I J. Futures Markets 169, 181-82 (1981).
---------------------------------------------------------------------------

    The Commission believes that if Federal speculative position limits 
had been in effect that correspond to the limits that the Commission 
proposes now, across markets now subject to Commission jurisdiction, 
such limits would have prevented the Hunt brothers and their cohorts 
from accumulating such large futures positions.\93\ Such large 
positions were associated with the sudden fluctuations in price shown 
in Figures 1 and 2. These unwarranted changes in price imposed an undue 
and unnecessary burden on interstate commerce, as described in greater 
detail on the preceding pages. If the Hunt brothers had been prevented 
from accumulating such large futures positions, they would not have 
been able to demand delivery on such large futures positions. The Hunts 
therefore would have been unable to hoard as much physical silver. The 
Commission's belief is based on the following assessment:
---------------------------------------------------------------------------

    \93\ See also Speculative Position Limits, 45 FR 79831, 79833, 
Dec. 2, 1980 (``Had limits on the amount of total open commitments 
which any trader or group can own been in effect, such occurrences 
may have been prevented.'').
---------------------------------------------------------------------------

    In order to approximate a single-month and all-months-combined 
limit calculated using a methodology similar to that proposed in this 
release \94\ for silver during this time period, the Commission used 
data regarding month-end open contracts from the Interagency Silver 
Study.\95\ These month-end open interest reports are for all silver 
futures combined for the Chicago Board of Trade and the Commodity 
Exchange in New York.\96\ Table 1 shows the month-end open interest for 
all silver futures combined from August 1979 to April 1980. Using these 
numbers, the average month-end open interest for this period is 190,545 
contracts, and applying the 10, 2.5 percent formula to this average 
would result in single-month and all-months-combined limits of 6,700 
contracts. The Hunts would have exceeded this single-month limit in the 
fall of 1979 when they and their cohorts held over 12,000 contracts for 
March delivery.\97\ In addition, the Hunts and their cohorts held net 
positions in silver futures on COMEX and CBOT that exceeded the 
calculated all-months-combined limits on multiple occasions between 
September 1975 and February 1980 as is shown in Table 2. Hence, if the 
proposed rule had been in place, it could have limited the size of the 
positions held by the Hunts and their cohorts as early as the autumn of 
1975.
---------------------------------------------------------------------------

    \94\ The formula for the non-spot-month position limits is based 
on total open interest for all Referenced Contracts in a commodity. 
The actual position limit level will be set based on a formula: 10 
percent of the open interest for the first 25,000 contracts and 2.5 
percent of the open interest thereafter. The 10, 2.5 percent formula 
is identified in 17 CFR 150.5(c)(2).
    \95\ Interagency Silver Study at 117.
    \96\ During the time of the events discussed, silver bullion 
futures contracts traded in the United States on the COMEX in New 
York, the CBOT in Chicago, and the MidAmerica Commodity Exchange 
(``MCE'') in Chicago. At this time, the COMEX and CBOT contracts 
were each 5,000 troy ounces of silver, and MCE's contract was 1,000 
troy ounces. Month-end open interest numbers were not available for 
MCE.
    \97\ See discussion below.
---------------------------------------------------------------------------

    There are two limitations to the data used in this analysis. First, 
the month-end open interest data do not include open interest from the 
MidAmerica Commodity Exchange. Second, the month-end open interest 
numbers are for a short time-period starting at the end of August 1979. 
If the proposed rule had been in place at the time of the Hunt brothers 
price spike, the limits would have been calculated using data from two 
years and would likely have used data from an earlier period which 
could have caused the limit levels to be different. However, the 
Commission believes that the calculated limits are a fair approximation 
of the limits that would have applied during this time period. 
Moreover, for speculative position limits not to have constrained the 
Hunts at the end of 1975 when their net position was reported as 15,876 
contracts, the average total open interest for the time period would 
have had to be over 500,000 contracts (of 5,000 troy ounces). Moreover, 
the average total open interest would have had to be over 900,000 
contracts (of 5,000 troy ounces) before the all-months-combined limit 
would have exceeded the maximum net position reported by the 
Interagency Silver Study (24,722 for September 30, 1979). According to 
the Interagency Silver Study, it was at this point that the Hunts began 
acquiring large quantities of physical silver.\98\
---------------------------------------------------------------------------

    \98\ Interagency Silver Study at 104.

  Table 1--Month-End Open Interest for Chicago Board of Trade (CBOT) and the Commodity Exchange (COMEX), August
                            1979 Through April 1980, All Silver Futures Combined \99\
----------------------------------------------------------------------------------------------------------------
                                                                     CBOT open      COMEX open      Total open
                              Date                                   interest        interest        interest
----------------------------------------------------------------------------------------------------------------
8/31/1979.......................................................         185,031         157,952         342,983
9/30/1979.......................................................         161,154         167,723         328,877
10/31/1979......................................................         105,709         145,611         251,320
11/30/1979......................................................          98,009         134,207         232,216
12/31/1979......................................................          93,748         127,225         220,973
1/31/1980.......................................................          49,675          77,778         127,453
2/29/1980.......................................................          28,211          63,672          91,884
3/31/1980.......................................................          24,336          48,688          73,024
4/30/1980.......................................................          19,008          27,166          46,174
----------------------------------------------------------------------------------------------------------------


[[Page 75691]]


                         Table 2--Estimated Ownership of Silver by Hunt Related Accounts
                                     [Contracts of 5,000 troy ounces] \100\
----------------------------------------------------------------------------------------------------------------
                                                                    Net futures     Net futures    Futures total
                              Date                                     COMEX           CBOT        (from table)
----------------------------------------------------------------------------------------------------------------
9/30/1975.......................................................           6,917           4,560          11,077
12/31/1975......................................................           6,865           9,011          15,876
3/31/1976.......................................................           6,092           5,324          11,416
6/30/1976.......................................................           4,061           (920)           3,141
9/30/1976.......................................................           3,890             578           4,468
12/31/1976......................................................           3,910             571           4,481
3/31/1977.......................................................           3,288             259           3,547
6/30/1977.......................................................           4,540             816           5,356
9/30/1977.......................................................           5,277           1,518           6,795
12/31/1977......................................................           5,826           2,016           7,344
3/31/1978.......................................................           6,459           2,224           8,683
6/30/1978.......................................................           4,200           2,451           6,651
9/30/1978.......................................................           2,481           3,047           5,528
12/31/1978......................................................           4,076           1,317           5,393
3/31/1979.......................................................           6,655           1,699           8,354
5/31/1979.......................................................           8,712           4,765          13,477
6/30/1979.......................................................           9,442           3,846          13,288
7/31/1979.......................................................          10,407           4,336          14,743
8/31/1979.......................................................          14,941           8,700          23,641
9/30/1979.......................................................          15,392           9,330          24,722
10/31/1979......................................................          11,395           7,444          18,839
11/30/1979......................................................          12,379           5,693          18,072
12/31/1979......................................................          13,806           5,921          19,727
1/31/1980.......................................................           7,432           1,344           8,776
2/29/1980.......................................................           6,993             789           7,782
4/2/1980........................................................           1,056             388           1,444
----------------------------------------------------------------------------------------------------------------

The Commission finds that if the position limits suggested by this data 
were applied as early as 1975, the Hunts would not have been able to 
accumulate or hold their excessively large futures positions and 
thereby the limits would have restricted their ability to cause the 
price fluctuations and other harms described above.
---------------------------------------------------------------------------

    \99\ Id. at 117.

    \100\ Id. at 103.
---------------------------------------------------------------------------

    Position limits would help to diminish or prevent unreasonable 
fluctuations or unwarranted changes in the price of a commodity, such 
as the extreme price volatility in the 2006 natural gas markets.\101\
---------------------------------------------------------------------------

    \101\ For purposes of discussion, the following section recounts 
certain findings about the 2006 natural gas markets by the staff of 
the Permanent Subcommittee on Investigations of the United States 
Senate (the ``Permanent Subcommittee''). See generally Excessive 
Speculation in the Natural Gas Market, Staff Report with Additional 
Minority Staff Views, Permanent Subcommittee on Investigations, 
United States Senate, Released in Conjunction with the Permanent 
Subcommittee on Investigations, June 25 & July 9, 2007 Hearings 
(``Subcommittee Report''). Separately, the Commission, on July 25, 
2007, charged Amaranth Advisors LLC, Amaranth Advisors (Calgary) ULC 
and its former head energy trader, Brian Hunter, with attempted 
manipulation in violation of the Commodity Exchange Act. The charges 
against the Amaranth entities were later settled, with a fine of 
$7.5 million levied against them in August of 2009. See U.S. 
Commodity Futures Trading Commission Charges Hedge Fund Amaranth and 
its Former Head Energy Trader, Brian Hunter, with Attempted 
Manipulation of the Price of Natural Gas Futures, July 25, 2007, 
available at http://www.cftc.gov/PressRoom/PressReleases/pr5359-07; 
Amaranth Entities Ordered to Pay a $7.5 Million Civil Fine in CFTC 
Action Alleging Attempted Manipulation of Natural Gas Futures 
Prices, August 12, 2009, available at http://www.cftc.gov/PressRoom/PressReleases/pr5692-09. The Commission enforcement action is still 
pending against Brian Hunter. The discussion herein of the natural 
gas events and Subcommittee Report shall not be construed to alter 
any statements by or positions of the Commission and its staff in 
the pending enforcement matter.
---------------------------------------------------------------------------

    Amaranth Advisors L.L.C. (``Amaranth'') was a hedge fund that, 
until its spectacular collapse in September 2006, held ``by far the 
largest positions of any single trader in the 2006 U.S. natural gas 
financial markets.'' \102\ Amaranth's activities are a classic example 
of the market power that often typifies excessive speculation. ``Market 
power'' in this context means the ability to move prices by exerting 
outsize influence on expectations of supply and/or demand for a 
commodity. Amaranth accumulated such large speculative natural gas 
futures positions that it affected expectations of demand for physical 
natural gas and prices rose to levels not warranted by the otherwise 
natural forces of supply and demand for the commodity.\103\
---------------------------------------------------------------------------

    \102\ Subcommittee Report at 67.
    \103\ Amaranth was a pure speculator that, for example, could 
neither make nor take delivery of physical natural gas.
---------------------------------------------------------------------------

    ``Prior to its collapse, Amaranth dominated trading in the U.S. 
natural gas market. . . . All but a few of the largest energy companies 
and hedge funds consider trades of a few hundred contracts to be large 
trades. Amaranth held as many as 100,000 natural gas futures contracts 
at once, representing one trillion cubic feet of natural gas, or 5% of 
the natural gas used in the United States in a year. At times, Amaranth 
controlled up to 40% of all of the open interest on NYMEX for the 
winter months (October 2006 through March 2007). Amaranth accumulated 
such large positions and traded such large volumes of natural gas 
futures that it distorted market prices, widened price spreads, and 
increased price volatility.'' \104\
---------------------------------------------------------------------------

    \104\ Subcommittee Report at 51-52.
    \105\ Subcommittee Report at 17.
---------------------------------------------------------------------------

    Natural gas is one of the main sources of energy for the United 
States. The price of natural gas has a pervasive effect throughout the 
U.S. economy. In general, ``[b]ecause one of the major uses of natural 
gas is for home heating, natural gas demand peaks in the winter month 
and ebbs during the summer months.'' \105\ During the summer months, 
when demand for physical natural gas falls, the spot price of natural 
gas tends to fall, with the excess physical supply being placed into 
underground storage reservoirs for future use. During the winter, when 
demand for natural gas exceeds production and the spot price tends to 
increase, natural gas is removed from

[[Page 75692]]

underground storage and is consumed.\106\
---------------------------------------------------------------------------

    \106\ See id.
---------------------------------------------------------------------------

    Amaranth believed that winter natural gas prices would be much 
higher than summer natural gas prices, notwithstanding an abundant 
supply of natural gas in 2006. Seeking to profit from this view, 
Amaranth engaged in spread trading: it bought contracts for future 
delivery of natural gas in months where it thought prices would be 
relatively higher and sold contracts for future delivery of natural gas 
in months were it thought prices would be relatively lower.\107\ 
Amaranth primarily traded the January/November spread and the March/
April spread, although it took positions in other near months. When 
Amaranth bet that the spread between the two contracts would increase, 
it would make money by selling out of the position or the equivalent 
underlying legs at a higher price than it paid. Amaranth's positions 
were extremely large.\108\ The Permanent Subcommittee found that 
``Amaranth's large positions and trades caused significant price 
movements in key natural gas futures prices and price relationships.'' 
\109\ The Permanent Subcommittee also found that ``Amaranth's trades 
were not the sole cause of the increasing price spreads between the 
summer and winter contracts; rather they were the predominant cause.'' 
\110\
---------------------------------------------------------------------------

    \107\ Amaranth sought to benefit from changes in the price 
relationship between two linked contracts. For instance, if a trader 
is long the front month at 10 and short the back month at 8, the 
spread is 2. If the price of the front month contract rises to 11, 
the spread is 3 and the position has a gain. If the price of the 
back month contract declines to 7, the spread is 3 and the position 
has a gain. If the price of the front month contract rises to 11 and 
the price of the back month contract declines to 7, the spread is 4 
and the position has a gain. But if the front month contract falls 
to 8 and the back month contract falls to 6, the spread does not 
change.
    \108\ ``Amaranth also held large positions in other winter and 
summer months spanning the five-year period from 2006-2010. In 
aggregate, Amaranth amassed an extraordinarily large share of the 
total open interest on NYMEX. During the spring and summer of 2006, 
Amaranth controlled between 25 and 48% of the outstanding contracts 
(open interest) in all NYMEX natural gas futures contracts for 2006; 
about 30% of the outstanding contracts (open interest) in all NYMEX 
natural gas futures contracts for 2007; between 25 and 40% of the 
outstanding contracts (open interest) in all NYMEX natural gas 
futures contracts for 2008; between 20 and 40% of the outstanding 
contracts (open interest) in all NYMEX natural gas futures contracts 
for 2009; and about 60% of the outstanding contracts (open interest) 
in all NYMEX natural gas futures contracts for 2010.'' Subcommittee 
Report at 52.
    \109\ Subcommittee Report at 2.
    \110\ Id. at 68 (emphasis in original).
---------------------------------------------------------------------------

    Events in the 2006 natural gas markets demonstrate the burdens on 
interstate commerce of extreme price volatility.
    In section 4a(a)(1) of the CEA Congress causally links excessive 
speculative positions with ``sudden or unreasonable fluctuations or 
unwarranted changes in the price of'' such commodities. The precipitous 
decline in natural gas prices from late-August 2006 until Amaranth's 
collapse in September 2006 demonstrates that link. The Permanent 
Subcommittee found that ``[p]urchasers of natural gas during the summer 
of 2006 for delivery in the following winter months paid inflated 
prices due to Amaranth's speculative trading'' and that ``[m]any of 
these inflated costs were passed on to consumers, including residential 
users who paid higher home heating bills.'' \111\ Such inflated costs 
are clearly a burden on interstate commerce. In the words of the 
Permanent Subcommittee, ``[t]he Amaranth experience demonstrates how 
excessive speculation can distort prices of futures contracts that are 
many months from expiration, with serious consequences for other market 
participants.'' \112\ The Permanent Subcommittee findings support the 
imposition of speculative position limits outside the spot month. 
Commercial participants in the 2006 natural gas markets were reluctant 
or unable to hedge.\113\ Speculators withdrew liquidity from a market 
viewed as artificially expensive.\114\ To relieve the burdens on 
interstate commerce posed by positions as large as Amaranth's, Congress 
directed the Commission to set position limits to, among other things, 
ensure sufficient market liquidity for bona fide hedgers.\115\
---------------------------------------------------------------------------

    \111\ Id. at 6.
    \112\ Id. at 4.
    \113\ See id. at 114.
    \114\ See id. at 71-77.
    \115\ 7 U.S.C. 6a(a)(3)(B)(iv).
---------------------------------------------------------------------------

    ``Amaranth held as many as 100,000 natural gas contracts in a 
single month, representing 1 trillion cubic feet of natural gas, or 5% 
of the natural gas in the entire United States in a year. At times 
Amaranth controlled 40% of all of the outstanding contracts on NYMEX 
for natural gas in the winter season (October 2006 through March 2007), 
including as much as 75% of the outstanding contracts to deliver 
natural gas in November 2008.'' \116\ Position limits that would 
prevent the accumulation of such overly large speculative positions in 
deferred commodity contracts would help to prevent unreasonable 
fluctuations or unwarranted changes in the price of a commodity that 
may occur when a speculator must substantially reduce its position 
within a short period of time to the extent the price of such commodity 
during the unwind period does not reflect fundamental values.\117\ 
Moreover, position limits would help to prevent disruptions to market 
integrity caused by the corrosive perception that a market is unfair or 
prices in a market do not reflect the fundamental forces of supply and 
demand as occurred during 2006 in the natural gas markets. Commodity 
markets where artificial volatility discourages participation are less 
likely to produce ``a market consensus on correct pricing.'' \118\
---------------------------------------------------------------------------

    \116\ Subcommittee Report at 2.
    \117\ This is because, among other things, the speculator's 
influence on expectations of demand is reduced as the speculator is 
no longer willing and able to hold such a large net position in 
futures contracts.
    \118\ Subcommittee Report at 119.
---------------------------------------------------------------------------

    Based on certain assumptions described below, the Commission 
believes that if Federal speculative position limits had been in effect 
that correspond to the limits that the Commission proposes now, across 
markets now subject to Commission jurisdiction, such limits would have 
prevented Amaranth from accumulating such large futures positions and 
thereby restrict its ability to cause unwarranted price effects. Using 
non-public data reported to the Commission under Part 16 of the 
Commission's regulations for open interest \119\ for natural gas 
contracts, the Commission calculated the single-month and all-months-
combined limits using the same methodology as proposed in this release 
for the period January 1, 2004 to December 31, 2005. The results of 
this analysis are presented in Table 3 below, which shows that the 
resulting single-month and all-months combined limits would have each 
been 40,900 contracts.
---------------------------------------------------------------------------

    \119\ See 17 CFR 16.01.

[[Page 75693]]



                        Table 3--Open Interest and Calculated Limits for NYMEX Natural Gas January 1, 2004, to December 31, 2005
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                           Open interest
            Core referenced futures contract                   Year           (daily       Open interest   Limit  (daily   Limit  (month       Limit
                                                                             average)       (month end)      average)          end)
--------------------------------------------------------------------------------------------------------------------------------------------------------
NYMEX Natural Gas.......................................            2004         851,763         839,330          23,200          22,900          40,900
                                                                    2005       1,559,335       1,529,252          40,900          40,200  ..............
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Using non-public data reported to the Commission under Part 17 of 
the Commission's regulation for large trader positions,\120\ the 
Commission also calculated Amaranth's positions \121\ as they would be 
calculated under the proposed rule for the period January 1, 2005 to 
September 30, 2006. During this time, Amaranth's net position would 
have exceeded the limits for the single month and for all-months-
combined on multiple days, starting as early as June 2006. It is 
important to note that ICE did not report market open interest for its 
swap contracts or for large traders to the Commission during this time 
period, so the Commission cannot exactly replicate the calculations in 
the proposed rule. However, even if ICE had the same amount of open 
interest in futures-equivalent terms as all of the NYMEX natural gas 
contracts listed in 2005,\122\ the calculated limit would be 79,900 
contracts. According to the Subcommittee Report, Amaranth would have 
exceeded this limit at the end of July 2006 with its holding of 80,000 
long contracts in the January 2007 delivery month.\123\ Moreover, the 
Subcommittee Report also shows that Amaranth tended to trade in the 
same direction for the same delivery month on ICE and NYMEX. Hence, the 
Commission believes that had the proposed rule been in effect in 2006, 
Amaranth would not have been able to build such large positions in 
natural gas futures and swaps and thereby limits would have restricted 
Amaranth's ability to cause harmful price effects that limits are 
intended to prevent.\124\
---------------------------------------------------------------------------

    \120\ See 17 CFR 17.00.
    \121\ Because the Commission's calculations are based on non-
public information, the results of this analysis may be different 
from calculations based on publicly available information, including 
information contained in the Subcommittee Report.
    \122\ Since the main natural gas swap contracts on ICE are one 
quarter of the size of the NYMEX Henry Hub Natural Gas Futures 
contract, this would mean that the open interest for natural gas 
contracts on ICE would have to be four times the open interest for 
natural gas contracts on NYMEX.
    \123\ See Subcommittee Report at 79.
    \124\ According to the Subcommittee Report, Amaranth reduced its 
positions on NYMEX as directed by NYMEX in August 2006, and at the 
same time, increased its corresponding positions on ICE. See 
Subcommittee Report at 97-98.
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    Position limits would prevent the accumulation of extraordinarily 
large positions that could potentially cause unreasonable price 
fluctuations even in the absence of manipulative conduct.
    As the above examples illustrate, position limits are vital tools 
to prevent the accumulation of speculative positions that can enable 
market manipulation. But these examples also show that limits are 
necessary to achieve a broader statutory purpose -- to prevent price 
distortions that can potentially occur due to excessively large 
speculative positions even in the absence of manipulative conduct.
    The text of section 4a(a)(1) of the Act itself establishes its 
broader purpose: It authorizes limits as the Commission finds are 
necessary to prevent price distortions that can potentially occur due 
to excessive speculation (i.e. excessively large speculative 
positions), without regard to whether it is manipulative.\125\ The 
Commission has long interpreted the provision as authorizing limits to 
achieve this broader purpose and it has long found that limits are 
necessary to do so.
---------------------------------------------------------------------------

    \125\ See 7 U.S.C. 6a(a)(1).
---------------------------------------------------------------------------

    For example, in the 1981 Rule requiring exchanges to set limits for 
all commodities, noted above, the Commission found that ``historical 
and current reason for imposing position limits on individual contracts 
is to prevent unreasonable fluctuations or unwarranted changes in the 
price of a commodity which may occur by allowing any one trader or 
group of traders acting in concert to hold extraordinarily large 
futures positions.'' \126\ In a 2010 rulemaking, the Commission stated 
that ``[f]rom the earliest days of federal regulation of the futures 
markets, Congress made it clear that unchecked speculative positions, 
even without intent to manipulate the market, can cause price 
disturbances. To protect markets from the adverse consequences 
associated with large speculative positions, Congress expressly 
authorized the [Commission] to impose speculative position limits 
prophylactically.'' \127\
---------------------------------------------------------------------------

    \126\ 46 FR 50938, 50939, Oct. 16, 1981.
    \127\ 75 FR 4144, 4145-46, Jan. 26, 2010.
---------------------------------------------------------------------------

    The Commission reiterated this view before Congress in 1982 in 
opposing industry amendments to the CEA that would have required that 
limits are necessary to prevent manipulation, corners or squeezes. 
Former Commission Chair Philip McBride Johnson told Congress that 
position limits were ``predicated on several different sections of the 
Commodity Exchange Act which pertain to orderly markets and the terms 
`manipulation, corners or squeezes' refer to only one class of market 
disruption which the limits established under this rule are intended to 
diminish or prevent. For instance, CEA section 4a contains the 
Congressional finding that excessive speculation in the futures markets 
can cause sudden or unreasonable fluctuations or unwarranted changes in 
the price of commodities. Accordingly, a requirement that the 
Commission make the suggested finding concerning `manipulation, 
corners, or squeezes' prior to requiring a contract market to establish 
speculative limits could significantly restrict the application of the 
current rule and undermine its more comprehensive regulatory purpose of 
preventing excessive speculation which arises from extraordinarily 
large positions.'' \128\
---------------------------------------------------------------------------

    \128\ Futures Trading Act of 1982: Hearings on S. 2109 before 
the S. Subcomm. on Agricultural Research, 97th Cong. 44 (1982).
---------------------------------------------------------------------------

    Congress effectively ratified the Commission's interpretation in 
1982. As it explained: ``the Senate Committee decided to retain [CEA 
section] 4a language concerning the burden which excess speculation 
places on interstate commerce. This was due to the Committee's belief 
that speculative limits, in addition to their role in preventing 
manipulations, corners, or squeezes, are also important regulatory 
tools for preventing unreasonable fluctuations or unwarranted changes 
in commodity prices that may arise even in the absence of 
manipulation.'' \129\
---------------------------------------------------------------------------

    \129\ S. Rep. 97-384 at 45 (1982).
---------------------------------------------------------------------------

    The Commission has long found and again finds, based on its 
experience, that unchecked speculative positions can potentially 
disrupt markets. In general, the larger a position held by a trader, 
the greater is the potential that the position may affect the price of 
the contract. The Commission reaffirms that, ``the capacity of any 
contract to absorb the

[[Page 75694]]

establishment and liquidation of large speculative positions in an 
orderly manner is related to the relative size of such positions, i.e., 
the capacity of the market is not unlimited.'' \130\ When positions 
exceed the capacity of markets to absorb and liquidate them, 
unreasonable price fluctuations and volatility can potentially occur. 
``[B]y limiting the ability of one person or group to obtain 
extraordinarily large positions, speculative limits diminish the 
possibility of accentuating price swings if large positions must be 
liquidated abruptly in the face of adverse price movements or for other 
reasons.'' \131\ As former Commission Chair McBride Johnson explained 
to Congress regarding the silver crisis: ``It seems clear from the 
silver crisis that the orderly imposition of speculative limits before 
a crisis develops is one of the more promising means of solving such 
difficulties in the future . . . .'' \132\ This statement is equally 
true of the natural gas events of 2006. Had the Hunt brothers and 
Amaranth been prevented from amassing extraordinarily large speculative 
positions in the first place, their ability to cause unwarranted price 
fluctuations and volatility and other harmful market effects 
attributable to such positions would have been restricted.
---------------------------------------------------------------------------

    \130\ 46 FR 50938, Oct. 16, 1981 (adopting then Sec.  1.61 (now 
part of Sec.  150.5)).
    \131\ 45 FR at 79833.
    \132\ Futures Trading Act of 1982: Hearings on S. 2109 before 
the S. Subcomm. on Agricultural Research, 97th Cong. 44 (1982).
---------------------------------------------------------------------------

    The Commission requests comment on all aspects of this section.
Studies and Reports
    In addition to those cited previously, the Commission has reviewed 
and evaluated additional studies and reports (collectively, 
``studies'') about various issues relating to position limits. A list 
of studies that the Commission has reviewed is in appendix A to this 
preamble.
    Some studies discuss whether or not excessive speculation exists, 
the definition of excessive speculation, and/or whether excessive 
speculation has a negative impact on derivatives markets.\133\ Those 
studies that do generally discuss the impact of position limits do not 
address or provide analysis of how the Commission should specifically 
implement position limits under section 4a of the CEA.\134\ Some 
studies may be read to support the imposition of Federal speculative 
position limits; others suggest that speculative position limits will 
be ineffective; still others assert that imposing speculative position 
limits will be harmful. There is a demonstrable lack of consensus in 
the studies.
---------------------------------------------------------------------------

    \133\ 76 FR at 71663.
    \134\ Id. at 71664.
---------------------------------------------------------------------------

    Many of the studies were focused on the impact of speculative 
activity in futures markets, e.g., how the behavior of non-commercial 
traders affected price levels. Such studies did not provide a view on 
position limits in general or on the Commission's implementation of 
position limits in particular. Some studies have found little or no 
evidence of excessive speculation unduly moving prices,\135\ while 
others conclude there is significant evidence of the impact of 
speculation in commodity markets.\136\ Even studies that questioned 
whether speculation affects prices were often equivocal.\137\ Still 
other studies have determined that while speculation may not cause a 
price movement, such activity may increase price pressures, thereby 
exacerbating the price movement.\138\
---------------------------------------------------------------------------

    \135\ See, e.g., Harris, Jeffrey and Buyuksahin, Bahattin, ``The 
Role of Speculators in the Crude Oil Futures Market,'' June 16, 
2009, at 2, 19 (``We find that the changing net positions of no 
specific trader groups lead to price changes . . . .'' and ``we fail 
to find the causality from these [speculative] traders' positions to 
prices.''); Byun, Sungje, ``Speculation in Commodity Futures Market, 
Inventories and the Price of Crude Oil,'' January 17, 2013, at 3, 33 
(noting that `` . . . evidence among researchers is inconsistent'' 
but that ``we conclude there does not exist sufficient evidence on 
the potential contribution of financial investors in the crude oil 
market.''); Irwin, Scott H.; Sanders, Dwight R.; and Merrin, Robert 
P., ``Devil or Angel: The Role of Speculation in the Recent 
Commodity Price Boom,'' August 1, 2009, at 17 (``There is little 
evidence that the recent boom and bust in commodity prices was 
driven by a speculative bubble . . . Economic fundamentals, as 
usual, provide a better explanation for the movements in commodity 
prices.'').
    \136\ See, e.g., Singleton, Kenneth J., ``Investor Flows and the 
2008 Boom/Bust in Oil Prices,'' March 23, 2011, at 2-3 (Singleton 
presents `` . . . new evidence that . . . there were economically 
and statistically significant effects of investor flows on futures 
prices.''); Tang, Ke and Xiong, Wei, ``Index Investment and 
Financialization of Commodities,'' November 1, 2012, at 72 (``As a 
result of the financialization process, the price of an individual 
commodity is no longer determined solely by its supply and demand. 
Instead, prices are also determined by the aggregate risk appetite 
for financial assets and the investment behavior of diversified 
commodity index investors.''); Manera, Matteo, Nicolini, Marcella, 
and Vignati, Ilaria, ``Futures Price Volatility in Commodities 
Markets: The Role of Short-Term vs Long-Term Speculation,'' April 1, 
2013, at 15 (``We find that speculation significantly affects the 
volatility of returns, although in contrasting ways. The scalping 
index has a positive and significant coefficient in the variance 
equation, suggesting that short term speculation has a positive 
impact on volatility.'').
    \137\ Compare Technical Committee of the International 
Organization of Securities Commissions, Task for on Commodity 
Futures Markets Final Report, March 1, 2009, at 3 (``economic 
fundamentals, rather than speculative activity, are a plausible 
explanation for recent price changes in commodities'') with id. at 8 
(``short term expectations can be influenced by sentiment and 
investor behavior, which can amplify short-term price fluctuations, 
as in other asset markets''). Another study opining that speculative 
activity in general may reduce volatility nevertheless conceded that 
the authors could not rule out the possibility that a single trader 
might implement strategies that move prices and increase volatility. 
Brunetti, Celso and Buyuksahin, Bahattin, ``Is Speculation 
Destabilizing?,'' April 22, 2009, at 4, 22-23; see also Irwin, et 
al., ``The Performance of CBOT Corn, Soybean, and Wheat Futures 
Contracts after Recent Changes in Speculative Limits,'' July 29, 
2007, at 1, 6 (concluding that there was ``no large change in'' 
price volatility after speculative limits were increased, but 
cautioning that ``[w]ith limited observations available for the 
period following the change in speculative limits . . . , 
conclusions about the impact on volatility are tentative. Additional 
observations will be required across varying scenarios of supply, 
demand, and price level, to have full confidence in the 
conclusions.'') (emphasis added); Parsons, John E., ``Black Gold & 
Fool's Gold: Speculation in the Oil Futures Market,'' September 1, 
2009, at 108 (position limits will not prevent asset bubbles from 
forming, but they are ``necessary to insure the integrity of the 
market'').
    \138\ See, e.g., Hamilton, James D., ``Causes and Consequences 
of the Oil Shock of 2007-08,'' April 1, 2009, at 258 (Hamilton 
raises ``the possibility that miscalculation of the long-run price 
elasticity of oil demand . . . was one factor in the oil shock of 
2007-2008, and that speculative investing in oil futures may have 
contributed to that miscalculation.''); Juvenal, Luciana and 
Petrella, Ivan, ``Speculation in the Oil Market,'' June 1, 2012, 
(``While global demand shocks account for the largest share of oil 
price fluctuations, speculative shocks are the second most important 
driver.'').
---------------------------------------------------------------------------

    Several studies did generally address the concept of position 
limits as part of their discussion of speculative activity. The authors 
of some of these works expressed views that speculative position limits 
were an important regulatory tool and that the CFTC should implement 
limits to control excessive speculation.\139\ For example,

[[Page 75695]]

one author opined that `` . . . strict position limits should be placed 
on individual holdings, such that they are not manipulative.'' \140\ 
Another stated, ``[s]peculative position limits worked well for over 50 
years and carry no unintended consequences. If Congress takes these 
actions, then the speculative money that flowed into these markets will 
be forced to flow out, and with that the price of commodities futures 
will come down substantially. Until speculative position limits are 
restored, investor money will continue to flow unimpeded into the 
commodities futures markets and the upward pressure on prices will 
remain.'' \141\ The authors of one study claimed that ``[r]ules for 
speculative position limits were historically much stricter than they 
are today. Moreover, despite rhetoric that imposing stricter limits 
would harm market liquidity, there is no evidence to support such 
claims, especially in light of the fact that the market was functioning 
very well prior to 2000, when speculative limits were tighter.'' \142\
---------------------------------------------------------------------------

    \139\ See, e.g., Greenberger, Michael, ``The Relationship of 
Unregulated Excessive Speculation to Oil Market Price Volatility,'' 
January 1, 2010, at 11 (On position limits: ``The damage price 
volatility causes the economy by needlessly inflating energy and 
food prices worldwide far outweighs the concerns about the precise 
application of what for over 70 years has been the historic 
regulatory technique for controlling excessive speculation in risk-
shifting derivative markets.''.); Khan, Mohsin S., ``The 2008 Oil 
Price ``Bubble'','' August 2009, at 8 (``The policies being 
considered by the CFTC to put aggregate position limits on futures 
contracts and to increase the transparency of futures markets are 
moves in the right direction.''); U.S. Senate Permanent Subcommittee 
on Investigations, ``Excessive Speculation in the Wheat Market,'' 
June 2009, at 12 (``The activities of these index traders constitute 
the type of excessive speculation the CFTC should diminish or 
prevent through the imposition and enforcement of position limits as 
intended by the Commodity Exchange Act.''); U.S. Senate Permanent 
Subcommittee on Investigations, ``Excessive Speculation in the 
Natural Gas Market,'' June 25, 2007, at 8 (The Subcommittee 
recommended that Congress give the CFTC authority over ECMs, noting 
that ``[to] ensure fair energy pricing, it is time to put the cop 
back on the beat in all U.S. energy commodity markets.''); United 
Nations Conference on Trade and Development, ``The Global Economic 
Crisis: Systemic Failures and Multilateral Remedies,'' March 1, 
2009, at 14, (The UNCTAD recommends that `` . . . regulators should 
be enabled to intervene when swap dealer positions exceed 
speculative position limits and may represent `excessive 
speculation'.); United Nations Conference on Trade and Development, 
``The Financialization of Commodity Markets,'' July 1, 2009, at 26 
(The report recommends tighter restrictions, notably closing 
loopholes that allow potentially harmful speculative activity to 
surpass position limits.).
    \140\ de Schutter, Olivier, ``Food Commodities Speculation and 
Food Price Crises,'' September 1, 2010, United Nations Special 
Report on the Right to Food, at 8.
    \141\ Masters, Michael and White, Adam, ``The Accidental Hunt 
Brothers: How Institutional Investors are Driving up Food and Energy 
Prices,'' July 31, 2008, at 3.
    \142\ Medlock, Kenneth and Myers Jaffe, Amy, ``Who is In the Oil 
Futures Market and How Has It Changed?,'' August 26, 2009, Baker 
Institute for Public Policy, at 8.
---------------------------------------------------------------------------

    Not all of the reviewed studies viewed position limits in a 
positive light. One study claimed that position limits will not 
restrain manipulation,\143\ while another argued that position limits 
in the agricultural commodities have not significantly affected 
volatility.\144\ Another study noted that while position limits are 
effective as an anti-manipulation measure, they will not prevent asset 
bubbles from forming or stop them from bursting.\145\ A study cautioned 
that while limits may be effective in preventing manipulation, they 
should be set at an optimal level so as to not harm the affected 
markets.\146\ Another study claimed that position limits should be 
administered by DCMs, as those entities are closest to and most 
familiar with the intricacies of markets and thus can implement the 
most efficient position limits policy.\147\ Another study suggested 
eliminating position limits, arguing that increasing ex-post penalties 
for manipulation would be more effective at deterring manipulative 
behavior.\148\ One study noted the similar efforts under discussion in 
European markets.\149\
---------------------------------------------------------------------------

    \143\ Ebrahim, Muhammed and Rhys ap Gwilym, ``Can Position 
Limits Restrain Rogue Traders?,'' March 1, 2013, Journal of Banking 
& Finance, at 27 (``. . . binding constraints have an unintentional 
effect. That is, they lead to a degradation of the equilibria and 
augmenting market power of Speculator in addition to other agents. 
We therefore conclude that position limits are not helpful in 
curbing market manipulation. Instead of curtailing price swings, 
they could exacerbate them.'').
    \144\ Irwin, Scott H.; Garcia, Philip; and Good, Darrel L., 
``The Performance of CBOT Corn, Soybean, and Wheat Futures Contracts 
after Recent Changes in Speculative Limits,'' July 29, 2007, at 16 
(``The analysis of price volatility revealed no large change in 
measures of volatility after the change in speculative limits. A 
relatively small number of observations are available since the 
change was made, but there is little to suggest that the change in 
speculative limits has had a meaningful overall impact on price 
volatility to date.'').
    \145\ Parsons, John E., ``Black Gold & Fool's Gold: Speculation 
in the Oil Futures Market,'' September 1, 2009, at 30 (``Restoring 
position limits on all nonhedgers, including swap dealers, is a 
useful reform that gives regulators the powers necessary to ensure 
the integrity of the market. Although this reform is useful, it will 
not prevent another speculative bubble in oil. The general purpose 
of speculative limits is to constrain manipulation . . . Position 
limits, while useful, will not be useful against an asset bubble. 
That is really more of a macroeconomic problem, and it is not 
readily managed with microeconomic levers at the individual exchange 
level.'').
    \146\ Wray, Randall, ``The Commodities Market Bubble: Money 
Manager Capitalism and the Financialization of Commodities,'' 
October 1, 2008, at 41, 43 (``While the participation of traditional 
speculators offers clear benefits, position limits must be carefully 
administered to ensure that their activities do not ``demoralize'' 
markets. . . . The CFTC must re-establish and enforce position 
limits.'').
    \147\ CME Group, Inc., ``Excessive Speculation and Position 
Limits in Energy Derivatives Markets,'' CME Group White Paper, at 6 
(``Indeed, as the Commission has previously noted, the exchanges 
have the expertise and are in the best position to fix position 
limits for their contracts. In fact, this determination led the 
Commission to delegate to the exchanges authority to set position 
limits in non-enumerated commodities, in the first instances, almost 
30 years ago.'') (available at http://www.cmegroup.com/company/files/PositionLimitsWhitePaper.pdf).
    \148\ Pirrong, Craig, ``Squeezes, Corpses, and the Anti-
Manipulation Provisions of the Commodity Exchange Act,'' October 1, 
1994, at 2 (``The efficiency of futures markets would be improved, 
and perhaps substantially so, by eliminating position limits . . . 
and relying upon revitalized, harm-based sanctions to deter market 
manipulation.'').
    \149\ European Commission, ``Review of the Markets in Financial 
Instruments Directive,'' December 1, 2010, at 82 note 282 
(``European Parliament . . . calls on the Commission to develop 
measures to ensure that regulators are able to set position limits 
to counter disproportionate price movements and speculative bubbles, 
as well as to investigate the use of position limits as a dynamic 
tool to combat market manipulation, most particularly at the point 
when a contract is approaching expiry. It also requests the 
Commission to consider rules relating to the banning of purely 
speculative trading in commodities and agricultural products, and 
the imposition of strict position limits especially with regard to 
their possible impact on the price of essential food commodities in 
developing countries and greenhouse gas emission allowances.'').
---------------------------------------------------------------------------

    Studies that militate against imposing any speculative position 
limits appear to conflict with the Congressional mandate (discussed 
above) that the Commission impose limits on futures contracts, options, 
and certain swaps for agricultural and exempt commodities. Such studies 
also appear to conflict with Congress' determination, codified in CEA 
section 4a(a)(1), that position limits are an effective tool to address 
excessive speculation as a cause of sudden or unreasonable fluctuations 
or unwarranted changes in the price of such commodities.\150\
---------------------------------------------------------------------------

    \150\ 7 U.S.C. 6a(a)(1)-(2).
---------------------------------------------------------------------------

    In any case, these studies overall show a lack of consensus 
regarding the impact of speculation on commodity markets and the 
effectiveness of position limits. While there is not a consensus, the 
fact that there are studies on both sides, in the Commission's view, 
warrants erring on the side of caution. In light of the Commission's 
experience with position limits, and its interpretation of 
congressional intent, it is the Commission's judgment that position 
limits should be implemented as a prophylactic measure, to protect 
against the potential for undue price fluctuations and other burdens on 
commerce that in some cases have been at least in part attributable to 
excessive speculation.
    In this regard, the Commission has found two studies of actual 
market events to be helpful and persuasive in making its alternative 
necessity finding.\151\ The first is the inter-agency report on the 
silver crisis.\152\ This report, by a joint task force of the staffs of 
the Commission, the Board of Governors of the Federal Reserve System, 
the Department of the Treasury and the Securities and Exchange 
Commission, provides an in-depth description and analysis of the silver 
crisis, the Hunt brothers' build-up of massive positions, the 
manipulative

[[Page 75696]]

conduct that those massive positions enabled, the resulting extreme 
price volatility, and consequent harms to the economy. The second is 
the PSI Report on Excessive Speculation in the Natural Gas market.\153\ 
As a Congressional report issued following hearings, it is more helpful 
and persuasive than academic and other studies in indicating how 
Congress views limits as necessary to prevent the adverse effects of 
excessively large speculative positions. The PSI Report is also more 
helpful because it thoroughly studied actual market events involving a 
vital energy commodity, natural gas, examined how Amaranth's buildup of 
massive speculative positions by itself created a risk of market harms, 
documented how Amaranth sought to avoid existing limits, and analyzed 
how its ability to do so was a cause of the attendant extreme price 
volatility documented in the report.
---------------------------------------------------------------------------

    \151\ Another study of actual market events analyzed position 
limits in the context of the ``Flash Crash'' of May 6, 2010. While 
this study concluded that position limits would not have prevented 
the crash, and that price limits were more effective, it measured 
the impacts of potential limits on certain financial contracts not 
implicated in the instant rulemaking. Lee, Bernard; Cheng, Shih-Fen; 
and Koh, Annie, ``Would Position Limits Have Made any Difference to 
the 'Flash Crash' on May 6, 2010,'' November 1, 2010, at 37.
    \152\ U.S Commodity Futures Trading Commission, ``Part Two, A 
Study of the Silver Market,'' May 29, 1981, Report to The Congress 
in Response to Section 21 of The Commodity Exchange Act.
    \153\ U.S. Senate Permanent Subcommittee on Investigations, 
``Excessive Speculation in the Natural Gas Market,'' June 25, 2007.
---------------------------------------------------------------------------

    The Commission requests comment on its discussion of studies and 
reports. It also invites commenters to advise the Commission of any 
additional studies that the Commission should consider, and why.

B. Proposed Rules

1. Section 150.1--Definitions
i. Various Definitions Found in Sec.  150.1
    The Commission proposes to amend the definitions of ``futures-
equivalent,'' ``independent account controller,'' ``long position,'' 
``short position,'' and ``spot month'' found in Sec.  150.1 of its 
regulations to conform them to the concepts and terminology of the CEA, 
as amended by the Dodd-Frank Act.\154\ The Commission also is proposing 
to add to Sec.  150.1, definitions for ``basis contract,'' ``calendar 
spread contract,'' ``commodity derivative contract,'' ``commodity index 
contract,'' ``core referenced futures contract,'' ``eligible 
affiliate,'' ``entity,'' ``excluded commodity,'' ``intercommodity 
spread contract,'' ``intermarket spread positions,'' ``intramarket 
spread positions,'' ``physical commodity,'' ``pre-enactment swap,'' 
``pre-existing position,'' ``referenced contract,'' ``spread 
contract,'' ``speculative position limit,'' ``swap,'' ``swap dealer'' 
and ``transition period swap.'' In addition, the Commission is 
proposing to move the definition of bona fide hedging from Sec.  1.3(z) 
into part 150, and to amend and update it. Moreover, the Commission 
proposes to delete the definition for ``the first delivery month of the 
`crop year.' '' The Commission notes that several terms that are not 
currently in part 150 are not included in the current rulemaking 
proposal even though definitions for those terms were adopted in 
vacated part 151. The Commission does not view definition of these 
terms as necessary for clarity in light of other revisions proposed 
herein. The terms not currently proposed include ``swaption'' and 
``trader.'' \155\ Separately, the Commission is making a non-
substantive change to list the definitions in alphabetical order rather 
than by use of assigned letters. This last change will be helpful when 
looking for a particular definition, both in the near future, in light 
of the additional definitions proposed to be adopted, and in the 
expectation that future rulemakings may adopt additional definitions.
---------------------------------------------------------------------------

    \154\ In a separate proposal approved on the same date as this 
proposal, the Commission is proposing amendments to Sec.  150.4--
aggregation of positions (``Aggregation NPRM'') (Nov. 5, 2013), 
including amendments to the definitions of ``eligible entity'' and 
``independent account controller.''
    \155\ ``Swaption'' was defined in vacated part 151 to mean ``an 
option to enter into a swap or a physical commodity option.'' 
``Trader'' was defined in vacated part 151 to mean ``a person that, 
for its own account or for an account that it controls, makes 
transactions in Referenced Contracts or has such transactions 
made.'' The Commission notes that while vacated part 151 and several 
places in current part 150 use the term ``trader,'' the term 
``person'' is currently used in both Sec.  1.3(z) and in other 
places in part 150. The amendments in both the Aggregation NPRM and 
this NPRM use the term ``person'' in a manner consistent with its 
current use in part 150.
---------------------------------------------------------------------------

a. Basis Contract
    While the term ``basis contract'' is not defined in current Sec.  
150.1, a definition was adopted in vacated Sec.  151.1. The definition 
adopted in Sec.  151.1 defined basis contract as ``an agreement, 
contract or transaction that is cash-settled based on the difference in 
price of the same commodity (or substantially the same commodity) at 
different delivery locations.'' When it adopted part 151, the 
Commission noted that a swap based on the difference in price of a 
commodity (or substantially the same commodity) at different delivery 
locations was a ``basis contract and therefore not subject to the 
limits adopted therein.\156\
---------------------------------------------------------------------------

    \156\ 76 FR 71626, 71631 (n. 49), Nov. 18, 2011.
---------------------------------------------------------------------------

    Under the proposal, the definition for ``basis contract'' adopted 
in Sec.  150.1 would expand upon the definition of basis contract 
adopted in vacated part 151, by defining basis contract to mean ``a 
commodity derivative contract that is cash-settled based on the 
difference in: (1) The price, directly or indirectly, of: (a) A 
particular core referenced futures contract; or (b) a commodity 
deliverable on a particular core referenced futures contract, whether 
at par, a fixed discount to par, or a premium to par; and (2) the 
price, at a different delivery location or pricing point than that of 
the same particular core referenced futures contract, directly or 
indirectly, of: (a) A commodity deliverable on the same particular core 
referenced futures contract, whether at par, a fixed discount to par, 
or a premium to par; or (b) a commodity that is listed in appendix B to 
this part as substantially the same as a commodity underlying the same 
core referenced futures contract.''
    The Commission notes that the proposal excludes intercommodity 
spread contracts, calendar spread contracts, and basis contracts from 
the definition of ``commodity index contract.''
    The Commission is proposing appendix B to this part, Commodities 
Listed as Substantially the Same for Purposes of the Definition of 
Basis Contract. The Commission proposes to expand the definition of 
basis contract to include contracts cash-settled on the difference in 
prices of two different, but economically closely related commodities. 
The basis contract definition in vacated part 151 targeted the location 
differential. Now the Commission is proposing a basis contract 
definition that would expand to include certain quality differentials 
(e.g., RBOB vs. 87 unleaded).\157\ The intent of the expanded 
definition is to reduce the potential for excessive speculation in 
referenced contracts where, for example, a speculator establishes a 
large outright directional position in referenced contracts and nets 
down that directional position with a contract based on the difference 
in price of the commodity underlying the referenced contracts and a 
close economic substitute that was not deliverable on the core 
referenced futures contract. In the absence of this expanded 
definition, the speculator could then increase further the large 
position in the referenced contracts. By way of comparison, the 
Commission preliminarily believes there is greater concern that (i) 
someone may manipulate the markets by disguise of a directional 
exposure through netting down the directional exposure using one of the 
legs of a quality differential (if that quality differential contract 
were not exempted) than (ii) that someone may use certain quality 
differential contracts that were exempted from position limits to 
manipulate the

[[Page 75697]]

outright price of a referenced contract. Historically, manipulation has 
occurred though use of outright positions (as in the case of the Hunt 
brothers) or time spreads (Amaranth, for example, used calendar month 
spreads), rather than quality or locational differentials.
---------------------------------------------------------------------------

    \157\ The expanded basis contract definition is not intended to 
include significant time differentials in prices of the two 
commodities (e.g., the expanded basis contract definition would not 
include calendar spreads for nearby vs. deferred contracts).
---------------------------------------------------------------------------

    The Commission seeks comment on alternatives to the specification 
of quality standards for substantially the same commodity, such as a 
methodology to identify and define which differential contracts should 
be excluded from position limits. (i) Should the Commission expand the 
definition of basis contract to include any commodity priced at a 
differential to any of its products and by-products? For example, 
should a basis contract include a soybean crush spread contract or a 
crude oil crack spread contract, regardless of the number of 
components? (ii) Should the Commission expand the definition of basis 
contract to include a product or by-product of a particular commodity, 
priced at a differential to another product or by-product of that same 
commodity? For example, should the basis contract definition include a 
contract based on jet fuel priced at a differential to heating oil? Jet 
fuel and heating oil are both products of the same commodity, namely 
crude oil. (iii) Should the Commission expand the definition of basis 
contract for a particular commodity to include other similar 
commodities? For example, should the basis contract definition include 
a contract based on the difference in prices of light sweet crude oil 
and a sour crude oil that is not deliverable on the WTI contract?
b. Commodity Derivative Contract
    The Commission proposes in Sec.  150.1(l) to define the term 
``commodity derivative contract'' for position limits purposes as 
shorthand for any futures, option, or swap contract in a commodity 
(other than a security futures product as defined in CEA section 
1a(45)). Part 150 refers only to futures and options, while vacated 
part 151 was drafted without the use of any similar concise phrase. It 
was determined during the process of updating part 150 that the use of 
such a generic term would be a useful way to streamline and simplify 
references in part 150 to the various kinds of contracts to which the 
position limits regime applies. As such, this new definition can be 
found frequently throughout the Commission's proposed amendments to 
part 150.\158\
---------------------------------------------------------------------------

    \158\ See, e.g., proposed amendments to Sec.  150.1 (the 
definitions of: ``basis contract,'' the definition of ``bona fide 
hedging position,'' ``inter-market spread position,'' ``intra-market 
spread position,'' ``pre-existing position,'' ``speculative position 
limits,'' and ``spot month''), Sec. Sec.  150.2(f)(2), 150.3(d), 
150.3(h), 150.5(a), 150.5(b), 150.5(e), 150.7(d), 150.7(f), appendix 
A to part 150, and appendix C to part 150.
---------------------------------------------------------------------------

c. Commodity Index Contract
    The term ``commodity index contract'' is not currently defined in 
Sec.  150.1; a definition for the term was adopted in vacated part 
151.\159\ Under the definition adopted in Sec.  151.1, commodity index 
contract means ``an agreement, contract, or transaction that is not a 
basis or any type of spread contract, based on an index comprised of 
prices of commodities that are not the same or substantially the same; 
provided that, a commodity index contract used to circumvent 
speculative position limits shall be considered to be a Referenced 
Contract for the purpose of applying the position limits of Sec.  
151.4.'' \160\
---------------------------------------------------------------------------

    \159\ 76 FR at 71685.
    \160\ See id.
---------------------------------------------------------------------------

    The Commission noted in the vacated part 151 final rulemaking that 
the definition of ``Referenced Contract'' in Sec.  151.1 expressly 
excluded commodity index contracts.\161\ The Commission also noted that 
``if a swap is based on prices of multiple different commodities 
comprising an index, it is a `commodity index contract.' '' \162\ As 
the preamble pointed out, it would not, therefore, be subject to 
position limits.\163\
---------------------------------------------------------------------------

    \161\ Id. at 71656.
    \162\ Id. at 71631 n.49.
    \163\ Id. The Commission clarifies here, that, as was noted in 
the vacated part 151 Rulemaking, if a swap is based on the 
difference between two prices of two different commodities, with one 
linked to a core referenced futures contract price (and the other 
either not linked to the price of a core referenced futures contract 
or linked to the price of a different core referenced futures 
contract), then the swap is an ``intercommodity spread contract,'' 
is not a commodity index contract, and is a Referenced Contract 
subject to the position limits specified in Sec.  150.2. The 
Commission further clarifies that, again as was noted in the vacated 
part 151 Rulemaking, a contract based on the prices of a referenced 
contract and the same or substantially the same commodity (and not 
based on the difference between such prices) is not a commodity 
index contract and is a referenced contract subject to position 
limits specified in Sec.  150.2. See id.
---------------------------------------------------------------------------

    The Commission proposes in the current rulemaking to add into Sec.  
150.1 substantially the same definition for ``commodity index 
contract'' as was adopted in vacated Sec.  151.1, with one change. The 
proviso included in Sec.  151.1, which required treatment of a position 
in a commodity index contract as a Referenced Contract if the contract 
was used to circumvent speculative position limits, acted in the Sec.  
151.1 definition as an anti-evasion provision, a substantive regulatory 
requirement. Consequently, to provide greater clarity as to the effect 
of the provision, the definition of ``commodity index contract'' 
proposed in 150.1 mirrors that of the definition in 151.1, but with no 
anti-evasion proviso. Instead, an anti-evasion provision, while similar 
to that contained in Sec.  151.1, is included in proposed Sec.  
150.2(h).\164\
---------------------------------------------------------------------------

    \164\ See discussion below.
---------------------------------------------------------------------------

    As in vacated part 151, and as noted above, the definition of 
``referenced contract'' proposed in the current rulemaking also 
expressly excludes commodity index contracts. However, as the 
Commission noted in the final part 151 Rulemaking, part 20 of the 
Commission's regulations requires reporting entities to report 
commodity reference price data sufficient to distinguish between 
commodity index contract and non-commodity index contract positions in 
covered contracts.\165\ Therefore, for commodity index contracts, the 
Commission intends to rely on the data elements in Sec.  20.4(b) to 
distinguish data records subject to Sec.  150.2 position limits from 
those contracts that are excluded from Sec.  150.2. This will enable 
the Commission to set position limits using the narrower data set 
(i.e., referenced contracts subject to Sec.  150.2 position limits) as 
well as conduct surveillance using the broader data set.
---------------------------------------------------------------------------

    \165\ 76 FR at 71632.
---------------------------------------------------------------------------

d. Core Referenced Futures Contract
    While current part 150 does not contain a definition of the term 
``core referenced futures contracts,'' a definition for the term was 
adopted in vacated Sec.  151.1 as a simple short-hand phrase to denote 
certain futures contracts, regarding which several position limit rules 
were then applied. The definition adopted in Sec.  151.1 provided that 
a core referenced futures contract was ``a futures contract defined in 
Sec.  151.2''; section 151.2 provided a list of 28 physical commodity 
futures and option contracts.\166\
---------------------------------------------------------------------------

    \166\ The Commission clarified in adopting Sec.  151.2, that 
core referenced futures contracts included options that expire into 
outright positions in such contracts. See 76 FR at 71631.
---------------------------------------------------------------------------

    The Commission proposes to include in Sec.  150.1 the same 
definition as was adopted in vacated Sec.  151.1--such that the 
definition would cite to futures contracts listed in Sec.  151.2.\167\
---------------------------------------------------------------------------

    \167\ The selection of the core referenced futures contracts is 
explained in the discussion of proposed Sec.  150.2. See discussion 
below.
---------------------------------------------------------------------------

e. Eligible Affiliate
    The term ``eligible affiliate,'' used in proposed Sec.  
150.2(c)(2), is not defined in current Sec.  150.1. The Commission 
proposes to amend Sec.  150.1 to define an

[[Page 75698]]

``eligible affiliate'' as ``an entity with respect to which another 
person: (1) Directly or indirectly holds either: (i) A majority of the 
equity securities of such entity, or (ii) the right to receive upon 
dissolution of, or the contribution of, a majority of the capital of 
such entity; (2) reports its financial statements on a consolidated 
basis under Generally Accepted Accounting Principles or International 
Financial Reporting Standards, and such consolidated financial 
statements include the financial results of such entity; and (3) is 
required to aggregate the positions of such entity under Sec.  150.4 
and does not claim an exemption from aggregation for such entity.'' 
\168\
---------------------------------------------------------------------------

    \168\ See proposed Sec.  150.1.
---------------------------------------------------------------------------

    The definition of ``eligible affiliate'' proposed in the current 
NPRM qualifies persons as eligible affiliates based on requirements 
similar to those recently adopted by the Commission in a separate 
rulemaking. On April 1, 2013, the Commission provided relief from the 
mandatory clearing requirement of section 2(h)(1)(A) of the Act for 
certain affiliated persons if the affiliated persons (``eligible 
affiliate counterparties'') meet requirements contained in Sec.  
50.52.\169\ Under both Sec.  50.52 and the current proposed definition, 
a person is an eligible affiliate if the person, directly or 
indirectly, holds a majority ownership interest in the other 
counterparty (a majority of the equity securities of such entity, or 
the right to receive upon dissolution of, or the contribution of, a 
majority of the capital of such entity), reports its financial 
statements on a consolidated basis under Generally Accepted Accounting 
Principles or International Financial Reporting Standards, and such 
consolidated financial statements include the financial results of such 
entity. In addition, for purposes of the position limits regime, an 
eligible affiliate, as proposed in Sec.  150.1, must be required to 
aggregate the positions of such entity under Sec.  150.4 and does not 
claim an exemption from aggregation for such entity.\170\
---------------------------------------------------------------------------

    \169\ See Clearing Exemption for Swaps Between Certain 
Affiliated Entities, 78 FR 21749, 21783, Apr. 11, 2013. Section 
50.52(a) addresses eligible affiliate counterparty status, allowing 
a person not to clear a swap subject to the clearing requirement of 
section 2(h)(1)(A) of the Act and part 50 if the person meets the 
requirements of the conditions contained in paragraphs (a) and (b) 
of Sec.  50.52. The conditions in paragraph (a) of Sec.  50.52 
specify either one counterparty holds a majority ownership interest 
in, and reports its financial statements on a consolidated basis 
with, the other counterparty, or both counterparties are majority 
owned by a third party who reports its financial statements on a 
consolidated basis with the counterparties.
    The conditions in paragraph (b) of Sec.  50.52 address factors 
such as the decision of the parties not to clear, the associated 
documentation, audit, and recordkeeping requirements, the policies 
and procedures that must be established, maintained, and followed by 
a dealer and major swap participant, and the requirement to have an 
appropriate centralized risk management program, rather than the 
nature of the affiliation. As such, those conditions are less 
pertinent to the definition of eligible affiliate.
    \170\ See proposed amendments to the definition of ``eligible 
affiliate'' in proposed Sec.  150.1.
---------------------------------------------------------------------------

    The Commission requests comment on the proposed definition. Is the 
definition an appropriate one for purposes of the position limits 
regime? Should the Commission consider adopting a definition that more 
closely tracks the ``eligible affiliate counterparties'' definition 
adopted in Sec.  50.52 or is the difference appropriate in light of the 
differing regulatory purposes of the two regulations?
f. Entity
    The current proposal defines ``entity'' to mean ``a `person' as 
defined in section 1a of the Act.'' \171\ The term is not defined in 
either current Sec.  150.1, but was defined in vacated Sec.  151.1; the 
language proposed here tracks that adopted in Sec.  151.1. The term 
``entity,'' like that of ``person,'' is used in a number of contexts, 
and in various definitions. Defining the term, therefore, provides a 
clear and unambiguous meaning, and prevents confusion.
---------------------------------------------------------------------------

    \171\ CEA section 1a(38); 7 U.S.C. 1a(38).
---------------------------------------------------------------------------

g. Excluded Commodity
    The phrase ``excluded commodity'' was added into the CEA in the 
CFMA, but was not defined or used in part 150. CEA section 4a(a)(2)(A), 
as amended by the Dodd-Frank Act, utilizes the phrase ``excluded 
commodity'' when it provides a timeline under which the Commission is 
charged with setting limits for futures and option contracts other than 
on excluded commodities.\172\
---------------------------------------------------------------------------

    \172\ CEA section 4a(2)(A); 7 U.S.C. 6a(2)(A).
---------------------------------------------------------------------------

    Part 151 included in the definition section of vacated Sec.  151.1, 
a definition which simply incorporated into part 151 the statutory 
meaning, as a useful term for purposes of a number of the changes made 
by part 151 to the position limits regime. For example, the phrase was 
used in vacated Sec.  151.11, in the provision of acceptable practices 
for DCMs and SEFs in their adoption of rules and procedures for 
monitoring and enforcing position accountability provisions; it was 
also used in the amendments to the definition of bona fide 
hedging.\173\ Similarly, the Commission believes that the adoption into 
part 150 of the excluded commodity definition will be a useful tool in 
addressing the same provisions, and so proposes to adopt into Sec.  
150.1 the definition used in Sec.  151.1.\174\
---------------------------------------------------------------------------

    \173\ See 17 CFR 1.3(z) as amended by the vacated part 151 
Rulemaking.
    \174\ See e.g., proposed Sec.  150.1 definitions for bona fide 
hedging and proposed amendments to Sec.  150.5(b).
---------------------------------------------------------------------------

h. First Delivery Month of the Crop Year
    The term ``first delivery month of the crop year'' is currently 
defined in Sec.  150.1(c), with a table of the first delivery month of 
the crop year for the commodities for which position limits are 
currently provided in Sec.  150.2. The crop year definition has been 
pertinent for purposes of the spread exemption to the single month 
limit in current Sec.  150.3(a)(3), which limits spread positions in a 
single month to a level no more than that of the all-months limit. The 
Commission did not adopt this definition in vacated part 151.\175\ In 
the current proposal, the Commission proposes to amend Sec.  150.1 to 
delete the definition of ``crop year.'' The elimination of the 
definition reflects the fact that the definition is no longer needed, 
since the current proposal, like the approach adopted in part 151, 
would raise the level of individual month limits to the level of the 
all-month limits.
---------------------------------------------------------------------------

    \175\ See 76 FR at 71685.
---------------------------------------------------------------------------

i. Futures Equivalent
    The term ``futures-equivalent'' is currently defined in Sec.  
150.1(f) to mean ``an option contract which has been adjusted by the 
previous day's risk factor, or delta coefficient, for that option which 
has been calculated at the close of trading and published by the 
applicable exchange under Sec.  16.01 of this chapter.'' \176\ The 
Commission proposes to retain the definition currently found in Sec.  
150.1(f), while broadening it in light of the Dodd-Frank Act amendments 
to CEA section 4a.\177\ The proposed amendments would also delete, as 
unnecessary, the reference to Sec.  16.01 found in the current 
definition.
---------------------------------------------------------------------------

    \176\ 17 CFR 150.1(f).
    \177\ Amendments to CEA section 4a(1) authorize the Commission 
to extend position limits beyond futures and option contracts to 
swaps traded on a DCM or SEF and swaps not traded on a DCM or SEF 
that perform or affect a significant price discovery function with 
respect to regulated entities (``SPDF swaps''). 7 U.S.C. 6a(a)(1). 
In addition, under new CEA sections 4a(a)(2) and 4a(a)(5), 
speculative position limits apply to agricultural and exempt 
commodity swaps that are ``economically equivalent'' to DCM futures 
and option contracts. 7 U.S.C. 6a(a)(2) and (5).
---------------------------------------------------------------------------

    As proposed, ``futures equivalent'' would be defined in Sec.  150.1 
as ``(1) An option contract, whether an option on a future or an option 
that is a swap, which has been adjusted by an economically reasonable 
and analytically supported risk factor, or delta coefficient, for that

[[Page 75699]]

option computed as of the previous day's close or the current day's 
close or contemporaneously during the trading day, and; (2) A swap 
which has been converted to an economically equivalent amount of an 
open position in a core referenced futures contract.''
    Vacated Sec.  151.1 did not retain a definition for ``futures-
equivalent;'' instead final part 151 referred to guidance on futures 
equivalency provided in appendix A to part 20.\178\ The Commission 
notes that while the part 20 ``futures equivalent'' definition is 
consistent with the ``futures-equivalent'' definition proposed herein, 
it addresses only swaps, and cites to, and relies on, the guidance 
provided in appendix A to part 20.\179\ The definition proposed herein 
addresses both options on futures and options that are swaps; it also 
includes and expands upon clarifications that are incorporated into the 
current definition regarding the computation time and the adjustment by 
an economically reasonable and analytically supported risk factor, or 
delta coefficient.
---------------------------------------------------------------------------

    \178\ 76 FR at 71633 (n. 67) (stating that ``For purposes of 
applying the limits, a trader shall convert and aggregate positions 
in swaps on a futures equivalent basis consistent with the guidance 
in the Commission's appendix A to Part 20, Large Trader Reporting 
for Physical Commodity Swaps.''). See also 76 FR 43851, 43865, Jul. 
22, 2011.
    \179\ See 17 CFR 20.1 (``Futures equivalent means an 
economically equivalent amount of one or more futures contracts that 
represents a position or transaction in one or more paired swaps or 
swaptions consistent with the conversion guidelines in appendix A of 
this part.'').
---------------------------------------------------------------------------

    As noted above, the current Sec.  150.1(f) definition of ``futures-
equivalent'' is narrowly defined to mean ``an option contract,'' and 
nothing else. Although certain contracts, from a practical standpoint, 
may be economically equivalent to futures contracts, as that terms is 
defined in Sec.  150.1, such products are not ``futures-equivalent'' 
under the narrow definition of current Sec.  150.1(f) unless they are 
options on those actual futures. Therefore, current Sec.  150.1(f) is 
narrowly tailored to target only specifically enumerated futures 
contracts on ``legacy'' agricultural commodities and their equivalent 
options.
    The current rulemaking, like vacated part 151, establishes federal 
position limits and limit formulas for 28 physical commodity futures 
and option contracts, or ``core referenced futures contracts,'' and 
applies these limits to all derivatives that are directly or indirectly 
linked to the price of a core referenced futures contracts, or based on 
the price of the same commodity underlying that particular core 
referenced futures contract for delivery at the same location or 
locations as specified in that particular core referenced futures 
contract, and defines such derivative products, collectively, as 
``referenced contracts.'' Therefore, the position limits amendments 
proposed in this current rulemaking, similar to the position limits 
regime established in vacated part 151, apply across different trading 
venues to economically equivalent contracts, as that term is defined in 
Sec.  150.1, that are based on the same underlying commodity. As 
discussed supra, however, current part 150 defines ``futures-
equivalent'' narrowly to mean ``an option contract,'' and makes no 
mention of broadly defined ``referenced contracts.'' Consequently, as 
noted above, and consistent with these changes to the position limits 
regime, including the applicability of aggregate position limits to 
economically equivalent ``referenced contracts'' across different 
trading venues, the Commission proposes to expand the strict ``futures-
equivalent'' standard set forth in current part 150.
j. Intercommodity Spread Contract
    Current part 150 does not include a definition of the term 
``intercommodity spread contract,'' which was introduced and adopted in 
vacated part 151. The Commission proposes to add into Sec.  150.1 the 
definition adopted in Sec.  151.1,\180\ such that an ``intercommodity 
spread contract'' means ``a cash-settled agreement, contract or 
transaction that represents the difference between the settlement price 
of a referenced contract and the settlement price of another contract, 
agreement, or transaction that is based on a different commodity.'' The 
Commission determined, however, to adopt the term ``intercommodity 
spread contract'' as part of the definition of reference contract 
rather than as a separate term, since the phrase ``intercommodity 
spread contract'' is used solely for purposes of defining the term 
``referenced contract.'' The inclusion of the term as part of the 
definition of referenced contract is intended to simplify the 
definition section and make it easier to understand.
---------------------------------------------------------------------------

    \180\ In vacated part 151, ``intercommodity spread contract'' 
was defined to mean ``a cash-settled agreement, contract or 
transaction that represents the difference between the settlement 
price of a Referenced Contract and the settlement price of another 
contract, agreement, or transaction that is based on a different 
commodity.'' See vacated Sec.  151.1.
---------------------------------------------------------------------------

k. Intermarket Spread Position
    The term ``intermarket spread position'' is not defined in current 
part 150, and was not adopted in part 151. But in conjunction with the 
amendments to part 150 to address the changes to CEA section 4a made by 
the Dodd-Frank Act,\181\ the Commission proposes to add into Sec.  
150.1 a definition for ``intermarket spread position'' to mean ``a long 
position in a commodity derivative contract in a particular commodity 
at a particular designated contract market or swap execution facility 
and a short position in another commodity derivative contract in that 
same commodity away from that particular designated contract market or 
swap execution facility.'' Among the changes to CEA section 4a, new 
section 4a(a)(6) of the Act requires the Commission to apply position 
limits on an aggregate basis to contracts based on the same underlying 
commodity across certain markets.\182\ The Commission believes that the 
term ``intermarket spread position'' simplifies the proposed changes to 
Sec.  150.5, which provide acceptable exemptions DCMs and SEFs may 
choose to grant from speculative position limits.\183\
---------------------------------------------------------------------------

    \181\ See e.g., discussions of Dodd-Frank changes to CEA section 
4a above and below.
    \182\ CEA section 4a(a)(6) requires the Commission to apply 
position limits on an aggregate basis to (1) contracts based on the 
same underlying commodity across DCMs; (2) with respect to foreign 
boards of trade (``FBOTs''), contracts that are price-linked to a 
DCM or SEF contract and made available from within the United States 
via direct access; and (3) SPDF swaps. 7 U.S.C. 6a(a)(6). See also, 
consideration of proposed changes to Sec.  150.2 for further 
discussion.
    \183\ See e.g., Sec.  150.5(a)(2)(B)(ii); see also 
150.5(b)(5)(b)(iv).
---------------------------------------------------------------------------

l. Intramarket Spread Position
    Neither current part 150, nor vacated part 151, includes a 
definition of the term ``intramarket spread contract.'' The Commission 
now proposes to add into Sec.  150.1 the definition, such that 
``intramarket spread position'' means ``a long position in a commodity 
derivative contract in a particular commodity and a short position in 
another commodity derivative contract in the same commodity on the same 
designated contract market or swap execution facility.''
    Current part 150 includes exemptions for certain spread positions. 
For example, current Sec.  150.3(a)(3) provides an exemption for spread 
(or arbitrage) positions, but this exemption is limited to those 
between single months for futures contracts and/or, options thereon, if 
outside of the spot month, and only if in the same crop year. While 
current Sec.  150.3(a)(3) limits the spread

[[Page 75700]]

exemption provided thereunder, the exemption under current Sec.  
150.5(a) is not so limited. Instead, under current Sec.  150.5(a), 
exchanges may exempt from position limits ``positions which are 
normally known in the trade as ``spreads, straddles, or arbitrage. . . 
.'' \184\ The Commission notes that the definition it now proposes for 
``intramarket spread position'' is a generic term, and not limited only 
to futures and/or options thereon.\185\ In a similar manner to adoption 
of the term ``intermarket spread position,'' the term ``intramarket 
spread position,'' therefore, simplifies the Commissions amendments to 
exemptions for spread positions, including proposed changes to Sec.  
150.5, which, as noted above, provide acceptable exemptions DCMs and 
SEFs may choose to grant from speculative position limits.
---------------------------------------------------------------------------

    \184\ The Commission notes that the exemption provided in Sec.  
150.5(a) for ``positions which are normally known in the trade as 
`spreads, straddles, or arbitrage,' '' tracks CEA section 4a(a)(1). 
7 U.S.C. 6a(a)(1). Also, various DCMs currently have rules in place 
that provide exemptions for such as ``spreads, straddles, or 
arbitrage'' positions. See, e.g., ICE Futures U.S. rule 6.27 and CME 
rule 559.C.
    \185\ For further discussion regarding the exemptions for 
intramarket spread positions, see infra, discussion regarding Sec.  
150.5(a)(2) and (b)(5).
---------------------------------------------------------------------------

m. Long Position
    The term ``long position'' is currently defined in Sec.  150.1(g) 
to mean ``a long call option, a short put option or a long underlying 
futures contract,'' but the phrase was not retained in vacated Sec.  
151.1. The Commission proposes to retain the definition, but to update 
it to make it also applicable to swaps such that a long position would 
include a long futures-equivalent swap.
n. Physical Commodity
    The Commission proposes to amend Sec.  150.1 by adding in a 
definition of the term ``physical commodity'' for position limits 
purposes. Congress used the term ``physical commodity'' in CEA sections 
4a(a)(2)(A) and 4a(a)(2)(B) to mean commodities ``other than excluded 
commodities as defined by the Commission.'' Therefore, the Commission 
interprets ``physical commodities'' to include both exempt and 
agricultural commodities, but not excluded commodities, and proposes to 
define the term as such.\186\
---------------------------------------------------------------------------

    \186\ For position limits purposes, proposed Sec.  150.1 would 
define ``physical commodity'' to mean ``any agricultural commodity 
as that term is defined in Sec.  1.3 of this chapter or any exempt 
commodity as that term is defined in section 1a(20) of the Act.''
---------------------------------------------------------------------------

o. Referenced Contracts
    Part 150 currently does not include a definition of the phrase 
``Referenced Contract,'' which was introduced and adopted in vacated 
part 151.\187\ As was noted when part 151 was adopted, the Commission 
identified 28 core referenced futures contracts and proposed to apply 
aggregate limits on a futures equivalent basis across all derivatives 
that [met the definition of Referenced Contracts'].'' \188\
---------------------------------------------------------------------------

    \187\ Vacated Sec.  151.1 defined ``Referenced Contract'' to 
mean ``on a futures-equivalent basis with respect to a particular 
Core Referenced Futures Contract, a Core Referenced Futures Contract 
listed in Sec.  151.2, or a futures contract, options contract, swap 
or swaption, other than a basis contract or contract on a commodity 
index that is: (1) Directly or indirectly linked, including being 
partially or fully settled on, or priced at a fixed differential to, 
the price of that particular Core Referenced Futures Contract; or 
(2) Directly or indirectly linked, including being partially or 
fully settled on, or priced at a fixed differential to, the price of 
the same commodity underlying that particular Core Referenced 
Futures Contract for delivery at the same location or locations as 
specified in that particular Core Referenced Futures Contract.''
    \188\ 76 FR at 71629.
---------------------------------------------------------------------------

    The vacated Sec.  151.1 definition of Referenced Contracts 
included: (1) The Core Referenced Futures Contract; (2) ``look-alike'' 
contracts (i.e., those that settle off of the Core Referenced Futures 
Contract and contracts that are based on the same commodity for the 
same delivery location as the Core Referenced Futures Contract); (3) 
contracts with a reference price based only on the combination of at 
least one Referenced Contract price and one or more prices in the same 
or substantially the same commodity as that underlying the relevant 
Core Referenced Futures Contract; and (4) intercommodity spreads with 
two components, one or both of which are Referenced Contracts. 
According to the Commission, these criteria captured contracts with 
prices that are or should be closely correlated to the prices of the 
Core Referenced Futures Contract, as defined in vacated Sec.  
151.1.\189\ In addition, the definition included categories of 
Referenced Contract based on objective criteria and readily available 
data (i.e., derivatives that are directly or indirectly linked to or 
based on the same commodity for delivery at the same delivery location 
as a Core Referenced Futures Contract).\190\ At that time, the 
Commission clarified that a swap contract using as its sole floating 
reference price the prices generated directly or indirectly from the 
price of a single Core Referenced Futures Contract or a swap priced 
based on a fixed differential to a Core Referenced Futures Contract, 
were look-alike Referenced Contracts, and subject to the limits adopted 
in vacated part 151.\191\ In addition, the definition included options 
that expire into outright positions in such contracts.\192\
---------------------------------------------------------------------------

    \189\ Id. at 71630.
    \190\ Id. at 71630-31.
    \191\ Id. at 71631 n.50 (``The Commission has clarified in its 
definition of `Referenced Contract' that position limits extend to 
contracts traded at a fixed differential to a Core Referenced 
Futures Contract (e.g., a swap with the commodity reference price 
NYMEX Light, Sweet Crude Oil + $3 per barrel is a Referenced 
Contract) or based on the same commodity at the same delivery 
location as that covered by the Core Referenced Futures Contract, 
and not to unfixed differential contracts (e.g., a swap with the 
commodity reference price Argus Sour Crude Index is not a Referenced 
Contract because that index is computed using a variable 
differential to a Referenced Contract).'').
    \192\ Id. at 71631.
---------------------------------------------------------------------------

    In response to comments that the Commission should broaden the 
scope of Referenced Contracts, the Commission noted that expanding the 
scope of position limits based, for example, on cross-hedging 
relationships or other historical price analysis would be problematic 
as historical relationships may change over time and, additionally, 
would require individualized determinations. In light of these 
circumstances, the Commission determined that it was not necessary to 
expand the scope of position limits beyond what was adopted. The 
Commission also noted that the commenters did not provide specific 
criteria or thresholds for making determinations as to which price-
correlated commodity contracts should be subject to limits, further 
noting that it would consider amending the scope of economically 
equivalent contracts (and the relevant identifying criteria) as it 
gained experience in this area.\193\
---------------------------------------------------------------------------

    \193\ Id.
---------------------------------------------------------------------------

    The definition for ``referenced contract'' proposed in Sec.  150.1 
mirrors the definition proposed in Sec.  151.1, with the delineation of 
several related terms incorporated into the definition.\194\ The

[[Page 75701]]

beginning of the current definition parallels the definition in vacated 
Sec.  151.1, differing only with the addition of a clarification that 
the definition of ``referenced contract'' does not include guarantees 
of a swap. This clarification is added into the list of products that 
are not included in the definition.\195\ In the proposed definition, 
``referenced contract'' would not include ``a guarantee of a swap, a 
basis contract, or a commodity index contract.'' \196\ In addition, for 
the sake of clarify, the proposal incorporates into the definition of 
``referenced contract'' several related terms. Consequently, the 
definition for ``referenced contract'' delineates the meaning of 
``calendar spread contract,'' ``commodity index contract,'' ``spread 
contract,'' and ``intercommodity spread contract.'' \197\ The 
incorporation of these terms into the definition of ``referenced 
contract'' is intended to retain in one place the various parts and 
meanings of the definition, thereby facilitating comprehension of the 
definition.
---------------------------------------------------------------------------

    \194\ In the current rulemaking, the term ``referenced 
contract'' is defined in Sec.  150.1 to mean, on a futures-
equivalent basis with respect to a particular core referenced 
futures contract, ``a core referenced futures contract listed in 
Sec.  151.2(d) of this part, or a futures contract, options 
contract, or swap, other than a guarantee of a swap, a basis 
contract, or a commodity index contract: (1) That is: (a) Directly 
or indirectly linked, including being partially or fully settled on, 
or priced at a fixed differential to, the price of that particular 
core referenced futures contract; or (b) Directly or indirectly 
linked, including being partially or fully settled on, or priced at 
a fixed differential to, the price of the same commodity underlying 
that particular core referenced futures contract for delivery at the 
same location or locations as specified in that particular core 
referenced futures contract; and (2) Where: (a) Calendar spread 
contract means a cash-settled agreement, contract, or transaction 
that represents the difference between the settlement price in one 
or a series of contract months of an agreement, contract or 
transaction and the settlement price of another contract month or 
another series of contract months' settlement prices for the same 
agreement, contract or transaction; (b) Commodity index contract 
means an agreement, contract, or transaction that is not a basis or 
any type of spread contract, based on an index comprised of prices 
of commodities that are not the same or substantially the same; (c) 
Spread contract means either a calendar spread contract or an 
intercommodity spread contract; and (d) Intercommodity spread 
contract means a cash-settled agreement, contract or transaction 
that represents the difference between the settlement price of a 
referenced contract and the settlement price of another contract, 
agreement, or transaction that is based on a different commodity.''
    \195\ As defined in vacated Sec.  151.1, ``Referenced Contract'' 
excludes ``a basis contract or contract on a commodity index.'' See 
vacated Sec.  151.1.
    \196\ The Commission proposes to exclude a guarantee of a swap 
from the definition of a referenced contract due to regulatory 
developments that occurred after the vacated part 151 Rulemaking. In 
connection with further defining the term ``swap'' jointly with the 
Securities and Exchange Commission, (see generally Further 
Definition of ``Swap,'' ``Security-Based Swap,'' and ``Security-
Based Swap Agreement''; Mixed Swaps; Security-Based Swap Agreement 
Recordkeeping, 77 FR 48208, Aug. 13, 2012 (``Product Definitions 
Adopting Release'')), the Commission interpreted the term ``swap'' 
(that is not a ``security-based swap'' or ``mixed swap'') to include 
a guarantee of such swap, to the extent that a counterparty to a 
swap position would have recourse to the guarantor in connection 
with the position. See id. at 48226. Excluding guarantees of swaps 
from the definition of referenced contract should help avoid any 
potential confusion regarding the application of position limits to 
guarantees of swaps, which could impede the Commission's efforts to 
monitor compliance with the requirements of the CEA. In addition, if 
the rules proposed in the Aggregation NPRM are adopted, it would 
obviate the need to include guarantees of swaps in the definition of 
referenced contracts.
    \197\ Compare vacated Sec.  151.1 with proposed Sec.  150.1.
---------------------------------------------------------------------------

p. Short Position
    The term ``short position'' is currently defined in Sec.  150.1(c) 
to mean ``a short call option, a long put option, or a short underlying 
futures contract.'' Vacated part 151 did not retain this definition. 
The current proposal would amend the definition to state that a short 
position means ``a short call option, a long put option or a short 
underlying futures contract, or a short futures-equivalent swap.'' This 
revised definition reflects the fact that under the Dodd-Frank Act, the 
Commission is charged with applying the position limits regime to 
swaps.
q. Speculative Position Limit
    The term ``speculative position limit'' is currently not defined in 
Sec.  150.1 and was not defined in vacated part 151. The Commission now 
proposes to define the term ``speculative position limit'' to mean 
``the maximum position, either net long or net short, in a commodity 
derivatives contract that may be held or controlled by one person, 
absent an exemption, such as an exemption for a bona fide hedging 
position. This limit may apply to a person's combined position in all 
commodity derivative contracts in a particular commodity (all-months-
combined), a person's position in a single month of commodity 
derivative contracts in a particular commodity, or a person's position 
in the spot month of commodity derivative contacts in a particular 
commodity. Such a limit may be established under federal regulations or 
rules of a designated contract market or swap execution facility. An 
exchange may also apply other limits, such as a limit on gross long or 
gross short positions, or a limit on holding or controlling delivery 
instruments.''
    This proposed definition is similar to definitions for position 
limits used by the Commission for many years; the various regulations 
and defined terms included use of maximum amounts ``net long or net 
short,'' which limited what any one person could ``hold or control,'' 
``one grain on any one contract market'' (or in ``in one commodity'' or 
``a particular commodity''), and ``in any one future or in all futures 
combined.'' For example, in 1936, Congress enacted the CEA, which 
authorized the CFTC's predecessor, the CEC, to establish limits on 
speculative trading. Congress empowered the CEC to ``fix such limits on 
the amount of trading . . . as the [CEC] finds is necessary to 
diminish, eliminate, or prevent such burden.'' \198\ The first 
speculative position limits were issued by the CEC in December 
1938.\199\ Those first speculative position limits rules provided in 
Sec.  150.1 for limits on position and daily trading in grain for 
future delivery, adopting a maximum amount ``net long or net short 
position which any one person may hold or control in any one grain on 
any one contract market'' as 2,000,000 bushels ``in any one future or 
in all futures combined.'' \200\
---------------------------------------------------------------------------

    \198\ CEA section 6a(1) (Supp. II 1936).
    \199\ 3 FR 3145, Dec. 24, 1938.
    \200\ 17 CFR 150.1 (1938) (Part 150--Orders of The Commodity 
Exchange Commission)(``Limits on position and daily trading in grain 
for future delivery. The following limits on the amount of trading 
under contracts of sale of grain for future delivery on or subject 
to the rules of contract markets which may be done by any person are 
hereby proclaimed and fixed, to be in full force and effect on and 
after December 31, 1938: (a) Position limits. (1) The limit on the 
maximum net long or net short position which any one person may hold 
or control in any one grain on any one contract market, except as 
specifically authorized by paragraph (a) (2), is: 2,000,000 bushels 
in any one future or in all futures combined. (2) To the extent that 
the net position held or controlled by any one person in all futures 
combined in any one grain on any one contract market is shown to 
represent spreading in the same grain between markets, the limit on 
net position in all futures combined set forth in paragraph (a)(1) 
may be exceeded on such contract market, but in no case shall the 
excess result in a net position of more than 3,000,000.'').
---------------------------------------------------------------------------

    Another example is found in the glossaries published by the 
Commission for many years. Various Commission documents over the years 
have included a glossary. For example, the Commission's annual report 
for 1983 includes in its glossary ``Position Limit The maximum 
position, either net long or net short, in one commodity future 
combined which may be held or controlled by one person as prescribed by 
any exchange or by the CFTC.'' The version of the staff glossary 
currently posted on the CFTC Web site defines speculative position 
limit as ``[t]he maximum position, either net long or net short, in one 
commodity future (or option) or in all futures (or options) of one 
commodity combined that may be held or controlled by one person (other 
than a person eligible for a hedge exemption) as prescribed by an 
exchange and/or by the CFTC.''
r. Spot Month
    Vacated part 151 adopted an amended definition for ``spot month'' 
that replaced the definition for spot month currently found in Sec.  
150.1 by citing to the definition provided in Sec.  151.3. Vacated 
Sec.  151.3 provided detailed lists of spot months separately for 
agricultural, metals and energy commodities.
    The Commission proposes to adopt a simplified update to the 
definition of ``spot month'' by expanding upon the current Sec.  150.1 
definition. The definition, as expanded, would specifically address 
both physical-delivery contracts and cash-settled contracts, and 
clarify the duration of ``spot month.'' Under the proposed changes, the 
term ``spot month'' does not refer to a month of time. Rather, the 
definition clarifies that the ``spot

[[Page 75702]]

month'' is the trading period immediately preceding the delivery period 
for a physical-delivery futures contract as well as for any cash-
settled swaps and futures contracts that are linked to the physical-
delivery contract. The definition continues to define the spot month as 
the period of time beginning at of the close of trading on the trading 
day preceding the first day on which delivery notices can be issued to 
the clearing organization of a contract market, while adding in a 
clarification that this definition applies only to physical-delivery 
commodity derivatives contracts. For physical-delivery contracts with 
delivery beginning after the last trading day, the proposal defines the 
spot month as the close of trading on the trading day preceding the 
third-to-last trading day, until the contract is no longer listed for 
trading (or available for transfer, such as through exchange for 
physical transactions). This definition is consistent with the current 
spot month for each of the 28 core referenced futures contracts. The 
definition proposes similar, but slightly different language for cash-
settled contracts, providing that the spot month begins at the earlier 
of the start of the period in which the underlying cash-settlement 
price is calculated or the close of trading on the trading day 
preceding the third-to-last trading day and continues until the 
contract cash-settlement price is determined.\201\ In addition, the 
definition includes a proviso that, if the cash-settlement price is 
determined based on prices of a core referenced futures contract during 
the spot month period for that core referenced futures contract, then 
the spot month for that cash-settled contract is the same as the spot 
month for that core referenced futures contract.\202\
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    \201\ For example, a ``look-alike'' contract that references a 
calendar-month average of settlement prices would have the same 
spot-month limit as the core referenced futures contract (CRFC) but 
the limit would be in effect beginning with the first calendar day 
of the cash-settlement period; a ``look-alike'' contract that 
references a single day's settlement price in the spot-month of the 
CRFC would have a spot-month limit at the same level as the CRFC but 
the limit would be in effect only during the spot month of the CRFC.
    \202\ For example, the physical-delivery NYMEX Henry Hub Natural 
Gas futures contract would have, as is currently the case for the 
exchange spot month limit, a spot period beginning on close of 
trading three business days prior to the last trading day of that 
core referenced futures contract. The NYMEX Henry Hub Natural Gas 
Penultimate Financial futures contract (which is cash-settled based 
on the NYMEX Henry Hub Natural Gas Futures contract settlement price 
on the business day preceding the last trading day for that 
physical-delivery contract, and is currently subject to position 
accountability effective on the last three trading days of the 
futures contract), would have a spot month period that is the same 
as that of the physical-delivery NYMEX Henry Hub Natural Gas futures 
contract.
---------------------------------------------------------------------------

s. Spot-Month, Single-Month, and All-Months-Combined Position Limits
    In addition to a definition for ``spot month,'' current part 150 
includes definitions for ``single month,'' and for ``all-months'' where 
``single month'' is defined as ``each separate futures trading month, 
other than the spot month future,'' and ``all-months'' is defined as 
``the sum of all futures trading months including the spot month 
future.''
    Vacated part 151 retained only the definition for spot month, and, 
instead, adopted a definition for ``spot-month, single-month, and all-
months-combined position limits.'' The definition provided that, for 
Referenced Contracts based on a commodity identified in Sec.  151.2, 
the maximum number of contracts a trader may hold was as provided in 
Sec.  151.4.
    In the current rulemaking proposal, as noted above, the Commission 
proposes to amend Sec.  150.1 by deleting the definitions for ``single 
month,'' and for ``all-months.'' Unlike the vacated part 151 
Rulemaking, the current proposal does not include a definition for 
``spot-month, single-month, and all-months-combined position limits.'' 
Instead, the current rulemaking proposes to adopt a definition for 
``speculative position limits'' that should obviate the need for these 
definitions.\203\
---------------------------------------------------------------------------

    \203\ See supra discussion of the proposed definition of 
``speculative position limit.''
---------------------------------------------------------------------------

t. Spread Contract
    Spread contract was defined in vacated part 151 as ``either a 
calendar spread contract or an intercommodity spread contract.'' \204\ 
The Commission proposes to add the same definition into Sec.  150.1 in 
conjunction with the proposal to define ``referenced contract.'' \205\
---------------------------------------------------------------------------

    \204\ Vacated Sec.  151.1.
    \205\ See supra discussion of proposed Sec.  150.1 ``referenced 
contract'' definition.
---------------------------------------------------------------------------

    The Commission also notes that while the proposed definition of 
``referenced contract'' specifically excludes guarantees of a swap, 
basis contracts and commodity index contracts, spread contracts are not 
excluded from the proposed definition of ``referenced contract.'' \206\
---------------------------------------------------------------------------

    \206\ The Commission notes that this is consistent with vacated 
part 151. See, e.g., the final part 151 Rulemaking, which noted that 
commodity index contracts, which by the definition in vacated Sec.  
151.1 were expressly excluded from the definition of ``Referenced 
Contract,'' were not spread contracts. 76 FR at 71656. See also, the 
definition of ``commodity index contract,'' which is defined as ``a 
contract, agreement, or transaction ``that is not a basis or any 
type of spread contract, [and] based on an index comprised of prices 
of commodities that are not the same nor substantially the same.'' 
Vacated Sec.  151.1.
---------------------------------------------------------------------------

u. Swap
    The definitions of several terms adopted in vacated part 151 relied 
on the statutory definition in some cases in conjunction with a further 
definition adopted by the Commission in other rulemakings.\207\ Other 
defined terms that rely on the statutory definition in included: 
``entity,'' ``excluded commodity,'' and ``swap dealer.'' Since the 
adoption of part 151, the Commission, in a joint rulemaking with the 
Securities and Exchange Commission, adopted a further definition for 
``swap'' in Sec.  1.3(xxx).\208\ Consequently, the definition of 
``swap'' proposed in the current rulemaking, while paralleling that of 
the definition included in vacated Sec.  151.1, and while substantially 
the same, additionally cites to the definition of ``swap'' found in 
Sec.  1.3(xxx).
---------------------------------------------------------------------------

    \207\ Under vacated Sec.  151.1, the term ``[s]wap means `swap' 
as defined in section 1a of the Act and as further defined by the 
Commission.''
    \208\ See 77 FR 48208, 48349, Aug. 13, 2012.
---------------------------------------------------------------------------

v. Swap Dealer
    The term ``swap dealer'' is not currently defined in Sec.  150.1, 
but was defined in vacated 151.1 to mean `` `swap dealer' as that term 
is defined in section 1a of the Act and as further defined by the 
Commission.'' \209\ Similar to the definition of ``swap,'' the 
Commission adopted a definition for ``swap dealer'' since part 151 was 
finalized.\210\ Under the current proposal, Sec.  150.1 would be amend 
to define ``swap dealer'' to mean `` `swap dealer' as that term is 
defined in section 1a of the Act and as further defined in section 1.3 
of this chapter.'' This revised definition reflects the fact that the 
definition of ``swap dealer,'' while paralleling that of the definition 
included in Sec.  151.1, and while substantially the same, additionally 
cites to the definition of ``swap dealer'' found in Sec.  1.3(ggg).
---------------------------------------------------------------------------

    \209\ See vacated Sec.  151.1.
    \210\ 77 FR 30596, May 23, 2012.
---------------------------------------------------------------------------

ii. Bona Fide Hedging Definition
    The core of the Commission's approach to defining bona fide hedging 
over the years has focused on transactions that offset a recognized 
physical price risk.\211\ Once a bona fide

[[Page 75703]]

hedge is implemented, the hedged entity should be price insensitive 
because any change in the value of the underlying physical commodity is 
offset by the change in value of the entity's physical commodity 
derivative position.
---------------------------------------------------------------------------

    \211\ For an historical perspective on the bona fide hedging 
provision prior to the Dodd-Frank amendments, see Testimony of 
General Counsel Dan M. Berkovitz, Commodity Futures Trading 
Commission, ``Position Limits and the Hedge Exemption, Brief 
Legislative History,'' July 28, 2009, available at http://www.cftc.gov/PressRoom/SpeechesTestimony/berkovitzstatement072809.
---------------------------------------------------------------------------

    Because a firm that has hedged its price exposure is price neutral 
in its overall physical commodity position, the hedged entity should 
have little incentive to manipulate or engage in other abusive market 
practices to affect prices. By contrast, a party that maintains a 
derivative position that leaves them with exposure to price changes is 
not neutral as to price and, therefore, may have an incentive to affect 
prices. Further, the intention of a hedge exemption is to enable a 
commercial entity to offset its price risk; it was never intended to 
facilitate taking on additional price risk.
    The Commission recognizes there are complexities to analyzing the 
various commercial price risks applicable to particular commercial 
circumstances in order to determine whether a hedge exemption is 
warranted. These complexities have led the Commission, from time to 
time, to issue rule changes, interpretations, and exemptions. Congress, 
too, has periodically revised the Federal statutes applicable to bona 
fide hedging, most recently in the Dodd-Frank Act. These complexities 
will be further explored below.
a. Bona Fide Hedging History
    Prior to 1974, the term bona fide hedging transactions or positions 
was defined in section 4a(3) of the Act. That definition only applied 
to agricultural commodities. When the Commission was created in 1974, 
the Act's definition of commodity was expanded. At that time, Congress 
was concerned that the limited hedging definition, even if applied to 
newly regulated commodity futures, would fail to accommodate the 
commercial risk management needs of market participants that could 
emerge over time. Accordingly, Congress, in section 404 of the 
Commodity Futures Trading Commission Act of 1974, repealed the 
statutory definition and gave the Commission the authority to define 
bona fide hedging.\212\ In response to the 1974 legislation, the 
Commission's predecessor adopted in 1975 a bona fide hedging definition 
in Sec.  1.3(z) of its regulations stating, among other requirements, 
that transactions or positions would not be classified as hedging 
unless their bona fide purpose was to offset price risks incidental to 
commercial cash or spot operations, and such positions were established 
and liquidated in an orderly manner and in accordance with sound 
commercial practices.\213\ Shortly thereafter, the newly formed 
Commission sought comment on amending that definition.\214\ Given the 
large number of issues raised in comment letters, the Commission 
adopted the predecessor's definition with minor changes as an interim 
definition of bona fide hedging transactions or positions, effective 
October 18, 1975.\215\
---------------------------------------------------------------------------

    \212\ Section 404 of Public Law 93-463, October 23, 1974, (CFTC 
Act), amended section 4a(3) of the Act, deleting the statutory 
definition of bona fide hedging position or transaction and 
directing the newly-established Commission to issue a rule defining 
that term.
    \213\ Pending promulgation of a definition by the Commission, 
the Secretary of Agriculture promulgated Sec.  1.3(z) pursuant to 
section 404 of the CFTC Act. 40 FR 11560, Mar. 12, 1975. This 
definition of bona fide hedging in new Sec.  1.3(z) deviated in only 
minor ways from the hedging definition contained in section 4a(3) of 
the Act. The Commodity Exchange Commission subsequently issued 
conforming amendments to various rules. 40 FR 15086, Apr. 4, 1975.
    \214\ 40 FR 34627, Aug. 18, 1975. The Commission sought comment 
on many issues, including whether to include in the definition of 
bona fide hedging transactions and positions ``the practice of many 
traders which results in hedging of gross cash positions rather than 
a net cash position--so-called `double hedging.' '' Id. at 34628. 
The Commission later noted ``that net cash positions do not 
necessarily measure total risk exposure and in such cases the 
hedging of gross cash positions does not constitute `double 
hedging.' '' 42 FR 42748, 42750, Aug. 24, 1977.
    \215\ 40 FR 48688, Oct. 17, 1975. The Commission re-issued all 
regulations, with rule 1.3(z) essentially unchanged, in 1976. 41 FR 
3192, 3195, Jan. 21, 1976.
---------------------------------------------------------------------------

    In 1977, the Commission proposed a revised definition of bona fide 
hedging that largely forms the basis of the current definition of bona 
fide hedging.\216\ The 1977 proposed definition set forth: (i) A 
general definition of bona fide hedging positions under economically 
appropriate circumstances and subject to other conditions (noted 
below); (ii) an enumerated list of specific positions that conform to 
the general definition; and (iii) a procedure to consider non-
enumerated cases.\217\ The 1977 proposal, as adopted, established the 
concept of portfolio hedging and recognized cross-commodity hedges and 
hedges of anticipated production or unfilled anticipated requirements, 
provided such hedges were not recognized in the five last days of 
trading in any particular futures contract (the ``five-day rule'' in 
current Sec.  1.3(z)(2)).\218\
---------------------------------------------------------------------------

    \216\ 42 FR 14832, Mar. 16, 1977.
    \217\ Id.
    \218\ 42 FR 42748, Aug. 24, 1977.
---------------------------------------------------------------------------

    The general definition of bona fide hedging in current Sec.  
1.3(z), as was the case when adopted in 1977, advises that a position 
should ``normally represent a substitute for . . . positions to be 
taken at a later time in a physical marketing channel,'' and requires 
such position to be ``economically appropriate to the reduction of 
risks in the conduct of a commercial enterprise,'' and where the risks 
arise from the potential change in value of assets, liabilities or 
services.\219\ Such bona fide hedges also must have a purpose ``to 
offset price risks incidental to commercial cash or spot operations'' 
and must be ``established and liquidated in an orderly manner in 
accordance with sound commercial practices.'' Thus a bona fide hedge 
exemption was appropriate where there was a demonstrated physical price 
risk that had been recognized. This also applies, for example, to bona 
fide hedge exemptions for unfilled anticipated requirements, where 
processors or manufacturers are exposed to price risk on such unfilled 
anticipated requirements necessary for their manufacturing or 
processing.\220\
---------------------------------------------------------------------------

    \219\ 17 CFR 1.3(z)(1) (2010). The Commission cautions that the 
e-CFR version of Sec.  1.3(z) reflects changes made by the vacated 
2011 final rule.
    \220\ The Commission notes that the definition of bona fide 
hedging transactions or positions historically included an exemption 
for unfilled anticipated requirements. As the Commission stated in 
1974, in its proposal to adopt Sec.  1.3(z), the regulation on the 
hedging definition proposed by the Secretary of Agriculture was 
intended to comply with the intent of section 404 of Public Law 93-
463, enacted October 23, 1974, as stated in the Conference Report 
accompanying HR. 13113, pp. 40-1. The Commission noted in its 
proposal that the new statutory language was intended to allow 
processors and manufacturers to hedge unfilled annual requirements. 
39 FR 39731, Nov. 11, 1974.
---------------------------------------------------------------------------

    The 1977 proposed definition did not include the modifying adverb 
``normally'' to the verb ``represent.'' \221\ The Commission explained 
in the 1977 preamble it intended to recognize bona fide hedging 
positions ``on the basis of net risk related to changes in the values 
reflected on balance sheets.'' \222\ The Commission introduced the 
adverb normally in the 1977 final rulemaking in order to make clear it 
would recognize as bona fide such balance sheet hedging and ``other [at 
the time] relatively infrequent but potentially important examples of 
risk reducing futures transactions'' that would otherwise not have met 
the general definition of bona fide hedging.\223\ The Commission noted: 
``One form of balance sheet hedging would involve offsetting net 
exposure to changes in currency exchange rates for the purpose of 
stabilizing the domestic dollar accounting value of assets which are 
held abroad. In the case of depreciable capital assets, such hedging 
transactions

[[Page 75704]]

might not represent a substitute for subsequent transactions in a 
physical marketing channel.'' \224\
---------------------------------------------------------------------------

    \221\ See 42 FR 42748, Aug. 24, 1977.
    \222\ Id.
    \223\ 42 FR at 42749.
    \224\ Id. at 42749 (n. 1).
---------------------------------------------------------------------------

    With respect to the five-day rule in current Sec.  1.3(z)(2) for 
anticipatory hedges of unfilled anticipated requirements, the 
Commission observed that historically there was a low utilization of 
this provision in terms of actual positions acquired in the futures 
market.\225\ For cross commodity and short anticipatory hedge 
positions, the Commission did ``not believe that persons who do not 
possess or do not have a commercial need for the commodity for future 
delivery will normally wish to participate in the delivery process.'' 
\226\
---------------------------------------------------------------------------

    \225\ Id. at 42749. The five-day rule in current Sec.  1.3(z)(2) 
for anticipatory hedges permits an exception for a person with a 
long anticipatory hedging need, for up to two months unfilled 
anticipated requirements.
    \226\ Id.
---------------------------------------------------------------------------

    In 1979, the Commission eliminated daily speculative trading volume 
limits and concluded such daily trading limits were ``not necessary to 
diminish, eliminate or prevent excessive speculation.'' \227\ The 
Commission noted eliminating daily trading limits had no effect on the 
limits on the size of speculative positions which any one person may 
hold or control on a single contract market. The Commission also noted 
the speculative position limits apply to positions throughout the day 
as well as to positions at the close of the trading session.\228\ The 
Commission continues to apply position limits throughout the day and 
will continue under this proposal.
---------------------------------------------------------------------------

    \227\ 44 FR 7124, Feb. 6, 1979.
    \228\ Id. at 7125.
---------------------------------------------------------------------------

    In the aftermath of the silver futures market crisis during late 
1979 to early 1980,\229\ in 1981 the Commission adopted Sec.  1.61, 
subsequently incorporated into Sec.  150.5, requiring DCMs to adopt 
speculative position limits and providing an exemption for ``bona fide 
hedging positions as defined by a contract market in accordance with 
Sec.  1.3(z)(1) of the Commission's regulations.'' \230\ That rule 
permits DCMs to limit bona fide hedging positions which it determines 
are not in accord with sound commercial practices or exceed an amount 
which the exchange determines may be established or liquidated in an 
orderly fashion.
---------------------------------------------------------------------------

    \229\ See, In re Nelson Bunker Hunt et al., CFTC Docket No. 85-
12.
    \230\ 46 FR 50938, 50945, Oct. 16, 1981. 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, Aug. 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. 72 FR 66097, 66098 n.1, Nov. 27, 2007.
---------------------------------------------------------------------------

    In 1986, in response to concerns raised in testimony regarding the 
constraints on investment decisions imposed by position limits, the 
House Committee on Agriculture, in its report accompanying the 
Commission's 1986 reauthorization legislation, instructed the 
Commission to reexamine its approach to speculative position limits and 
its definition of hedging.\231\ Specifically, the Committee Report 
``strongly urge[d] the Commission to undertake a review of its hedging 
definition . . . and to consider giving certain concepts, uses, and 
strategies `non-speculative' treatment . . . whether under the hedging 
definition or, if appropriate, as a separate category similar to the 
treatment given certain spread, straddle or arbitrage positions . . . 
'' \232\ The Committee Report singled out four categories of trading 
and positions that the Commission should consider recognizing as non-
speculative: (i) ``Risk management'' trading by portfolio managers as 
an alternative to the concept of ``risk reduction;'' (ii) futures 
positions taken as alternatives to, rather than as temporary 
substitutes for, cash market positions; (iii) other positions acquired 
to implement strategies involving the use of financial futures 
including, but not limited to, asset allocation (altering portfolio 
exposure in certain areas such as equity and debt), portfolio 
immunization (curing mismatches between the duration and sensitivity of 
assets and liabilities to ensure that portfolio assets will be 
sufficient to fund the payment of liabilities), and portfolio duration 
(altering the average maturity of a portfolio's assets); and (iv) 
certain options trading, in particular the writing of covered puts and 
calls.\233\
---------------------------------------------------------------------------

    \231\ House Committee on Agriculture, Futures Trading Act of 
1986, H.R. Rep. No. 624, 99th Cong., 2d Sess. 44-46 (1986).
    \232\ Id. at 46.
    \233\ Id.
---------------------------------------------------------------------------

    The Senate Committee on Agriculture, Nutrition and Forestry, in its 
report on the 1986 CFTC reauthorization legislation, also directed the 
Commission to reassess its interpretation of bona fide hedging.\234\ 
Specifically, the Senate Committee directed the Commission to consider 
``whether the concept of prudent risk management [should] be 
incorporated in the general definition of hedging as an alternative to 
this risk reduction standard.'' \235\
---------------------------------------------------------------------------

    \234\ Senate Committee on Agriculture, Nutrition and Forestry, 
Futures Trading Act of 1986, S. Rep. No. 291, 99th Cong., 2d Sess. 
at 21-22 (1986).
    \235\ Id. at 22.
---------------------------------------------------------------------------

    The Commission heeded Congress's recommendation, and the Commission 
issued two 1987 interpretive statements regarding the definition of 
bona fide hedging. The first 1987 interpretative statement clarified 
the meaning of current Sec.  1.3(z)(1).\236\ The Commission interpreted 
the regulatory ``temporary substitute'' criterion \237\ not to be a 
necessary condition for classification of positions as hedging. The 
Commission interpreted the ``incidental test'' \238\ to be a 
``requirement that the risks that are offset by a futures or option 
hedge must arise from commercial cash market activities.'' The 
Commission also noted bona fide hedges could include balance sheet and 
other trading strategies that are risk reducing, such as ``strategies 
that provide protection equivalent to a put option for an existing 
portfolio of securities.'' \239\
---------------------------------------------------------------------------

    \236\ See, Clarification of Certain Aspect of the Hedging 
Definition, 52 FR 27195, Jul. 20, 1987 (July 1987 Interpretative 
Statement).
    \237\ In current Sec.  1.3(z)(1), the phrase ``where such 
transactions or positions normally represent a substitute for 
transactions to be made or positions to be taken at a later time in 
a physical marketing channel'' has been termed the ``temporary 
substitute criterion.'' (Emphasis added.)
    \238\ In current Sec.  1.3(z)(1), the phrase ``price risks 
incidental to commercial cash or spot operations'' has been termed 
the ``incidental test.''
    \239\ 52 FR at 27197.
---------------------------------------------------------------------------

    The second 1987 interpretative statement provides assistance to an 
exchange who may wish to recognize risk management exemptions from 
exchange speculative position limit rules.\240\ ``The Commission 
note[d] that providing risk management exemptions to commercial 
entities who are typically engaged in buying, selling or holding cash 
market instruments is similar to a provision in the Commission's 
hedging definition, [namely], the risks to be hedged arise in the 
management and conduct of a commercial enterprise.'' \241\ The 
Commission believed that it would be consistent with the objectives of 
section 4a of the Act and Sec.  1.61 [now incorporated as Sec.  150.5] 
for exchange rules to exempt from speculative limits a number of risk 
management positions in debt-based, equity-based and foreign currency 
futures and options.\242\ Those positions included: Unleveraged long 
positions (covered by cash set aside); short calls on securities or 
currencies owned (i.e., covered calls); and long positions in asset 
allocation strategies

[[Page 75705]]

covered by hedged debt securities or currencies owned.\243\
---------------------------------------------------------------------------

    \240\ See, Risk Management Exemptions from Speculative Position 
Limits Approved under Commission Regulation 1.61, 52 FR 34633, Sep. 
14, 1987.
    \241\ Id. at 34637.
    \242\ Id. at 34636.
    \243\ Id.
---------------------------------------------------------------------------

    In 1987, the Commission also added an enumerated hedging position 
for spread positions which offset unfixed-price cash sales and unfixed-
price cash purchases that are priced basis different delivery months in 
a futures contract (that is, floating-price cash purchases coupled with 
floating-price cash sales).\244\ In this regard, the Commission 
extended the cross-commodity hedging provisions to offsets of such 
coupled floating-price cash contracts that were not cash market 
transactions in the same commodity underlying the futures 
contract.\245\
---------------------------------------------------------------------------

    \244\ 52 FR 38914, 38919, Oct. 20, 1987.
    \245\ Id. at 38922.
---------------------------------------------------------------------------

    The Commission adopted federal limits on soybean meal and soybean 
oil futures contracts in 1987, in response to a petition by the Chicago 
Board of Trade.\246\ In the final rule, the Commission noted: ``Crush 
positions allow the processor to determine or fix his processing margin 
in advance and are included within the exemptions permitted for 
anticipatory hedging under Commission Rule 1.3(z)(2).'' \247\ 
Specifically, the Commission noted for a crush position established by 
a soybean processor, the short positions in soybean oil and soybean 
meal futures would be permitted to the extent of twelve months unsold 
anticipated production; and the long positions in soybean futures would 
be permitted to the extent of twelve months unfilled anticipated 
requirements. The Commission declined to adopt an exemption for a 
reverse crush position. The Commission stated its belief, based upon 
comments received and its own analysis, ``that there are important 
differences between the crush and reverse crush positions from the 
standpoint of bona fide hedging by soybean processors.'' The results of 
a crush position, plus or minus basis variation, are known once the 
position is established. In contrast, the Commission noted with a 
reverse crush spread position, ``the intended results transpire only 
if, and when, the futures markets reflect the expected or anticipated 
more favorable crushing margin and the position can be lifted.'' 
Accordingly, the Commission noted it did not appear appropriate to 
recognize the reverse crush spread position as an enumerated category 
of bona fide hedging.\248\
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    \246\ Petition for rulemaking of the CBOT, dated July 24, 1986, 
cited in 52 FR 6814, Mar. 5, 1987.
    \247\ 52 FR 38914, 38920, Oct. 20, 1987.
    \248\ Id. The Commission noted at that time that the 
determination of whether a reverse crush position is bona fide 
hedging should be made on a case-by-case basis under Sec.  1.47.
---------------------------------------------------------------------------

    In 2007, the Commission proposed a risk management exemption to 
federal position limits, in addition to the bona fide hedging 
exemption.\249\ A risk management position would have been 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 on either tracking a broadly 
diversified index for clients or a portfolio diversification plan that 
included an exposure to a broadly diversified index. In either case, 
the exemption would have been conditioned on the futures positions 
being passively managed, unleveraged, and outside of the spot month. 
The Commission withdrew that proposal in 2008, citing a lack of 
consensus.\250\
---------------------------------------------------------------------------

    \249\ 72 FR 66097, Nov. 27, 2007.
    \250\ 73 FR 32261, Jun. 6, 2008.
---------------------------------------------------------------------------

    In March of 2009, the Commission issued a concept release on 
whether to eliminate the bona fide hedge exemption for certain swap 
dealers and create a new limited risk management exemption from 
speculative position limits.\251\ The Commission explained that, 
beginning in 1991, the Commission had granted bona fide hedge 
exemptions under Sec.  1.47 to a number of swap intermediaries who were 
seeking to manage price risk on their books as a result of their 
serving as counterparties to their swap clients in commodity index swap 
contracts or commodity swap contracts.\252\ The swap clients included 
pension funds and other passive investors who were not using swaps to 
offset risks in the physical marketing channel. In order to protect 
itself from the risks of such swaps, the swap intermediary would 
establish a portfolio of long futures positions in the commodities 
making up the index or the commodity underlying the swap, in such 
amounts as would offset its exposure under the swap transaction. By 
design, the commodity index did not include contract months in the spot 
month. The exemptions did not cover positions carried into the spot 
month. The comments on the March 2009 concept release were about 
equally divided between those who favored eliminating the bona fide 
hedge exemption for swap dealers (or restricting the exemption to 
positions offsetting swap dealers' exposure to traditional commercial 
market users) and those who favored retaining the swap dealer hedge 
exemption in its current form, or some variation thereof.\253\
---------------------------------------------------------------------------

    \251\ 74 FR 12282, Mar. 24, 2009.
    \252\ Id. at 12284.
    \253\ The comments are available for review on the Commission's 
Web site at http://www.cftc.gov/LawRegulation/PublicComments/09-004.
---------------------------------------------------------------------------

    In January of 2010, the Commission proposed an integrated 
speculative position framework for the major energy contracts listed on 
DCMs.\254\ The proposed rules would not have recognized futures and 
option transactions offsetting exposure acquired pursuant to swap 
dealing activity as bona fide hedges. Instead, upon compliance with 
several conditions including reporting and disclosure obligations, the 
proposed regulations would have allowed swap dealers to seek a limited 
exemption from the proposed speculative position limits for the major 
energy contracts.\255\ The proposed framework was withdrawn after 
enactment of the Dodd-Frank Act, which the Commission interprets as 
expanding the range of derivative contracts, beyond contracts listed on 
DCMs, on which the Commission must impose position limits.
---------------------------------------------------------------------------

    \254\ 75 FR 4144, Jan. 26, 2010 (withdrawn 75 FR 50950, Aug. 18, 
2010).
    \255\ 75 FR at 4152.
---------------------------------------------------------------------------

    Since 1974, the Commission has had authority under the Act to 
define the term bona fide hedging position. With the enactment on July 
21, 2010 of the Dodd-Frank Act, section 4a(c)(1) of the Act,\256\ 
continues to provide that position limits do not apply to positions 
shown to be bona fide hedging positions as defined by the 
Commission.\257\
---------------------------------------------------------------------------

    \256\ 7 U.S.C. 6a(c)(1).
    \257\ Id. The Dodd-Frank Act did not change the language found 
in prior 7 U.S.C. 6a(c) (2010).
---------------------------------------------------------------------------

    However, Dodd-Frank added section 4a(c)(2) of the Act, which the 
Commission interprets as directing the Commission to narrow the bona 
fide hedging position definition for physical commodities from the 
definition found in current Sec.  1.3(z)(1), as discussed further 
below.\258\ Separately, Dodd-Frank added section 4a(a)(7) of the Act to 
give the Commission plenary authority to grant general exemptive relief 
from the position limit rules.\259\
---------------------------------------------------------------------------

    \258\ See infra discussion of ``temporary substitute test.''
    \259\ Section 4a(a)(7) of the Act provides: ``The Commission, by 
rule, regulation, or order, may exempt, conditionally or 
unconditionally, any person or class of persons, any swap or class 
of swaps, any contract of sale of a commodity for future delivery or 
class of such contracts, any option or class of options, or any 
transaction or class of transactions from any requirement it may 
establish under this section with respect to position limits.'' 7 
U.S.C. 6a(a)(7).
---------------------------------------------------------------------------

    On November 18, 2011, the Commission adopted part 151 to establish 
a position limits regime for

[[Page 75706]]

twenty-eight exempt and agricultural commodity futures and options 
contracts and the physical commodity swaps that are economically 
equivalent to such contracts.\260\ In connection with issuing the part 
151 limits, the Commission defined bona fide hedging transactions or 
positions in Sec.  151.5(a) and enumerated eight transactions or 
positions that would constitute bona fide hedging transactions or 
positions and, thus, would be exempt from the part 151 limits.\261\
---------------------------------------------------------------------------

    \260\ See generally 76 FR 71626, Nov. 18, 2011.
    \261\ See 17 CFR 151.5(a)(2)(i)-(viii). The Commission also 
recognized pass-through swaps and pass-through swap offsets as bona 
fide hedging transactions. 17 CFR 151.5(a)(3)-(4).
---------------------------------------------------------------------------

    In addition to the exemptions enumerated in Sec.  151.5(a)(2) and 
(5) provided that, ``Any person engaging in other risk reducing 
practices commonly used in the market which they believe may not be 
specifically enumerated in Sec.  151.5(a)(2) may request relief from 
Commission staff under Sec.  140.99 of this chapter \262\ or the 
Commission under section 4a(a)(7) of the Act concerning the 
applicability of the bona fide hedging transaction exemption.'' \263\
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    \262\ Section 140.99 sets out general procedures and 
requirements for requests to Commission staff for exemptive, no-
action and interpretative letters.
    \263\ 17 CFR Sec.  151.5(a)(5).
---------------------------------------------------------------------------

    On January 20, 2012, the Working Group of Commercial Energy Firms 
(the ``Working Group'') filed a petition pursuant to both section 
4a(a)(7) of the Act and Sec.  151.5(a)(5) (the ``Working Group 
Petition'') \264\ requesting that the Commission ``grant exemptive 
relief for [ten] classes of risk-reducing transactions described [in 
the petition] to the extent that such transactions are not covered by 
[Sec. Sec.  ] 151.5(a)(1) or (2) of the Position Limit Rules or, in the 
alternative, clarify that such classes of transactions qualify as `bona 
fide hedging transactions or positions' within the meaning of 
[Sec. Sec.  ] 151.5(a)(1) and (2); [(``Requests One-Ten'')] and provide 
exemptive relief regarding the definition of (a) ``spot month'' set 
forth in [Sec.  ] 151.3(c) of the Position Limit Rules, and (b) 
``swaption'' set forth in [Sec.  ] 151.1 of the Position Limit Rules 
[(`Other Requests)].'' \265\ In connection with any relief ultimately 
granted as a result of the Petition, the Working Group also requested 
that the Commission ``confirm that any relief granted is generally 
applicable to the entire market.'' \266\
---------------------------------------------------------------------------

    \264\ The Working Group Petition is available at http://www.cftc.gov/stellent/groups/public/@rulesandproducts/documents/ifdocs/wgbfhpetition012012.pdf. The Working Group supplemented the 
petition in a letter dated April 17, 2012, available at http://www.cftc.gov/stellent/groups/public/@rulesandproducts/documents/ifdocs/workinggroupltr041712.pdf. As noted in their submission, the 
Working Group is a diverse group of commercial firms in the energy 
industry whose primary business activity is the physical delivery of 
one or more energy commodities to, among others, industrial, 
commercial and residential consumers. Members of the Working Group 
and their affiliates actively trade futures and swaps and they 
assert that they would be materially impacted by position limit 
rules under part 151.
    \265\ See Working Group Petition at 1.
    \266\ See Working Group Petition at 3. In letters dated March 
1,2012, and March 26, 2012, respectively, a group of three energy 
trade associations (Edison Electric Institute, American Gas 
Association, and Electric Power Supply Association), and the Futures 
Industry Association submitted comments in support of the Working 
Group Petition, available at http://www.cftc.gov/stellent/groups/public/@rulesandproducts/documents/ifdocs/eei-aga-epsa_comments.pdf 
and http://www.cftc.gov/stellent/groups/public/@rulesandproducts/documents/ifdocs/fialtr032612.pdf.
---------------------------------------------------------------------------

    In addition to the Working Group Petition, on March 13, 2012, the 
American Petroleum Institute (``API'') also filed a petition pursuant 
to both section 4a(a)(7) of the Act and Sec.  151.5(a)(5) (the ``API 
Petition'').\267\ The API Petition generally endorsed the Working Group 
petition and requested that the Commission recognize as bona fide 
hedging transactions certain routine energy market transactions that 
are priced at monthly average index prices.\268\ The request in the API 
Petition is essentially a restatement of Requests One through Three of 
the Working Group Petition. The API Petition also requested relief for 
pass-through swaps.
---------------------------------------------------------------------------

    \267\ The API Petition is available at http://www.cftc.gov/stellent/groups/public/@rulesandproducts/documents/ifdocs/apiltr031312.pdf. As noted in their submission, API is a national 
trade association representing more than 450 oil and natural gas 
companies. Its members transact in physical and financial, exchange-
traded, and over-the-counter markets primarily to hedge or mitigate 
commercial risks associated with their core business of delivering 
energy to wholesale and retail customers.
    \268\ See API Petition at 1.
---------------------------------------------------------------------------

    Further, the CME Group, on April 26, 2012, filed a petition 
pursuant to section 4a(a)(7) of the Act and Sec.  151.5(a)(5) (the 
``CME Petition'').\269\ The CME Petition generally requested that the 
Commission recognize as bona fide hedging transactions certain 
purchases by persons engaged in processing, manufacturing or feeding 
that were permitted under Sec.  1.3(z)(2)(ii)(C) during the last five 
trading days in physical-delivery contracts, not to exceed anticipated 
requirements for that month and the next succeeding month. The request 
in the CME Petition is substantively similar to Request Eight of the 
Working Group Petition.
---------------------------------------------------------------------------

    \269\ The CME Petition is available at http://www.cftc.gov/stellent/groups/public/@rulesandproducts/documents/ifdocs/cmeltr042612.pdf.
---------------------------------------------------------------------------

    With the court's September 28, 2012, order vacating part 151, the 
Commission now re-proposes a definition of bona fide hedging position.
b. Proposed Definition of Bona Fide Hedging Position
    The Commission proposes to delete Sec.  1.3(z), the current 
definition of ``bona fide hedging transactions or positions,'' and 
replace it with a new definition of ``bona fide hedging position'' in 
Sec.  150.1.\270\ Section 4a(c)(1) of the Act, as added by the Dodd-
Frank Act, authorizes the Commission to define bona fide hedging 
positions ``consistent with the purposes of this Act.'' \271\ The 
proposed definition of bona fide hedging position builds on the 
Commission's history, both in administering a regulatory exemption to 
federal limits and in providing guidance to exchanges in establishing 
exchange limits, and is grounded for physical commodities on the new 
requirements in section 4a(c)(2) of the Act, as amended by section 737 
of the Dodd-Frank Act in July 2010.\272\
---------------------------------------------------------------------------

    \270\ The proposed definition does not reference 
``transactions'' because the Commission has not had trading volume 
limits on transactions since 1979. See generally Elimination of 
Daily Speculative trading Limits, 44 FR 7124, Feb. 6, 1979.
    \271\ 7 U.S.C. 6a(c)(1).
    \272\ 7 U.S.C. 6a(c)(2).
---------------------------------------------------------------------------

    Organization. The proposed definition of bona fide hedging position 
is organized into six sections: an opening paragraph with two general 
requirements for all hedges; and five numbered paragraphs (paragraphs 
(1)-(5)). Paragraph (1) of the proposed definition sets forth 
requirements for hedges of an excluded commodity, and incorporates 
guidance on risk management exemptions that may be adopted by an 
exchange.\273\ Paragraph (2) lists requirements for hedges of a 
physical commodity. Paragraphs (3) and (4) list enumerated exemptions. 
Paragraph (5) specifies the requirements for cross-commodity hedges.
---------------------------------------------------------------------------

    \273\ Regarding the definition of bona fide hedging positions in 
excluded commodities, the Commission notes this proposed definition 
also would provide flexibility to exchanges adopting exemptions for 
securities futures contracts consistent with Sec.  41.25(a)(3)(iii).
---------------------------------------------------------------------------

c. General Requirements for All Bona Fide Hedges--Opening Paragraph
    The opening paragraph of the proposed definition sets forth two 
general requirements for any legitimate hedging position: (i) The 
purpose of the position must be to offset price risks incidental to 
commercial cash operations (the ``incidental test''); and

[[Page 75707]]

(ii) the position must be established and liquidated in an orderly 
manner in accordance with sound commercial practices (the ``orderly 
trading requirement''). These general requirements are found in current 
Sec.  1.3(z)(1).\274\
---------------------------------------------------------------------------

    \274\ In relevant part, current Sec.  1.3(z)(1) provides: 
``Notwithstanding the foregoing, no transaction or position shall be 
classified as bona fide hedging for purposes of section 4a of the 
Act unless their purpose is to offset price risks incidental to 
commercial cash or spot operations and such position are established 
and liquidated in an orderly manner in accordance with sound 
commercial practices and [unless other] provisions [of this 
definition] have been satisfied.'' 17 CFR 1.3(z)(1). The second 
characteristic was contained in vacated Sec.  151.5(a)(1)(v).
---------------------------------------------------------------------------

    Incidental test. Consistent with its prior interpretation of the 
incidental test under Sec.  1.3(z)(1), discussed above, the Commission 
intends the proposed incidental test to be a requirement that the risks 
offset by a commodity derivative contract hedging position must arise 
from commercial cash market activities.\275\ The Commission believes 
this requirement is consistent with the statutory guidance to define 
bona fide hedging positions to permit hedging ``legitimate anticipated 
business needs.'' \276\ In the absence of a requirement for a 
legitimate business need, the Commission believes it would be difficult 
to distinguish between hedging and speculative activities. The 
Commission believes the concept of commercial cash market activities is 
also embodied in the economically appropriate test for physical 
commodities in section 4a(c)(2) of the Act, discussed below. The 
proposed incidental test amends the incidental test in current Sec.  
1.3(z)(1) by clarifying that forward commercial operations may also 
serve as the basis for a bona fide hedging position.\277\ This is 
consistent with the Commission's long-standing recognition of fixed-
price purchase and fixed-price sales contracts (which may specify 
forward delivery dates) as the basis of certain enumerated hedges in 
current Sec.  1.3(z)(2).
---------------------------------------------------------------------------

    \275\ See, Clarification of Certain Aspect of the Hedging 
Definition, 52 FR 27195, Jul. 20, 1987 (July 1987 interpretative 
statement).
    \276\ 7 U.S.C. 6a(c)(1).
    \277\ The incidental test was not contained in vacated Sec.  
151.5(a)(1). This omission was not discussed in the preambles to the 
proposed or final rule. However, the incidental test was retained in 
amended Sec.  1.3(z)(1) for excluded commodities. 76 FR at 71683.
---------------------------------------------------------------------------

    Orderly trading requirement. The proposed orderly trading 
requirement is intended to impose on bona fide hedgers a duty of 
ordinary care when entering, maintaining and exiting the market in the 
ordinary course of business and in order to avoid as practicable the 
potential for significant market impact in establishing, maintaining or 
liquidating a position in excess of position limitations.\278\ The 
Commission believes the proposed orderly trading requirement is 
consistent with the policy objectives of position limits to diminish, 
eliminate or prevent excessive speculation and to ensure that the price 
discovery function of the underlying market is not disrupted.\279\ The 
Commission believes the orderly trading requirement is particularly 
important since the Commission intends to set the initial levels of 
position limits at the outer bound of the range of levels of position 
limits that may serve to maximize the statutory policy objectives. 
Thus, bona fide hedgers likely would only need an exemption for 
extraordinarily large positions.
---------------------------------------------------------------------------

    \278\ Compare, section 4c(a)(5)(B) of the Act, which makes it 
unlawful for any person to engage in any trading, practice, or 
conduct on or subject to the rules of a registered entity that, for 
example, demonstrates intentional or reckless disregard for the 
orderly execution of transactions during the closing period. 7 
U.S.C. 6c(a)(5)(B). Section 4c(a)(6) of the Act authorizes the 
Commission to promulgate such ``rules and regulations as, in the 
judgment of the Commission, are reasonable necessary to prohibit . . 
. any other trading practice that is disruptive of fair and 
equitable trading.'' 7 U.S.C. 6c(a)(6).
    \279\ See sections 4a(3)(B)(i) and (iv) of the Act. 7 U.S.C. 
6a(3)(B)(i) and (iv).
---------------------------------------------------------------------------

    The Commission believes that negligent trading, practices, or 
conduct should be a sufficient basis for the Commission to disallow a 
bona fide hedging exemption. The Commission believes that an evaluation 
of ``orderly trading'' should be based on the totality of the facts and 
circumstances as of the time the person engaged in the relevant 
trading, practices, or conduct--i.e., the Commission intends to 
consider whether the person knew or should have known, based on the 
information available at the time, he or she was engaging in the 
conduct at issue.
    The Commission proposes to apply its policy regarding orderly 
markets for purposes of the disruptive trading practice prohibitions, 
to its orderly trading requirement for purposes of position limits. 
``The Commission's policy is that an orderly market may be 
characterized by, among other things, parameters such as a rational 
relationship between consecutive prices, a strong correlation between 
price changes and the volume of trades, levels of volatility that do 
not dramatically reduce liquidity, accurate relationships between the 
price of a derivative and the underlying such as a physical commodity 
or financial instrument, and reasonable spreads between contracts for 
near months and for remote months.'' \280\ Further, in fulfilling their 
duty of ordinary care when entering, maintaining and exiting a 
position, market participants should assess market conditions and 
consider how their trading practices and conduct affect the orderly 
execution of transactions when establishing, maintaining or liquidating 
a position in excess of a speculative position limit.
---------------------------------------------------------------------------

    \280\ See Interpretive Guidance and Policy Statement on 
Antidisruptive Practices Authority, 78 FR 31890, 31895-96 (May 28, 
2013) (available at http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2013-12365a.pdf).
---------------------------------------------------------------------------

d. Requirements and Guidance for Hedges in an Excluded Commodity--
Paragraph (1)
    The proposed definition of bona fide hedging position for contracts 
in an excluded commodity \281\ includes the general requirements in the 
opening paragraph and would require that the position is economically 
appropriate to the reduction of risks in the conduct and management of 
a commercial enterprise (the ``economically appropriate'' test) and is 
either (i) specifically enumerated in paragraphs (3)-(5) of the 
definition of bona fide hedging position; or (ii) recognized as a bona 
fide hedging position by a DCM or SEF consistent with the guidance on 
risk management exemptions in proposed appendix A to part 150.\282\
---------------------------------------------------------------------------

    \281\ ``Excluded commodity'' is defined in section 1a(19) of the 
Act. 7 U.S.C. 1a(19).
    \282\ See the discussion below of proposed Sec.  150.5(b)(5), 
requiring exchange hedge exemptions to exchange limits on contracts 
in an excluded commodity to conform to the definition of bona fide 
hedging position in Sec.  150.1. The Dodd-Frank Act expanded the 
authority of the Commission with respect to core principles 
applicable to exchange traded contracts in an excluded commodity, 
but did not address directly the definition of bona fide hedging 
positions for excluded commodities. The Dodd-Frank Act amended the 
core principles for DCMs and established core principles for SEFs, 
authorizing the Commission, by rule or regulation, to restrict the 
reasonable discretion of the exchange in complying with core 
principles. 7 U.S.C. 7(d)(1)(B) and 7b-3(f)(1)(B).
---------------------------------------------------------------------------

    The economically appropriate test in section 4a(c)(2) of the Act, 
applicable to physical commodities, also should apply to excluded 
commodities because it has long been a fundamental requirement of a 
bona fide hedging position.\283\ Current Sec.  1.3(z)(1) contains the 
economically appropriate test.\284\

[[Page 75708]]

The Commission notes that the concept of the reduction of risk was long 
embodied in the statutory concept of ``offset'' prior to 1974.\285\ The 
economically appropriate test is discussed further, below.
---------------------------------------------------------------------------

    \283\ See, e.g., the definition of bona fide hedging promulgated 
by the Commission's predecessor in Sec.  1.3(z) of its regulations 
in 1975. 40 FR 11560, 11561, Mar. 12, 1975 (``Bona fide hedging 
transactions or positions . . . shall mean sales of or short 
positions in any commodity for future delivery . . . ,'' (emphasis 
added)).
    \284\ The Commission adopted this requirement in Sec.  1.3(z)(1) 
in 1977. 42 FR 42748, 42751, Aug. 24, 1977. Prior to that time, the 
concept of economically appropriate to the reduction of risk in the 
operation of a commercial enterprise was not separately articulated, 
but was reflected in the incidental test (``unless their bona fide 
purpose is to offset price risks incidental to commercial cash or 
spot operations'') in Sec.  1.3(z)(1) as amended in 1975. 40 FR 
11560, 11561, Mar. 12, 1975. Current Sec.  150.5(d) provides 
guidance to DCMs that exchange regulations for bona fide hedging 
position exemptions (including exemptions for excluded commodity 
contracts) should be granted in accordance with current Sec.  
1.3(z)(1). 17 CFR 150.5(d) See, for example, Chicago Mercantile 
Exchange Rule 559.A., Bona Fide Hedging Positions, available at 
http://www.cmegroup.com/rulebook/CME/I/5/5.pdf, that provides: ``The 
Market Regulation Department may grant exemptions from position 
limits for bona fide hedge positions as defined by CFTC Regulation 
Sec.  1.3(z)(1). Approved bona fide hedgers may be exempted from 
emergency orders that reduce position limits or restrict trading.''
    \285\ Prior to 1974, section 4a of the Act defined bona fide 
hedging transactions as: ``For the purposes of this paragraph, bona 
fide hedging transactions shall mean sales of any commodity for 
future delivery on or subject to the rules of any board of trade to 
the extent that such sales are offset in quantity by the ownership 
or purchase of the same cash commodity or, conversely, purchases of 
any commodity for future delivery on or subject to the rules of any 
board of trade to the extent that such purchases are offset by sales 
of the same cash commodity.'' 7 U.S.C. 6a (1940).
---------------------------------------------------------------------------

    Under the proposed definition, an exchange would be permitted to 
grant an exemption based on its rules that were consistent with the 
enumerated exemptions in paragraphs (3)-(5) of the proposed definition 
of bona fide hedging position. Current Sec.  1.3(z)(1) also requires a 
bona fide hedging position to be either (i) an enumerated exemption in 
current Sec.  1.3(z)(2) or (ii) a non-enumerated exemption under 
current Sec.  1.3(z)(3) (a non-enumerated exemption may be granted 
under current Sec.  1.47 as a risk management exemption). The 
enumerated exemptions in paragraphs (3)-(5) of the proposed definition 
of bona fide hedging position contain all of the enumerated exemptions 
in current Sec.  1.3(z)(2). The specifically enumerated exemptions also 
are discussed separately, below.
    The Commission is proposing to incorporate as guidance in appendix 
A to part 150 the concepts in the 1987 risk management exemptions 
interpretative statement.\286\ The Commission believes that it would be 
consistent with the objectives of section 4a of the Act for exchange 
rules to exempt from speculative limits a number of risk management 
positions in commodity derivative contracts in an excluded commodity. 
Such risk management exemption positions would include, but not be 
limited to, three types of exemptions for: (i) Unleveraged long 
positions (covered by cash set aside); (ii) short calls on securities 
or currencies owned (i.e., covered calls); and (iii) long positions in 
asset allocation strategies covered by hedged debt securities or 
currencies owned (i.e., unleveraged synthetic positions).\287\ The 
Commission is proposing to withdraw the 1987 risk management exemption 
interpretative statement in light of incorporating its concepts in 
proposed appendix A to part 150, thus rendering that interpretative 
statement redundant. The Commission requests comment on all aspects of 
proposed appendix A to part 150.
---------------------------------------------------------------------------

    \286\ 52 FR 34633, Sep. 14, 1987.
    \287\ Id. at 34626.
---------------------------------------------------------------------------

    In addition, under the proposed guidance for excluded commodities 
and as is currently the case, there need not be any temporary 
substitute test for a bona fide hedging position in an excluded 
commodity. This is consistent with the Commission's July 1987 
interpretative statement that the temporary substitute component need 
not apply to a bona fide hedging position in an excluded 
commodity.\288\
---------------------------------------------------------------------------

    \288\ 52 FR 27195, Jul. 20, 1987 (July 1987 Interpretative 
Statement). See also House of Representatives Committee Report 
quoted at 52 FR 34633, 34634, September 14, 1987, regarding 
``futures positions taken as alternatives rather than temporary 
substitutes for cash market positions.'' H.R. Rep No. 624, 99th 
Cong., 2d Sess. 1, 45-46 (1986). However, the Commission is 
proposing to withdraw the July 1987 Interpretative Statement, since 
the temporary substitute test was added by the Dodd-Frank Act as a 
statutory requirement for a bona fide hedging position in a physical 
commodity. 7 U.S.C. 4a(c)(2)(A)(i).
---------------------------------------------------------------------------

e. Requirements for Hedges in a Physical Commodity--Paragraph (2)
    The Commission is proposing to implement the statutory directive of 
section 4a(c)(2) of the Act in paragraph (2) of the proposed definition 
of bona fide hedging position under Sec.  150.1. The proposed 
definition for physical commodities would also include the general 
requirements of the opening paragraph, as is the case under current 
Sec.  1.3(z)(1) and as discussed above.
    Section 4a(c)(2) of the Act directs the Commission to define what 
constitutes a bona fide hedging position for futures and option 
contracts on physical commodities listed by DCMs.\289\ The Commission 
proposes to apply the same definition to (i) swaps that are 
economically equivalent to futures contracts and (ii) direct-access 
linked FBOT futures contracts that are economically equivalent to 
futures contracts listed by DCMs.\290\ Applying the same definition to 
economically equivalent contracts would promote administrative 
efficiency. Applying the same definition to economically equivalent 
contracts also is consistent with congressional intent as embodied in 
the expansion of the Commission's authority to apply position limits to 
swaps (i.e., those that are economically equivalent to futures and 
swaps that serve a significant price discovery function) and to direct-
access linked FBOT contracts.\291\
---------------------------------------------------------------------------

    \289\ 7 U.S.C. 6a(c)(2).
    \290\ This is consistent with the approach the Commission took 
in vacated Sec.  151.5. 76 FR 71643 n.168.
    \291\ 7 U.S.C. 6a(a)(5)-(6).
---------------------------------------------------------------------------

    Paragraph (2)(i) of the proposed definition would recognize as bona 
fide a position in a commodity derivative contract that (i) represents 
a substitute for positions taken or to be taken at a later time in the 
physical marketing channel (i.e., the ``temporary substitute'' test); 
(ii) is economically appropriate to the reduction of risks (i.e., the 
``economically appropriate'' test); and (iii) arises from the potential 
change in value of assets, liabilities or services (i.e., the ``change 
in value'' requirement), provided the position is enumerated in 
paragraphs (3) through (5) of the definition, as discussed below. This 
subparagraph would incorporate the provisions of section 4a(c)(2)(A) of 
the Act for futures and option contracts and also would include the 
provisions of section 4a(c)(2)(B)(ii) of the Act, regarding swaps, by 
using the term commodity derivative contracts, which includes swaps, 
futures and futures option contracts.
    Temporary substitute test. The temporary substitute test requires 
that a bona fide hedging position must represent ``a substitute for . . 
. positions taken or to be taken at a later time in a physical 
marketing channel.'' \292\ Paragraph (2)(i) of the proposed definition 
incorporates the temporary substitute test of section 4a(c)(2)(A)(i) of 
the Act. The express language of section 4a(c)(2)(A)(i) of the Act 
requires the temporary substitute test to be a necessary condition for 
classification of positions in physical commodities as bona fide 
hedging positions. Section 4a(c)(2)(A) of the Act incorporates many 
aspects of the general definition of bona fide hedging in current Sec.  
1.3(z)(1). However, there are significant differences. Section 
4a(c)(2)(A)(i) of the Act does not include the adverb ``normally'' to 
modify the verb ``represents'' in the phrase ``represents a substitute 
for transactions made or to be made or positions taken or to be taken 
at a later time in a physical marketing

[[Page 75709]]

channel.'' \293\ In addition, Congress provided explicit requirements 
for recognizing swaps as bona fide hedging positions in section 
4a(c)(2)(B), recognizing positions that reduce either the risk of swaps 
that meet the requirements of section 4a(c)(2)(A) of the Act or swaps 
that are executed opposite a counterparty whose transaction would 
qualify as bona fide under section 4a(c)(2)(A) of the Act. The 
statutory requirements are more stringent than the conditions for swap 
risk management exemptions the Commission previously granted under 
Sec.  1.3(z)(3) and Sec.  1.47. As discussed above, the Commission 
granted risk management exemptions for persons to offset the risk of 
swaps that did not represent substitutes for transactions or positions 
in a physical marketing channel, neither by the intermediary nor the 
counterparty. Thus, positions that reduce the risk of such speculative 
swaps would no longer meet the requirements for a bona fide hedging 
transaction or position under the new statutory criteria.
---------------------------------------------------------------------------

    \292\ 7 U.S.C. 6a(c)(2)(A)(i).
    \293\ In contrast and as noted above, in current Sec.  
1.3(z)(1), the phrase ``where such transactions or positions 
normally represent a substitute for transactions to be made or 
positions to be taken at a later time in a physical marketing 
channel'' has been termed the ``temporary substitute'' criterion. 
(Emphasis added.)
---------------------------------------------------------------------------

    Economically appropriate test. Paragraph (2)(A)(ii) of the proposed 
definition incorporates the economically appropriate test of section 
4a(c)(2)(A)(ii) of the Act. This statutory provision mirrors the 
provisions in current Sec.  1.3(z)(1). The Commission has provided 
interpretations and guidance over the years as to the meaning of 
``economically appropriate'' in current Sec.  1.3(z)(1). For example, 
the Commission has indicated that hedges of processing margins by a 
processor, such as a soybean processor that establishes long positions 
in the soybean contract and short positions in the soybean meal contact 
and the soybean oil contract, may be economically appropriate.\294\
---------------------------------------------------------------------------

    \294\ 52 FR 38914, 38920, Oct. 20, 1987.
---------------------------------------------------------------------------

    By way of example, a manufacturer may anticipate using a commodity 
that it does not own as an input to its manufacturing process; however, 
the manufacturer expects to change output prices to offset 
substantially a change in price of the input commodity. For example, 
processing by a soybean crush operation or a fuel blending operation 
may add relatively little value to the price of the input commodity. In 
such circumstances, it would be economically appropriate for the 
processor to offset the price risks of both the unfilled anticipated 
requirement for the input commodity and the unsold anticipated 
production; such a hedge would, for example, fully lock in the value of 
soybean crush processing. Alternatively, a processor may wish to 
establish a calendar month hedge solely in terms of the input 
commodity, to offset the price risk of the anticipated input commodity 
and to cross-commodity hedge the unsold anticipated production. In such 
an alternative, a processor has hedged the commercial enterprise's 
exposure to the value of the input commodity at the expected time of 
acquisition and to the input commodity's value component of the 
processed commodity at the expected later time of production and sale. 
Unfilled anticipated requirements, unsold anticipated production and 
cross-commodity hedging are also discussed as enumerated hedges, below.
    The Commission affirms that gross hedging may be appropriate under 
certain circumstances, when net cash positions do not measure total 
risk exposure due to differences in the timing of cash commitments, the 
location of stocks, and differences in grades or types of the cash 
commodity being hedged.\295\ By way of example, a merchant may have 
sold a certain quantity of a commodity for deferred delivery in the 
current year (i.e., a fixed-price cash sales contract) and purchased 
that same quantity of that same commodity for deferred receipt in the 
next year (i.e., a fixed-price cash purchase contract). Such a merchant 
would be exposed to value risks in the two cash contracts arising from 
different delivery periods (that is, from a timing difference). Thus, 
although the merchant has bought and sold the same quantity of the same 
commodity, the merchant may elect to offset the price risk arising from 
the cash purchase contract separately from the price risk arising from 
the cash sales contract, with each offsetting commodity derivative 
contract regarded as a bona fide hedging position. However, if such a 
merchant were to offset only the cash purchase contract, but not the 
cash sales contract (or vice versa), then it reasonably would appear 
the offsetting commodity derivative contract would result in an 
increased value exposure of the enterprise (that is, the risk of 
changes in the value of the cash commodity contract that was not offset 
is likely to be higher than the risk of changes in the value of the 
calendar spread difference between the nearby and deferred delivery 
period) and, so, the commodity derivative contract would not qualify as 
a bona fide hedging position.
---------------------------------------------------------------------------

    \295\ 42 FR 14832, 14834, Mar. 16, 1977.
---------------------------------------------------------------------------

    In order for a position to be economically appropriate to the 
reduction of risks in the conduct and management of a commercial 
enterprise, the enterprise generally should take into account all 
inventory or products that the enterprise owns or controls, or has 
contracted for purchase or sale at a fixed price. For purposes of 
reporting cash market positions under current part 19, the Commission 
historically has allowed a reporting trader to ``exclude certain 
products or byproducts in determining his cash positions for bona fide 
hedging'' if it is ``the regular business practice of the reporting 
trader'' to do so.\296\ The Commission has determined to clarify the 
meaning of ``economically appropriate'' in light of this reporting 
exclusion of certain cash positions.
---------------------------------------------------------------------------

    \296\ See current Sec.  19.00(b)(1) (providing that ``[i]f the 
regular business practice of the reporting trader is to exclude 
certain products or byproducts in determining his cash position for 
bona fide hedging . . . , the same shall be excluded in the 
report''). 17 CFR 19.00(b)(1).
---------------------------------------------------------------------------

    Originally, the Commission intended for the optional part 19 
reporting exclusion to cover only cash positions that were not capable 
of being delivered under the terms of any derivative contract.\297\ The 
Commission differentiated between ``products and byproducts'' of a 
commodity and the underlying commodity itself, the former capable of 
exclusion from part 19 reporting under normal business practices due to 
the absence of any derivative contract in such product or 
byproduct.\298\ This intention ultimately evolved to allow cross-
commodity hedging of products and byproducts of a commodity that were 
not necessarily deliverable under the terms of any derivative 
contract.\299\
---------------------------------------------------------------------------

    \297\ 43 FR 45825, 45827, Oct. 4, 1978 (explaining that the 
allowance for eggs not kept in cold storage to be excluded from 
reporting a cash position in eggs under part 19 ``was appropriate 
when the only futures contract being traded in fresh shell eggs 
required delivery from cold storage warehouses.'').
    \298\ See id. Prior to the Commission's revision of the part 19 
reporting exclusion for eggs, the exclusion allowed ``eggs not in 
cold storage or certain egg products'' not to be reported as a cash 
position. 26 FR 2971, Apr. 7, 1961 (emphasis added). Additionally, 
the title to the revised exclusion read, ``Excluding products or 
byproducts of the cash commodity hedged.'' See 43 FR 45825, 45828 
(Oct. 4, 1978). So, in addition to a commodity itself that was not 
deliverable under any derivative contract, the Commission also 
recognized a separate class of ``products and byproducts'' that 
resulted from the processing of a commodity that it did not believe 
at the time were capable of being hedged by any derivative contract 
for purposes of a bona fide hedge.
    \299\ See 42 FR 42748, Aug. 24, 1977. Cross-commodity hedging is 
discussed as an enumerated hedge, below.

---------------------------------------------------------------------------

[[Page 75710]]

    The instructions to current Form 204 go a step further than current 
Sec.  19.00(b)(1) by allowing for a reporting trader to exclude 
``certain source commodities, products, or byproducts in determining [ 
] cash positions for bona fide hedging.'' (Emphasis added.) In line 
with its historical approach to the reporting exclusion, the Commission 
does not believe that it would be economically appropriate to exclude 
large quantities of a source commodity held in inventory when an 
enterprise is calculating its value at risk to a source commodity and 
it intends to establish a long derivatives position as a hedge of 
unfilled anticipated requirements. As explained in the revisions to 
part 19, discussed below, a source commodity itself can only be 
excluded from a calculation of a cash position if the amount is de 
minimis, impractical to account for, and/or on the opposite side of the 
market from the market participant's hedging position.
    Change in value requirement. Paragraph (2)(A)(iii) of the proposed 
definition incorporates the potential change in value requirement of 
section 4a(c)(2)(A)(iii) of the Act. This statutory provision largely 
mirrors the provisions in current Sec.  1.3(z)(1).\300\ The Commission 
notes that it uses the term ``price risk'' to mean a ``potential change 
in value.'' To satisfy the change in value requirement, the purpose of 
a bona fide hedge must be to offset price risks incidental to a 
commercial enterprise's cash operations. The change in value 
requirement is embedded in the concept of offset of price risks.
---------------------------------------------------------------------------

    \300\ Compare 7 U.S.C. 6a(c)(2)(A)(iii) and 17 CFR 1.3(z)(1). 
Note that Sec.  1.3(z)(1)(ii) uses the phrase ``liabilities which a 
person owes or anticipate incurring,'' while section 
4a(c)(2)(A)(iii)(II) uses the phrase ``liabilities that a person 
owns or anticipates incurring.'' (Emphasis added.) The Commission 
interprets the word ``owns'' to be an error and the word ``owes'' to 
be correct.
---------------------------------------------------------------------------

    Pass-through Swaps and Offsets. Subparagraph (2)(B) of the proposed 
definition would recognize as bona fide a commodity derivative contract 
that reduces the risk of a position resulting from a swap executed 
opposite a counterparty for which the position at the time of the 
transaction would qualify as a bona fide hedging position under 
subparagraph (2)(A). This provision generally mirrors the provisions of 
section 4a(c)(2)(B)(i) of the Act,\301\ and clarifies that the swap 
itself is also a bona fide hedging position to the extent it is offset. 
However, the Commission is proposing that it will not recognize as bona 
fide hedges the offset of such swaps with physical-delivery contracts 
during the lesser of the last five days of trading or the time period 
for the spot month in such physical-delivery commodity derivative 
contract (the ``five-day'' rule).
---------------------------------------------------------------------------

    \301\ The Commission interprets the statutory provision that 
requires that ``the transaction would qualify as a bona fide hedging 
transaction'' to mean the swap position at the time of the 
transaction would qualify as a bona fide hedging position. 7 U.S.C. 
6a(c)(2)(B)(i).
---------------------------------------------------------------------------

    The Commission is proposing to use its exemptive authority under 
section 4a(a)(7) of the Act to net positions in futures, futures 
options, economically equivalent swaps and direct-access linked FBOT 
contracts in the same referenced contract for purposes of single month 
and all-months-combined limits under proposed Sec.  150.2, discussed 
below.\302\ Thus, a pass-through swap exemption would not be necessary 
for a swap portfolio in referenced contracts that would automatically 
be netted with futures and futures options in the same referenced 
contract outside of the spot month under the proposed rules. The 
Commission historically has permitted non-enumerated risk management 
positions under Sec.  1.3(z)(3) and Sec.  1.47. Almost all exemptions 
historically requested and granted under these provisions were for risk 
management of swap positions related to the agricultural commodities 
subject to federal position limits under part 150.
---------------------------------------------------------------------------

    \302\ This is consistent with netting permitted in vacated Sec.  
151.4(b) of swaps with futures for purposes of single-month and all-
months-combined limits. The Commission noted in that final 
rulemaking that it did ``not believe that including a risk 
management provision is necessary or appropriate given that the 
elimination of the class limits outside of the spot-month will allow 
entities, including swap dealers, to net Referenced Contracts 
whether futures or economically equivalent swaps.'' 76 FR at 71644.
---------------------------------------------------------------------------

    As noted above, the proposed rule would impose a five-day rule 
during the spot-month. In the risk management exemptions for swaps 
issued to date by the Commission under current Sec.  1.3(z)(3) and 
Sec.  1.47, the exemptions for swap offsets did not run to the spot 
month. As discussed above, the Commission has long imposed a five-day 
rule in current Sec.  1.3(z)(2) for other exemptions. For example, for 
hedges of unfilled anticipated requirements, the Commission observed 
that historically there was a low utilization of this provision in 
terms of actual positions acquired in the futures market.\303\ For 
cross-commodity and short anticipatory hedge positions, the Commission 
did not believe that persons who do not possess or do not have a 
commercial need for the commodity for future delivery will normally 
wish to participate in the delivery process.\304\ In the instant cases 
of swaps, the Commission has observed generally low usage among all 
traders of the physical-delivery futures contract during the spot 
month, relative to the existing exchange spot-month position 
limits.\305\ The Commission invites comments as to the extent to which 
traders actually have offset the risk of swaps during the spot month in 
a physical-delivery futures contract with a position in excess of an 
exchange's spot-month position limit.
---------------------------------------------------------------------------

    \303\ 42 FR 42748, Aug. 24, 1977.
    \304\ Id. 42749.
    \305\ Compare 76 FR at 71690. Vacated Sec.  151.5(a)(2)(3) 
recognized a pass-through swap offset during the spot period as an 
exception to the five-day rule if the ``pass-through swap position 
continues to offset the cash market commodity price risk of the bona 
fide hedging counterparty.'' Based on a review of open positions in 
physical-delivery futures contracts, the Commission no longer 
believes it necessary to recognize offsets of swaps in the last few 
days of the expiring physical-delivery contract and has not provided 
this additional provision in the current proposal. Rather, the 
Commission has decided to forego this exception to the five-day rule 
in the interest of ensuring that the price discovery function of the 
underlying market is not disrupted during the last few days of the 
spot period. Further, the Commission believes it would have been 
administratively burdensome for a trader to demonstrate that its 
counterparty continued to have a bona fide hedging need through the 
spot period.
---------------------------------------------------------------------------

    The Commission has reviewed its historical policy position 
regarding the five-day rule for speculative limits in the spot month in 
light of position information, including positions in physical-delivery 
energy futures contracts.\306\ For example, the Commission reviewed 
three years of confidential large trader data in cash-settled and 
physical-delivery energy contracts. The review covered actual positions 
held in the physical-delivery energy futures markets during the three-
day spot period, among all traders (including those who had received 
hedge exemptions from their DCM). It showed that, historically, there 
have been relatively few positions held in excess (and those few not 
greatly in excess) of the spot month limits. Accordingly, the 
Commission generally is not inclined to change its long-held policy 
views regarding physical-

[[Page 75711]]

delivery futures contracts at this time.\307\
---------------------------------------------------------------------------

    \306\ The Commission also relies upon the congressional shift 
evidenced in the Dodd-Frank Act amendments to the CEA, that directed 
the Commission, to the maximum extent practicable, in its 
discretion, (i) to diminish, eliminate, or prevent excessive 
speculation, (ii) to deter and prevent market manipulation, 
squeezes, and corners, (iii) to ensure sufficient market liquidity 
for bona fide hedgers, and (iv) to ensure that the price discovery 
function of the underlying market is not disrupted. 7 U.S.C. 
6a(a)(3)(B). The five-day rule would serve to prevent excessive 
speculation as a physical-delivery contract nears expiration, 
thereby deterring or preventing types of market manipulations such 
as squeezes and corners and protecting the price discovery function 
of the market. The restriction of the five-day rule does not appear 
to deprive the market of sufficient liquidity for bona fide hedgers.
    \307\ Nevertheless, the Commission requests comment on whether 
the five-day rule should be waived for pass-through swaps and 
offsets in the event a position of the bona fide counterparty in the 
physical-delivery futures contract would have been recognized as a 
bona fide hedging position. If so, should a person be required to 
document the continuing bona fides of the counterparty to such swaps 
through the spot period, that is, in addition to the time of the 
transaction? Further, should a person also be required to have an 
unfixed-price forward contract with the bona fide counterparty, so 
that a person would have a bona fide need and ability to make or 
take delivery on the physical-delivery futures contract, analogous 
to the agent provisions in proposed paragraph (3)(iv) of the 
definition of bona fide hedging position?
---------------------------------------------------------------------------

    The Commission typically does not publish ``general statistical 
information'' \308\ regarding large trader positions in the expiring 
physical-delivery energy futures contracts because of concerns that 
such data may reveal information about the amount of market power a 
person may need to ``mark the close'' \309\ or otherwise manipulate the 
price of an expiring contract.\310\
---------------------------------------------------------------------------

    \308\ As authorized by CEA section 8(a)(1). 7 U.S.C. 12(a)(1).
    \309\ Marking the close refers to, among other things, the 
practice of acquiring a substantial position leading up to the 
closing period of trading in a futures contract, followed by 
offsetting the position before the end of the close of trading, in 
an attempt to manipulate prices in the closing period.
    \310\ The Commission gathers large trader position reports on 
reportable traders in futures under part 17 of the Commission's 
rules. That data has historically remained confidential pursuant to 
CEA section 8. The Commission does, however, publish summary 
statistics for all-months-combined in its Commitments of Traders 
Report, available on http://www.cftc.gov/MarketReports/CommitmentsofTraders/index.htm.
---------------------------------------------------------------------------

f. Trade Option Exemption
    The Commission previously amended part 32 of its regulations to 
allow commodity options to trade subject to the same rules applicable 
to any other swap, unless the commodity option qualifies under the new 
Sec.  32.3 trade option exemption.\311\ In order to qualify for the 
trade option exemption, (i) both offeror and offeree must be a 
producer, processor, or commercial user of, or merchant handling the 
commodity that is the subject of the commodity option transaction, or 
the products or byproducts thereof, and both offeror and offeree must 
be offering or entering into the commodity option transaction solely 
for purposes related to their business as such,\312\ and (ii) the 
option is intended to be physically settled such that, if exercised, 
the commodity option would result in the sale of an exempt or 
agricultural commodity for immediate or deferred shipment or 
delivery.\313\ Qualifying trade options are exempt from all 
requirements of the CEA and Commission's regulations, except for 
certain enumerated provisions, including position limits.\314\
---------------------------------------------------------------------------

    \311\ See 17 CFR 32.2; Commodity Options, 77 FR 25320 (Apr. 27, 
2012).
    \312\ Additionally, the offeror can be an eligible contract 
participant (``ECP'') as defined in CEA section 1a(18).
    \313\ The Commission noted in the preamble to the trade option 
exemption that in determining delivery intent, market participants 
could refer to the guidance provided for the forward contract 
exclusion in the Product Definition rulemaking. See 77 FR at 25326. 
This guidance conveyed that the Commission's ``Brent 
Interpretation'' is equally applicable to the forward exclusion from 
the swap definition as it was to the forward exclusion from the 
``future delivery'' definition, which allows for subsequently, 
separately negotiated book-out transactions to qualify for the 
forward contract exclusion. See 77 FR 48208, 48228, Aug. 13, 2012 
(citing Statutory Interpretation Concerning Forward Transactions, 55 
FR 39188, Sep. 25, 1990).
    \314\ See 17 CFR 32.3(b)-(d).
---------------------------------------------------------------------------

    The Commission is making conforming changes to the trade option 
exemption requirement that position limits still apply. Under Sec.  
32.3(c)(2), ``Part 151 (Position Limits)'' of the Commission's 
regulations applies to every counterparty to a trade option ``to the 
same extent that [part 151] would apply to such person in connection 
with any other swap.'' The Commission is replacing the reference to 
``Part 151,'' now vacated, with ``Part 150'' to clarify that the 
position limit requirements proposed herein still would be applicable 
to trade options qualifying under the exemption.
    The Commission also is requesting comment as to whether the 
Commission should use its exemptive authority under CEA section 
4a(a)(7) \315\ to provide that the offeree of a commodity option 
qualifying for the trade option exemption would be presumed to be a 
``pass-through swap counterparty'' for purposes of the offeror of the 
trade option qualifying for the pass-through swap offset.\316\ Although 
the Commission is proposing generally to net futures and swaps in 
reference contracts in the same commodity under proposed Sec.  150.2, 
as discussed below, the Commission notes that cross-commodity offsets 
of pass-through swaps would not be recognized unless the counterparty 
to the swap is a bona fide hedger. Would this presumption help offerors 
determine the appropriateness of carrying out cross-commodity hedge 
transactions?
---------------------------------------------------------------------------

    \315\ 7 U.S.C. 6a(a)(7).
    \316\ See the proposed Sec.  150.1 definition of ``bona fide 
hedge exemption'' at paragraph (2)(ii).
---------------------------------------------------------------------------

    In addition, the Commission requests comments on whether adopting 
such a presumption might allow use of the exemption to evade Commission 
rules pertaining to swap transactions. Should the Commission adopt an 
anti-evasion provision to address this concern? Furthermore, might some 
additional safeguards be included to allow the Commission to provide 
administrative simplicity through use of the presumption, while also 
limiting use of the presumption to evade other regulations?
    Further, the Commission requests comment on whether it would be 
appropriate to exclude trade options from the definition of referenced 
contracts and, thus, to exempt trade options from the proposed position 
limits. If trade options were excluded from the definition of reference 
contracts, then commodity derivative contracts that offset the risk of 
trade options would not automatically be netted with such trade options 
for purposes of non-spot month position limits. The Commission notes 
that forward contracts are not subject to the proposed position limits; 
however, certain forward contracts may serve as the basis of a bona 
fide hedging position exemption, e.g., an enumerated bona fide hedging 
position exemption is available for the offset of the risk of a fixed 
price forward contract with a short futures position. Should the 
Commission include trade options as one of the enumerated exemptions 
(e.g., proposed paragraphs (3)(ii) and (iii) of the definition of bona 
fide hedging position under proposed Sec.  150.1)? As an alternative to 
excluding trade options from the definition of referenced contract, 
should the Commission provide an exemption under CEA section 4a(a)(7) 
that permits the offeree or offeror to submit a notice filing to 
exclude their trade options from position limits? If so, why and under 
what circumstances? Are there any other characteristics of trade 
options or the parties to trade options that the Commission should 
consider? Would any of these alternatives permit commodity options that 
should be regulated as swaps to circumvent the protections established 
in the Dodd-Frank Act for the forward contract exclusion for non-
financial commodities?
g. Enumerated Hedges--Paragraphs (3)-(5).
    Proposed paragraph (1)(i) would require a bona fide hedging 
position in an excluded commodity to be enumerated under paragraphs 
(3), (4), or (5) of the definition or to be granted an exemption under 
exchange rules consistent with the risk management guidance of appendix 
A to part 150. Proposed paragraph (2)(i)(D) would require a bona fide 
hedging position in

[[Page 75712]]

a physical commodity to be enumerated under paragraphs (3), (4), or (5) 
of the definition. The Commission has historically enumerated 
acceptable bona fide hedging positions in Sec.  1.3(z)(2) for physical 
commodities. Each of the enumerated provisions is discussed below. For 
convenience, the Commission is providing a summary comparison of the 
various provisions of the proposed rule, vacated part 151, and current 
rules, in Table 4 below.

                       Table 4--Proposed, Current, and Vacated Enumerated Bona Fide Hedges
----------------------------------------------------------------------------------------------------------------
                                     Paragraph in proposed
                                    definition of bona fide
  Cash position underlying bona      hedging position under     Current Sec.   1.3(z)       Vacated part 151
      fide hedging position         Sec.   150.1 and related   and related  provisions         definition
                                           provisions
----------------------------------------------------------------------------------------------------------------
Inventory and fixed-price cash     (3)(i)...................  1.3(z)(2)(i)(A).........  151.5(a)(2)(i)(A).
 commodity purchase contracts.
Fixed-price cash commodity sales   (3)(ii)..................  1.3(z)(2)(ii)(A) and (B)  151.5(a)(2)(ii)(A) and
 contracts.                                                                              (B).
Unfilled anticipated requirements  (3)(C)(i)................  1.3(z)(2)(ii)(C)........  151.5(a)(2)(ii)(C).
 for same cash commodity.
Unfilled anticipated requirements  (3)(C)(ii)...............  N/A.....................  N/A.
 for resale by a utility.
Hedges by agents.................  (3)(iv)..................  1.3(z)(3)...............  151.5(a)(2)(iv).
                                                              Discussed as example of
                                                               non-enumerated hedge.
Unsold anticipated production....  (4)(i)...................  1.3(z)(2)(i)(B).........  151.5(a)(2)(i)(B).
Offsetting unfixed-price cash      (4)(ii)..................  1.3(z)(2)(iii)..........  151.5(a)(2)(iii).
 commodity sales and purchases.    Scope expanded in
                                    comparison to part 151.
Anticipated royalties............  (4)(iii).................  N/A.....................  151.5(a)(2)(vi).
                                   Scope reduced in
                                    comparison to part 151
                                    to ownership of
                                    royalties.
Services.........................  (4)(iv)..................  N/A.....................  151.5(a)(2)(vii).
Cross-commodity hedges...........  (5)......................  1.3(z)(2)(iv)...........  151.5(a)(2)(viii).
                                   Scope expanded to permit
                                    cross-hedge of pass-
                                    through swap in
                                    comparison to part 151.
Pass-through swap offset.........  (2)(ii)(A)...............  1.3(z)(3) and 1.47......  151.5(a)(3).
                                                              Non-enumerated exemption
                                                               for futures used in
                                                               risk management of
                                                               swaps.
Pass-through swap................  (2)(ii)(B)...............  N/A, as not subject to    151.5(a)(4).
                                                               current federal limits.
Non-enumerated hedges............  150.3(e).................  1.3(z)(3) and 1.47......  151.5(a)(5).
Filing for anticipatory hedges...  150.7....................  1.3(z) and 1.48.........  151.5(d).
----------------------------------------------------------------------------------------------------------------
N/A denotes not applicable.

    For clarity, the proposed definition uses the terms long positions 
and short positions in commodity derivative contracts as those terms 
are proposed to be defined, rather than the terms purchases or sales of 
any commodity for future delivery, used in current Sec.  1.3(z)(2). 
These clarifications are for two reasons. First, the proposed 
definition only addresses bona fide hedging positions, and does not 
address bona fide hedging transactions. Although the language of 
current Sec.  1.3(z)(2) was written to address purchase or sales 
transactions, the Commission eliminated daily speculative trading 
volume limits in 1979, as noted above.\317\ The Commission and its 
predecessor has long interpreted the terms sales or purchases of 
futures contracts in Sec.  1.3(z)(2) to mean short or long positions in 
futures contracts in the context of position limits.\318\ Second, the 
proposed definition would be applicable to positions in commodity 
derivative contracts (i.e., futures, options thereon, swaps and direct-
access linked FBOT contracts) rather than only to futures and options 
contracts. As noted above, the Commission preliminarily believes it 
appropriate to apply the same definition of bona fide hedging positions 
to all physical commodity derivative contracts subject to federal 
limits.
---------------------------------------------------------------------------

    \317\ 44 FR 7124, Feb. 6, 1979.
    \318\ The statutory definition of bona fide hedging in section 
4a(3) of the Act (prior to the CFTC Act of 1974) used the terms 
``sales of any commodity for future delivery . . . to the extent 
that such sales are offset in quantity by the ownership or purchase 
of the same cash commodity'' and ``purchases of any commodity for 
future delivery . . . to the extent that such purchases are offset 
by sales of the same cash commodity.'' 7 U.S.C. 6a(3) (1940). 
Following enactment of the CFTC Act, the Secretary of Agriculture's 
initial proposed definition of bona fide hedging transactions or 
positions makes clear this understanding, as that definition 
provided, in relevant part, for ``sales of, or short positions in 
any commodity for future delivery . . . to the extent that such 
sales or short positions are offset in quantity by the ownership or 
fixed-price purchase of the same cash commodity'' and for 
``purchases of, or long positions in, any commodity for future 
delivery . . . to the extent that such purchases or long positions 
are offset by fixed-price sales of the same cash commodity. . . .'' 
39 FR 39731, Nov. 11, 1974. The Commission adopted that same 
language in its initial definition of bona fide hedging transactions 
or positions. 40 FR 48688, 48689, Oct. 17, 1975. In both the 
proposed and final rules in 1977, the Commission was silent as to 
why it omitted the clarifying phrases ``long positions'' and ``short 
positions.'' Proposed Rule, 42 FR 14832, Mar. 16, 1977; Final Rule, 
42 FR 42748, Aug. 24, 1977.
---------------------------------------------------------------------------

    The Commission notes that DCMs and SEFs may impose additional 
conditions on holders of positions in commodity derivative contracts, 
particularly in the spot month. The Commission has long relied on the 
DCMs to protect the integrity of the exchange's delivery process in 
physical-delivery contracts. Congress recognizes this obligation, 
including in core principle 5, which

[[Page 75713]]

requires DCMs to consider position limitations or position 
accountability for speculators to reduce the potential threat of market 
manipulation or congestion, especially during trading in the delivery 
month.\319\ Exchanges will typically impose on large short position 
holders in a physical-delivery contract a continuing obligation to 
compare cash market and futures market prices in the spot month and to 
liquidate the derivative position (i.e., buy back the short position) 
if the commodity may be sold at a more favorable (higher) price in the 
cash market. Further, exchanges will typically impose on large long 
position holders in a physical-delivery contract a continuing 
obligation to compare cash market and futures market prices in the spot 
month and to liquidate the derivative position (i.e., sell the long 
position) if the commodity may be purchased at a more favorable (lower) 
price in the cash market. Exchanges can continue these practices under 
the proposed rule.
---------------------------------------------------------------------------

    \319\ 7 U.S.C. 7(d)(5).
---------------------------------------------------------------------------

(1) Exemption-by-Exemption Discussion
    Inventory and cash commodity purchase contracts--paragraph (3)(A). 
Inventory and fixed-price cash commodity purchase contracts have long 
served as the basis of a bona fide hedging position.\320\ This 
provision is in current Sec.  1.3(z)(2)(i)(A). A commercial enterprise 
is exposed to price risk if it has (i) obtained inventory in the normal 
course of business or (ii) entered into a fixed-price purchase 
contract, whether spot or forward, calling for delivery in the physical 
marketing channel of a commodity; and has not offset that price risk. 
For example, an enterprise may offset such price risk in the cash 
market by entry into fixed-price sales contracts. An appropriate hedge 
of inventory or a fixed-price purchase contract would be to establish a 
short position in a commodity derivative contract to offset the risk of 
such position. Such short position may be held into the spot month in a 
physical-delivery contract if economically appropriate.\321\
---------------------------------------------------------------------------

    \320\ See, e.g., 7 U.S.C 6a(3) (1970). That statutory definition 
of bona fide hedging included ``sales of, or short positions in, any 
commodity for future delivery on or subject to the rules of any 
contract market made or held by such person to the extent that such 
sales or short positions are offset in quantity by the ownership or 
purchase of the same cash commodity by the same person.''
    \321\ For example, it would not appear to be economically 
appropriate to hold a short position in the spot month of a 
commodity derivative contract against fixed-price purchase contracts 
that provide for deferred delivery in comparison to the delivery 
period for the spot month commodity derivative contract. This is 
because the commodity under the cash contract would not be available 
for delivery on the commodity derivative contract.
---------------------------------------------------------------------------

    A person can use a commodity derivative contract to hedge 
inventories of a cash commodity that is deliverable on that physical-
delivery contract. Such a deliverable cash commodity inventory need not 
be in a delivery location. However, the Commission notes that a DCM or 
SEF may prudentially require such short positions holders to 
demonstrate the ability to move the commodity into a deliverable 
location, particularly during the spot month.\322\
---------------------------------------------------------------------------

    \322\ Further, the Commission notes an exchange, pursuant to its 
position accountability rules, may at any time direct a trader that 
is in excess of accountability levels to reduce a position in a 
contract traded on that exchange.
---------------------------------------------------------------------------

    Once inventory has been sold, a person is permitted a commercially 
reasonable time period, as necessary to exit the market in an orderly 
manner, to liquidate a position in commodity derivative contracts in 
excess of a position limit. Generally, the Commission believes such 
time period would be less than one business day.
    Cash commodity sales contracts--paragraph (3)(B). Fixed-price cash 
commodity sales have long served as the basis of a bona fide hedging 
position.\323\ This provision is in current Sec.  1.3(z)(2)(ii)(A) and 
(B). A commercial enterprise is exposed to price risk if it has entered 
into a fixed-price sales contract, whether spot or forward, calling for 
delivery in the physical marketing channel of a commodity and has not 
offset that price risk, for example, by entering into a fixed-price 
purchase contract. An appropriate hedge of a fixed-price sales contract 
would be to establish a long position in a commodity derivative 
contract to offset the risk of such cash market contact. Such long 
position may be held into the spot month in a physical-delivery 
contract if economically appropriate.
---------------------------------------------------------------------------

    \323\ See, e.g., 7 U.S.C. 6a(3)(1970). That statutory definition 
of bona fide hedging included ``purchases of, or long positions in, 
any commodity for future delivery on or subject to the rules of any 
contract market made or held by such person to the extent that such 
purchases or long positions are offset by sales of the same cash 
commodity by the same person.''
---------------------------------------------------------------------------

    Unfilled anticipated requirements--paragraph (3)(C)(i). Unfilled 
anticipated requirements for the same cash commodity have long served 
as the basis of a bona fide hedging position.\324\ This provision 
mirrors the requirement of current Sec.  1.3(z)(2)(ii)(C). An 
appropriate hedge of unfilled anticipated requirements would be to 
establish a long position in a commodity derivative contract to offset 
the risk of such unfilled anticipated requirements.
---------------------------------------------------------------------------

    \324\ See, e.g., 7 U.S.C. 6a(3)(C) (1970). That statutory 
definition of bona fide hedging included ``an amount of such 
commodity the purchase of which for future delivery shall not exceed 
such person's unfilled anticipated requirements for processing or 
manufacturing during a specified operating period not in excess of 
one year: Provided, That such purchase is made and liquidated in an 
orderly manner and in accordance with sound commercial practice in 
conformity with such regulations as the Secretary of Agriculture may 
prescribe.''
---------------------------------------------------------------------------

    Under the proposal, such long positions may not be held into the 
lesser of the last five days of trading or the time period for the spot 
month in a physical-delivery commodity derivative contract (the five-
day rule), with the exception that a person may hold long positions 
that do not exceed the person's unfilled anticipate requirements of the 
same cash commodity for the next two months. As noted above, the CME 
Group and the Working Group pointed out that previously, persons 
engaged in purchases of futures contracts have been permitted to hold 
up to twelve months unfilled anticipated requirements of the same cash 
commodity for processing, manufacturing, or feeding by the same person, 
provided that such transactions and positions in the five last trading 
days of any one futures do not exceed the person's unfilled anticipated 
requirements of the same cash commodity for that month and for the next 
succeeding month.
    Utility hedging unfilled anticipated requirements of customers--
paragraph (3)(iii)(B). The Commission is proposing a new exemption for 
unfilled anticipated requirements for resale by a utility. This 
provision is analogous to the unfilled anticipated requirements 
provision of paragraph (3)(iii)(A), except the commodity is not for use 
by the same person--that is, the utility--but rather for anticipated 
use by the utility's customers. The proposed new exemption would 
recognize a bona fide hedging position where a utility is required or 
encouraged to hedge by its public utility commission (``PUC'').
    Request Six of the Working Group petition asked the Commission to 
grant relief with respect to a long position in a commodity derivative 
contract that arises from natural gas utilities' desire to hedge the 
price of gas that they expect to purchase and supply to their retail 
customers. In support of its petition, the Working Group provided 
evidence that hedging natural gas price risk, which includes some 
combination of fixed-price supply contracts, storage and derivatives, 
is a prudent risk management practice that limits volatility in the 
prices ultimately paid by consumers.\325\
---------------------------------------------------------------------------

    \325\ See, e.g., ``Use of Hedging by Local Gas Distribution 
Companies: Basic Considerations and Regulatory Issues,'' K. Costello 
and J. Cita, The National Regulatory Research Institute at the Ohio 
State University (May 2001). All supporting materials provided by 
the Working Group are available at http://sirt.cftc.gov/sirt/sirt.aspx?Topic=CommissionOrdersandOtherActionsAD&Key=23082.

---------------------------------------------------------------------------

[[Page 75714]]

    Materials submitted in support of the Working Group petition \326\ 
make it clear that the risk management transactions--fixed-price 
contracts, storage, and derivatives--engaged in by a typical natural 
gas utility to reduce risk associated with anticipated requirements of 
natural gas are used to fulfill its obligation to serve retail 
customers and are typically considered by the state PUC as prudent. The 
PUC may indeed obligate the natural gas utility to hedge some portion 
of the supply of natural gas needed to meet the needs of its customers 
and may take regulatory action if the utility fails to do so. As a 
result, in order to mitigate the impact of natural gas price volatility 
on the cost of natural gas acquired to serve its regulated retail 
natural gas customers, a utility may enter into long positions in 
commodity derivative contracts to hedge a specified percentage of such 
customers' anticipated natural gas requirements over a multi-year 
horizon. The utility's PUC considers such hedging practices to be 
prudent and has allowed gains and losses related to such hedging 
activities to be retained by its regulated retail natural gas 
customers.
---------------------------------------------------------------------------

    \326\ Id.
---------------------------------------------------------------------------

    The Commission recognizes the highly regulated nature of the 
natural gas market, where state-regulated public utilities may have 
rules or guidance concerning locking in the costs of anticipated 
requirements for retail customers through a number of means, including 
fixed-price purchase contracts, storage, and commodity derivative 
contracts. Moreover, since the public utility typically does not 
directly profit from the results of its hedging activity (because most 
or all of the gains derived from hedging are passed on to customers, 
e.g., through the price charged for natural gas), the utility has no 
incentive to speculate.
    The Commission invites comments on all aspects of this new 
enumerated bona fide hedging exemption.
    Hedges by agents--paragraph (3)(iv). The Commission is proposing an 
enumerated exemption for hedges by an agent who does not own or has not 
contracted to sell or purchase the offsetting cash commodity at a fixed 
price, provided that the agent is responsible for merchandising the 
cash positions that are being offset in commodity derivative contracts 
and the agent has a contractual arrangement with the person who owns 
the commodity or holds the cash market commitment being offset. The 
Commission historically has recognized a merchandising transaction as a 
bona fide hedge in the narrow circumstances of an agent responsible for 
merchandising a cash market position which is being offset.\327\
---------------------------------------------------------------------------

    \327\ This provision is included in current Sec.  1.3(z)(3) as 
an example of a potential non-enumerated case. 17 CFR 1.3(z)(3). 
Compare vacated Sec.  151.5(a)(2)(iv).
---------------------------------------------------------------------------

    Other enumerated hedging positions--paragraph (4). Each of the 
other enumerated hedging positions would be subject to the five-day 
rule for physical-delivery contracts. The Commission reiterates the 
intent of the five-day rule is to protect the integrity of the delivery 
process in physical-delivery contracts. The reorganization into new 
paragraph (4) of existing provisions in 1.3(z) subject to the five-day 
rule is intended for administrative ease.
    Unsold anticipated production--paragraph (4)(i). Unsold anticipated 
production has long served as the basis of a bona fide hedging 
position.\328\ This provision is in current Sec.  1.3(z)(2)(i)(B). The 
Commission historically has recognized twelve months of unsold 
anticipated production in an agricultural commodity as the basis of a 
bona fide hedging position. Under the proposal, this twelve-month 
restriction would not apply to physical-delivery contracts that were 
not in an agricultural commodity.
---------------------------------------------------------------------------

    \328\ See 7 U.S.C 6a(3)(A) (1940). That statutory definition of 
bona fide hedging, enacted in 1936, included ``the amount of such 
commodity such person is raising, or in good faith intends or 
expects to raise, within the next twelve months, on land (in the 
United States or its Territories) which such person owns or 
leases.''
---------------------------------------------------------------------------

    The Commission is considering relaxing the five-day rule to permit 
a person to hold a position in a physical-delivery commodity derivative 
contract, other than in an agricultural commodity, through the close of 
the spot month that does not exceed in quantity the reasonably 
anticipated unsold forward production that would be available for 
delivery under the terms of a physical-delivery commodity derivative 
contract. For example, a person with a significant number of producing 
natural gas wells may be highly certain that she can be a position to 
deliver natural gas on the physical-delivery natural gas futures 
contract.\329\ The Commission is considering permitting the exchange 
listing the physical-delivery commodity derivative contract to 
administer exemptions to the five-day rule upon application to such 
exchange specifying the unsold forward production that could be moved 
into delivery position. The Commission requests comment on this 
alternative.
---------------------------------------------------------------------------

    \329\ In contrast, prior to harvest, a farmer must plant and 
manage a crop until it is ripe. Anticipated agricultural production 
may not be available timely at a delivery location for a futures 
contract. Thus, historically, only inventories of agricultural 
commodities, rather than anticipated production, have been 
recognized as a basis for a bona fide hedging position under the 
five-day rule.
---------------------------------------------------------------------------

    Offsetting unfixed-price cash commodity sales and purchases--
paragraph (4)(ii). Offsetting unfixed-price cash commodity sales and 
purchases basis different delivery months in the same commodity 
derivative contract have long served as the basis of a bona fide 
hedging position. \330\ This provision is in current Sec.  
1.3(z)(2)(iii). The Commission explained a major rationale for this 
exemption for spread positions was to facilitate commercial risk 
shifting positions which may not have otherwise conformed to the 
definition of bona fide hedging.\331\
---------------------------------------------------------------------------

    \330\ The Commission added this enumerated exemption to the 
definition of bona fide hedging in 1987. 52 FR 38914, Oct. 20, 1987.
    \331\ 51 FR 31648, 31650, September 4, 1986. ``In particular, a 
cotton merchant may contract to purchase and sell cotton in the cash 
market in relation to the futures price in different delivery months 
for cotton, i.e., a basis purchase and a basis sale. Prior to the 
time when the price is fixed for each leg of such a cash position, 
the merchant is subject to a variation in the two futures contracts 
utilized for price basing. This variation can be offset by 
purchasing the future on which the sales were based [and] selling 
the future on which [the] purchases were based.'' Id. (n. 3).
---------------------------------------------------------------------------

    The proposed enumerated provision would be expanded from current 
Sec.  1.3(z)(2)(iii) to include unfixed-price cash contracts basis 
different commodity derivative contracts in the same commodity, 
regardless of whether the commodity derivative contracts are in the 
same calendar month.\332\ The Commission notes a commercial enterprise 
may enter into the described transactions to reduce the risk arising 
from either (or both) a location differential or a time differential in 
unfixed price purchase and sale contracts in the same cash 
commodity.\333\ The contemplated derivative transactions represent a 
substitute for two transactions to be made at a later time in a 
physical marketing channel: a fixed-price purchase and a fixed-price 
sale of the

[[Page 75715]]

same cash commodity. The commercial enterprise intends to later take 
delivery on one unfixed-price cash contract and to re-deliver the same 
cash commodity on another unfixed-price cash contract. There may be no 
substantive difference in time between taking and making delivery in 
the physical marketing channel, but the derivative contracts do not 
offset each other because they are in two different contracts (e.g., 
the NYMEX Light Sweet Crude Oil futures contract versus the ICE Europe 
Brent crude futures) or two different instruments (e.g., swaps versus 
futures). The contemplated derivative positions will offset the risk 
that the difference in the expected delivery prices of the two unfixed-
price cash contracts in the same commodity will change between the time 
the hedging transaction is entered and the time of fixing of the prices 
on the purchase and sales cash contracts. Therefore, the contemplated 
derivative positions are economically appropriate to the reduction of 
risk.
---------------------------------------------------------------------------

    \332\ The Working Group requested this expansion in Requests One 
and Two.
    \333\ A location differential is the difference in price between 
two derivative contracts in the same commodity (or substantially the 
same commodity) at two different delivery locations on the same (or 
similar) delivery dates. A location differential also may underlie a 
single derivative contract that is called a basis contract.
---------------------------------------------------------------------------

    In the case of reducing the risk of a location differential, and 
where each of the underlying transactions in separate derivative 
contracts may be in the same contract month, the Commission notes that 
a position in a basis contract would not be subject to position limits, 
as discussed in the proposed definition of referenced contract.
    The Commission notes that upon fixing the price of, or taking 
delivery on, the purchase contract, the owner of the cash commodity may 
hold the short derivative leg of the spread as a hedge against a fixed-
price purchase or inventory.\334\ However, the long derivative leg of 
the spread would no longer qualify as a bona fide hedging position 
since the commercial entity has fixed the price or taken delivery on 
the purchase contract. Similarly, if the commercial entity first fixed 
the price of the sales contract, the long derivative leg of the spread 
may be held as a hedge against a fixed-price sale,\335\ but the short 
derivative leg of the spread would no longer qualify as a bona fide 
hedging position.
---------------------------------------------------------------------------

    \334\ See proposed paragraph (3)(i) of the definition of bona 
fide hedging position under Sec.  150.1.
    \335\ See proposed paragraph (3)(ii) of the definition of bona 
fide hedging position under Sec.  150.1.
---------------------------------------------------------------------------

    Anticipated royalties--paragraph (4)(iii). The new enumerated 
exemption would permit an owner of a royalty to lock in the price of 
anticipated mineral production. The Commission initially recognized the 
hedging of anticipated royalties in vacated Sec.  151.5(a)(2)(vi).\336\ 
That provision would have recognized ``sales or purchases'' in 
commodity derivative contracts that would be ``offset by the 
anticipated change in value of royalty rights that are owned by the 
same person . . . [and] arise out of the production, manufacturing, 
processing, use, or transportation of the commodity underlying the 
[commodity derivative contract], which may not exceed one year for 
agricultural'' commodity derivative contracts; such positions would be 
subject to the five-day rule.
---------------------------------------------------------------------------

    \336\ 76 FR at 71689.
---------------------------------------------------------------------------

    The Commission has reconsidered that exemption in vacated Sec.  
151.5(a)(2)(vi) and now re-proposes it as an enumerated exemption for 
short positions in commodity derivative contracts offset by the 
anticipated change in value of mineral royalty rights that are owned by 
the same person and arise out of the production of a mineral commodity 
(e.g., oil and gas); such positions would be subject to the five-day 
rule. This proposed exemption differs from the exemption in vacated 
Sec.  151.5(a)(2)(vi) because it applies only to: (i) Short positions; 
(ii) arising from production; and (iii) in the context of mineral 
extraction.
    A royalty arises as ``compensation for the use of property . . . 
[such as] natural resources, expressed as a percentage of receipts from 
using the property or as an account per unit produced.'' \337\ A short 
position is the proper offset of a yet-to-be received payment based on 
a percentage of receipts per unit produced for a royalty that is owned. 
This is because a short position fixes the price of the anticipated 
receipts, removing exposure to change in value of the person's share of 
the production revenue.\338\ In contrast, a person who has issued a 
royalty has, by definition, agreed to make a payment in exchange for 
value received or to be received (e.g., the right to extract a 
mineral). Upon extraction of a mineral and sale at the prevailing cash 
market price, the issuer of a royalty remits part of the proceeds in 
satisfaction of the royalty agreement. Thus, the issuer of a royalty 
does not have price risk arising from that royalty agreement.
---------------------------------------------------------------------------

    \337\ Black's Law Dictionary, 6th Ed.
    \338\ A short position fixes the price at the entry price to the 
commodity derivative contract. For any decrease (increase) in price 
of the commodity produced, the expected royalty would decline 
(increase) in value, but the commodity derivative contract would 
increase (decrease) in value, offsetting the price risk in the 
royalty.
---------------------------------------------------------------------------

    The Commission preliminarily believes that ``manufacturing, 
processing, use, or transportation'' of a commodity does not conform to 
the meaning of the term royalty. Further, while the Commission 
recognizes that, historically, royalties have been paid for use of land 
in agricultural production,\339\ the Commission has not received any 
evidence of a need for a bona fide hedging exemption from owners of 
agricultural production royalties. The Commission nonetheless invites 
comment on all aspects of this new royalty exemption.
---------------------------------------------------------------------------

    \339\ For example, corn ``rents'' were cited in An Inquiry into 
the Nature and Causes of the Wealth of Nations, Smith, Adam, 1776, 
at cp. 5, available at: http://www.gutenberg.org/files/3300/3300-h/3300-h.htm. This eBook is for the use of anyone anywhere at no cost 
and with almost no restrictions whatsoever. You may copy it, give it 
away, or re-use it under the terms of the Project Gutenberg License 
included with this eBook or online at www.gutenberg.org.
---------------------------------------------------------------------------

    Services--paragraph (4)(iv). The Commission is proposing the 
hedging of services as a new enumerated hedge in subparagraph (4)(iv) 
of the proposed definition. This new exemption is not without 
Commission precedent. For example, in 1977, the Commission noted that 
the existence of futures markets for both source and product 
commodities, such as soybeans and soybean oil and meal, afford business 
firms increased opportunities to hedge the value of services.\340\ The 
Commission's current proposal is similar to vacated Sec.  
151.5(a)(2)(vii).\341\ That provision would have recognized ``sales or 
purchases'' in commodity derivative contracts that would be ``offset by 
the anticipated change in value of receipts or payments due or expected 
to be due under an executed contract for services held by the same 
person . . . [and] the contract for services arises out of the 
production, manufacturing, processing, use, or transportation of the 
commodity underlying the [commodity derivative contract], which may not 
exceed one year for agricultural'' commodity derivative contracts; such 
positions would be subject to the five-day rule. That provision also 
made such positions subject to a provision for cross-commodity hedging, 
namely that, ``The fluctuations in the value of the position in 
[commodity derivative contracts] are substantially related to the 
fluctuations in value of receipts or payments due or expected to be due 
under a contract for services.'' \342\
---------------------------------------------------------------------------

    \340\ 42 FR 14832, 14833, Mar. 16, 1977.
    \341\ 76 FR at 71689.
    \342\ Vacated Sec.  151.5(a)(2)(vii)(B).
---------------------------------------------------------------------------

    The Commission has reconsidered its proposed exemption in vacated 
Sec.  151.5(a)(2)(vii) and now re-proposes an enumerated exemption that 
is largely the same, save for deleting the cross-commodity hedging 
provision in this enumerated exemption, as that provision is included 
under the cross-

[[Page 75716]]

commodity hedging exemption, discussed below. Thus, the proposed 
exemption would recognize ``sales or purchases'' in commodity 
derivative contracts that are ``offset by the anticipated change in 
value of receipts or payments due or expected to be due under an 
executed contract for services by the same person . . . [and] the 
contract for services arises out of the production, manufacturing, 
processing, use, or transportation of the commodity which may not 
exceed one year for agricultural'' commodity derivative contracts; such 
positions would be subject to the five-day rule.
    As the Commission previously noted and under this proposed 
exemption, ``crop insurance providers and other agents that provide 
services in the physical marketing channel could qualify for a bona 
fide hedge of their contracts for services arising out of the 
production of the commodity underlying a [commodity derivative 
contract].'' \343\ The Commission invites comment on all aspects of 
this new services exemption.
---------------------------------------------------------------------------

    \343\ 76 FR at 71654.
---------------------------------------------------------------------------

(2) Cross-Commodity Hedges--Paragraph (5)
    The proposed cross-commodity hedging provision would apply to all 
enumerated hedges in paragraphs (3) and (4) of the definition of bona 
fide hedging position, as well as to pass-through swaps under paragraph 
(2).\344\ The Commission has long recognized cross-commodity hedging, 
noting in 1977 that sales for future delivery of any product or 
byproduct which is offset by the ownership of fixed-price purchase of 
the source commodity would be covered by the general provisions for 
cross-commodity hedging in Sec.  1.3(z)(2).\345\
---------------------------------------------------------------------------

    \344\ Compare with vacated Sec.  151.5(a)(2)(viii), which 
provided for cross-commodity hedges in enumerated positions but not 
for pass-through swaps.
    \345\ 42 FR 14832, 14834, Mar. 16, 1977. The Commission noted 
its belief that there is little commercial need to maintain cross-
hedge positions during the last five trading days of any expiring 
contract. It believed the five-day restriction was necessary to 
guarantee the integrity of the markets. The Commission considered 
there was little commercial utility of such positions during the 
last five days of trading to offset anticipated production, which at 
that time was limited to agricultural commodities. The Commission 
considered its responsibility for orderly markets and concluded not 
to propose an enumerated exemption in the last five days of trading 
for anticipatory production. See also 7 U.S.C. 6a(3)(B) (1970). That 
statutory definition of bona fide hedging included ``an amount of 
such commodity the sale of which for future delivery would be a 
reasonable hedge against the products or byproducts of such 
commodity owned or purchased by such person, or the purchase of 
which for future delivery would be a reasonable hedge against the 
sale of any product or byproduct of such commodity by such person.'' 
Id.
---------------------------------------------------------------------------

    Under the proposed enumerated exemption, cross-commodity hedging 
would be conditioned on: (i) The fluctuations in value of the position 
in the commodity derivative contract (or the commodity underlying the 
commodity derivative contract) are substantially related to the 
fluctuations in value of the actual or anticipated cash position or 
pass-through swap (the ``substantially related'' test); and (ii) the 
five-day rule being applied to positions in any physical-delivery 
commodity derivative contract.\346\ As discussed above, the five-day 
rule would not restrict positions in cash-settled contracts, but would 
restrict only positions in physical-delivery commodity derivative 
contracts. Thus, the Commission is protecting the integrity of the 
delivery process in the physical-delivery contract. Further, as noted 
above, few traders typically hold a position in excess of the position 
limits during the last few days of the spot month. Hence, a cross-
commodity hedger who held a position deep into the spot month in excess 
of the spot position limit likely would be large relative to all 
traders. Such large positions may interfere with convergence of the 
commodity derivative contract with the cash market price, since the 
supply and demand expectations for cross-commodity hedgers may differ 
from those of persons hedging price risks of the commodity underlying 
the physical-delivery derivative.
---------------------------------------------------------------------------

    \346\ Compare with current Sec.  1.3(z)(2)(iv), which requires 
compliance with the substantially related test and with the five-day 
rule, and does not provide an exception to the five-day rule for 
cash-settled contracts.
---------------------------------------------------------------------------

    Substantially related test. The Commission is proposing guidance on 
the meaning of the substantially related test. The Commission is 
proposing a non-exclusive safe harbor for cross-commodity hedges.\347\ 
The safe harbor would have two factors: (i) Qualitative; and (ii) 
quantitative.
---------------------------------------------------------------------------

    \347\ The Commission understands that cross-commodity hedges in 
physical commodities are not generally recognized by accountants as 
eligible for hedge accounting treatment.
---------------------------------------------------------------------------

    Qualitative factor: As a first factor in assessing whether a cross-
commodity hedge is bona fide, the target commodity should have a 
reasonable commercial relationship to the commodity underlying the 
commodity derivative contract. For example, there is a reasonable 
commercial relationship between grain sorghum (commonly called milo), 
used as a food grain for humans or as animal feedstock, with corn 
underlying a commodity derivative contract.\348\
---------------------------------------------------------------------------

    \348\ See, e.g., ``The Alternative Field Crops Manual,'' 
University of Minnesota, November 1989, available at http://www.hort.purdue.edu/newcrop/afcm/sorghum.html.
---------------------------------------------------------------------------

    In contrast, there does not appear to be a reasonable commercial 
relationship between a physical commodity and a stock price index; 
while long-term price series of such commodities may be statistically 
related by either inflation or measures of economic activity, such 
disparate commodities do not appear to have the requisite commercial 
relationship. Such correlation appears for this purpose to be spurious.

[[Page 75717]]

    Quantitative factor: The target commodity should also be offset by 
a position in a commodity derivative contract that provides a 
reasonable quantitative correlation and in light of available liquid 
commodity derivative contracts. The Commission will presume an 
appropriate quantitative relationship exists when the correlation (R), 
between first differences or returns in daily spot price series for the 
target commodity and the price series for the commodity underlying the 
derivative contract (or the price series for the derivative contract 
used to offset risk), is at least 0.80 for a time period of at least 36 
months.\349\ When less granular price series than daily are used, R 
typically will be higher. Thus, price series data of at least daily 
frequency should be used, if available.
---------------------------------------------------------------------------

    \349\ By way of comparison, accounting practice may look to 
goodness of fit (R\2\) to be at least 0.80. The proposed correlation 
(R) of 0.80 corresponds to an R\2\ of 0.64, substantially less than 
accounting practice. Further, accounting practice may look to the 
coefficient (hedge ratio) from a regression analysis to be in the 
range of negative 0.80 to 1.25. The Commission notes that the size 
of this coefficient is dependent upon the unit of trading for the 
hedging instrument and the unit of trading for the target of the 
hedge. To the extent both may be expressed in similar terms, the 
coefficient may fall within the range suggested by accounting 
practice. However, given standardized hedging instruments such as 
futures are fixed in terms of a particular price quote for a 
commodity (such as in dollars per bushel) and the target of a cross-
commodity hedge may not have units fixed in the same terms (such as 
in dollars per hundred weight), the hedge ratio will depend on a 
fairly arbitrary choice of units to express the price series of the 
target of the hedge. Thus, the Commission is not proposing any 
particular safe harbor or requirement for a hedge ratio.
---------------------------------------------------------------------------

    The Commission will presume that positions in a commodity 
derivative contract that does not meet the safe harbor are not bona 
fide cross-commodity hedging positions. However, a person may rebut 
this presumption upon presentation of facts and circumstances 
demonstrating a reasonable relationship between the spot price series 
for the commodity to be hedged and either the spot price series for the 
commodity underlying the commodity derivative contract or the price 
series for the commodity derivative contract to be used for hedging. A 
person should consider whether there is an actively traded commodity 
derivative contract that would meet the safe harbor, in light of 
liquidity considerations. A person may seek interpretative relief under 
Sec.  140.99 for recognition of such a position as a bona fide hedging 
position.
    Generally, a regression or time series analysis of prices should be 
performed to determine an appropriate hedge ratio.\350\ Many price 
series are non-stationary because the prices increase with time and, 
thus, do not revert to a mean (i.e., stationary) price level. A 
regression on non-stationary data can give rise to spurious values for 
the ``goodness of fit'' and other statistics.\351\ Thus, a quantitative 
analysis should be performed using first differences or returns 
(percentage price changes) so as to render the time series 
stationary.\352\ However, the Commission is not proposing to condition 
the substantially related test on any particular hedge ratio 
methodology.
---------------------------------------------------------------------------

    \350\ The Commission notes this safe harbor is intentionally 
written in general terms. Appropriate hedge ratios may be determined 
using an appropriate model, including but not limited to ordinary 
lease squares (OLS), autoregressive conditional heteroscedasticity 
(ARCH), generalized autoregressive conditional heteroscedasticity 
(GARCH), or an error-correction model (ECM).
    \351\ ``Goodness of fit'' is defined as: ``A general term 
describing the extent to which an econometrically estimated equation 
fits the data. There are various ways of summarizing this concept, 
including the coefficient of determination and adjusted R\2\.'' 
``The MIT Dictionary of Modern Economics,'' 4th Ed. (1996).
    \352\ See, e.g., ``A Guide to Econometrics,'' 5th Ed., The MIT 
Press (2003), at p.319.
---------------------------------------------------------------------------

    By way of example, the Commission believes that fluctuations in the 
value of electricity contracts typically will not be substantially 
related to fluctuations in value of natural gas. There may not be a 
substantial relation, for example, because the marginal pricing in a 
spot market may be driven by the price of something other than natural 
gas, such as nuclear, coal, transmission, outages, or water/
hydroelectric power generation. Table 5 below shows illustrative simple 
correlations, both in terms of levels and returns, between spot 
electricity prices and natural gas (both spot Henry Hub prices and the 
nearby NYMEX Henry Hub Natural Gas futures prices, assuming a roll to 
the next deferred futures contract on the eleventh calendar day of each 
month). These correlations are much lower than the proposed safe harbor 
level of 0.80.

[[Page 75718]]



 Table 5--Correlations--Spot Electricity Prices and Natural Gas (spot and futures) Prices January 2, 2009 to May
                                                    14, 2013
----------------------------------------------------------------------------------------------------------------
            Price series:                Correlations using:         Henry Hub spot         Henry Hub futures
----------------------------------------------------------------------------------------------------------------
Houston electricity.................  Levels..................                   0.1333                   0.0630
                                      Returns.................                   0.1264                   0.0488
PJM electricity.....................  Levels..................                   0.4415                   0.2724
                                      Returns.................                   0.0987                   0.0153
New England electricity.............  Levels..................                   0.3450                   0.2422
                                      Returns.................                   0.1808                   0.0121
----------------------------------------------------------------------------------------------------------------
Data sources: Henry Hub Gulf Coast Natural Gas Spot Price ($ per mmBTUs) and Natural Gas Futures Contracts ($
  per mmBTU), source: US Energy Information Administration, available at http://www.eia.gov/dnav/ng/ng_pri_fut_s1_d.htm; Wholesale Day Ahead Prices at Selected Hubs, Peak (5/16/2013), source: US Energy Information
  Administration, republished from the Intercontinental Exchange (ICE), available at http://www.eia.gov/electricity/wholesale/ electricity/wholesale/.

    Alternatively, a generator of electricity that owns or leases a 
natural gas generator may qualify for an unfilled anticipated 
requirements bona fide hedge to meet a fixed price power commitment 
(sale of electricity). The position that is hedged is the quantity 
equivalent of natural gas through the generator to meet the contracted 
fixed price power commitment.\353\ A natural gas hedge exemption can 
also be applied to operating characteristics of the plant and sources 
of revenue such as ancillary services.
---------------------------------------------------------------------------

    \353\ A generator must also be able to satisfy any operating 
constraints, including minimum production runs.
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    (3) Examples of Bona Fide Hedging Positions in Appendix B
    The Commission is providing examples to illustrate enumerated bona 
fide hedging positions. The Commission invites comment on all aspects 
of the examples.
h. Non-Enumerated Hedging Exemptions
    The Commission proposes to replace the existing procedures for 
persons seeking non-enumerated hedging exemptions under current Sec.  
1.3(z)(3) and Sec.  1.47 with proposed Sec.  150.3(e), discussed 
further below, that would provide guidance for persons seeking non-
enumerated hedging exemptions through filing of a petition under 
section 4a(a)(7) of the Act. As noted above, practically all non-
enumerated hedging exemption requests were from persons seeking to 
offset the risk arising from swap books, which the Commission has 
addressed in the proposed pass-through swaps and pass-through swap 
offsets, and in the proposal to net positions in futures and swap 
reference contracts for purposes of single-month and all-months-
combined position limits.
    The Commission requests comment on industry practices involving the 
hedging of risks of cash market activities in a physical commodity that 
are not specifically enumerated in paragraphs (3), (4), and (5) of the 
proposed definition of bona fide hedging position, the extent to which 
such hedging practices reflect industry standards or best practices and 
the particular sources of changes in value that such hedging positions 
offset.
    Under the proposal for hedges of physical commodities, additional 
enumerated hedges could only be added to the proposed definition of 
bona fide hedging position by way of notice and comment rulemaking. 
Should the Commission adopt, as an alternative, an administrative 
procedure that would allow the Commission to add additional enumerated 
bona fide hedges without requiring notice and comment rulemaking? If 
so, what procedures should be used? Is current Sec.  1.47 an 
appropriate process? And what standards, in addition to the statutory 
standards of CEA section 4a(c)(2), should be applicable to any such 
administrative procedure? The Commission is particularly concerned 
about the absence of standards in current Sec.  1.47. If the Commission 
were to adopt such an administrative procedure, how should the 
Commission address the factors in CEA section 4a(a)(3)(B) in such an 
administrative procedure?
    No Proposal of Unfilled Storage Capacity as an Anticipated 
Merchandizing Hedge. The Commission is not re-proposing a hedge for 
unfilled storage capacity that was in vacated Sec.  151.5(a)(2)(v). 
That exemption would have permitted a person to establish as a bona 
fide hedge offsetting sales and purchases of commodity derivative 
contracts that did not exceed in quantity the amount of the same cash 
commodity that was anticipated to be merchandized. That exemption was 
limited to the current or anticipated amount of unfilled storage 
capacity that the person owned or leased.
    The Commission previously noted it had not recognized anticipated 
merchandising transactions as bona fide hedges due to its historic view 
that merchandizing transactions generally fail to meet the economically 
appropriate test.\354\ The Commission explained, ``A merchant may 
anticipate that it will purchase and sell a certain amount of a 
commodity, but has not acquired any inventory or entered into fixed-
price purchase or sales contracts. Although the merchant may anticipate 
such activity, the price risk from merchandising activity is yet to be 
assumed and therefore a transaction in [commodity derivative contracts] 
could not reduce this yet-to-be-assumed risk.'' In response to 
comments, the Commission opined that, ``in some circumstances, such as 
when a market participant owns or leases an asset in the form of 
storage capacity, the market participant could establish market 
positions to reduce the risk associated with returns anticipated from 
owning or leasing that capacity. In these narrow circumstances, the 
transaction in question may meet the statutory definition of a bona 
fide hedging transaction.''
---------------------------------------------------------------------------

    \354\ 76 FR at 71646.
---------------------------------------------------------------------------

    With the benefit of further review, the Commission now sees a 
strong basis to doubt that such a position generally will meet the 
economically appropriate test. This is because the value fluctuations 
in a calendar month spread in a commodity derivative contract will 
likely have at best a low correlation with value fluctuations in 
expected returns (e.g., rents) on unfilled storage capacity. There are 
at least two factors that contribute to the size of a calendar month 
spread.\355\ One factor is the cost of carry, comprised of the 
anticipated storage cost plus the interest paid to finance purchase of 
the physical

[[Page 75719]]

commodity over the time period of the calendar month spread.\356\ A 
second factor, and likely the factor that most contributes to value 
fluctuations in the calendar month spread, is the difference in the 
anticipated supply and demand of a commodity on the different dates of 
the calendar month spread. In this context, a calendar month spread 
position would likely increase, rather than decrease, risk in the 
operation of a commercial enterprise. Accordingly, for these reasons, 
the Commission is not re-proposing to recognize a bona fide hedging 
position based on an unfilled storage bin and any of a number of 
commodities that a merchant might store in such bin.
---------------------------------------------------------------------------

    \355\ A calendar month spread generally means the purchase of 
one delivery month of a given futures contract and simultaneous sale 
of a different delivery month of the same futures contract. See CFTC 
Glossary, available at http://www.cftc.gov/ConsumerProtection/EducationCenter/CFTCGlossary/index.htm.
    \356\ For a brief discussion of cost of carry, see, e.g., 
``Options, Futures, and Other Derivatives,'' 3rd Ed., Hull, (1997) 
at p. 67.
---------------------------------------------------------------------------

    For example, the Commission recognizes there is commercial risk in 
operating off-farm storage, including the risk that total grain 
production may not be sufficient to ensure capacity utilization of such 
storage. Business costs of providing off-farm storage include the fixed 
cost of the storage facility and the variable costs for labor and fuel, 
in addition to other costs such as insurance. However, as the 
Commission noted above, based on its experience, the value fluctuations 
in a calendar month spread in a commodity derivative contract will 
likely have at best a low correlation with value fluctuations in 
expected returns (e.g., rents) on unfilled storage capacity. Therefore, 
the Commission requests comment on what positions in commodity 
derivative contracts, if any, would offset the value changes in the 
commercial risks (e.g., changes in anticipated rental income or changes 
in other revenue streams) arising from a commodity storage business. 
And for those positions that would offset value changes in the 
commercial risks, what data should the Commission obtain to verify such 
claims? By way of comparison, the Commission has recognized unsold 
anticipated production and unfilled anticipated requirements for 
processing, manufacturing or feeding, as the basis of a bona fide 
hedging position.\357\ The Commission has required persons seeking to 
claim such production or requirements exemptions to file statements 
showing historical production or usage and anticipated production or 
usage.\358\
---------------------------------------------------------------------------

    \357\ See current Sec.  1.3(z)(2)(i)(B) and (C).
    \358\ See current Sec.  1.48.
---------------------------------------------------------------------------

    The Commission invites commenters to provide specific, empirical 
analysis and data that would demonstrate how particular types of 
transactions could reduce the value at risk of unfilled storage space 
that could support such an exemption.
i. Summary of Disposition of Working Group Petition Requests
    As noted above, the Working Group made ten requests for exemptions 
under vacated part 151.\359\ The Commission summarizes and addresses in 
a brief statement each request, below.
---------------------------------------------------------------------------

    \359\ The Working Group Petition is available at http://www.cftc.gov/stellent/groups/public/@rulesandproducts/documents/ifdocs/wgbfhpetition012012.pdf.
---------------------------------------------------------------------------

    Request One. Unfixed Price Transactions Involving a Non-Referenced 
Contract: In a hedge of an unfixed price purchase and unfixed price 
sale of a physical commodity in which one leg of the hedge is a 
referenced contract and the other leg is a non-referenced contract, the 
Working Group requests that the referenced contract leg of the hedge be 
treated as a bona fide hedging position.
    The proposed definition of bona fide hedging position would permit 
Request One under proposed paragraphs (4)(ii)(B) and (5), discussed 
above.
    Request Two. Offsetting Unfixed Price Transactions Hedged with 
Derivatives in the Same Calendar Month: The Working Group requests that 
hedges of an unfixed price purchase and an unfixed price sale of a 
physical commodity in which the separate legs of the hedge are in the 
same calendar month, but which do not offset each other, because they 
are in different contracts or for any other reason, be treated as bona 
fide hedging positions.
    The proposed definition of bona fide hedging position would permit 
Request Two under proposed paragraphs (4)(ii)(B) and (5), discussed 
above.
    Request Three. Unpriced Physical Purchase or Sale Commitments: The 
Working Group requests that referenced contracts used to lock in a 
price differential where one leg of the underlying transaction is an 
unpriced commitment to buy or sell a physical energy commodity, and the 
offsetting sale or purchase has not been completed, be treated as bona 
fide hedging transactions or positions.
    This request would not be permitted under the proposed definition 
of bona fide hedging position. The transaction described in Request 
Three concerns a commercial entity that has entered into either an 
unfixed-price sale or an unfixed-price purchase, but has not entered 
into an offsetting purchase or sale contract. This differs from the 
proposed enumerated bona fide hedge exemption provided in paragraph 
(4)(ii) because both sides of the cash transactions have not been 
contracted.
    Locking in the spread for the same commodity between two markets is 
prudent risk management when a commercial trader has a contractual 
commitment both to buy and sell the physical commodity at unfixed 
prices in the same two markets. A commercial merchant may expect to 
match an unfixed-price purchase with an unfixed-price sale, regardless 
of which came first, and at that point, will qualify for a hedge 
exemption for the basis risk, under paragraphs (4)(ii) and (5), as 
discussed in Requests One and Two, above.
    However, a trader has not established a definite exposure to a 
value change when that trader has established only an unfixed price 
purchase or sales contract. This cash position fails the change in 
value requirement. Considering the anticipated merchandizing 
transaction, a merchant may assert her intention, but merchandizing 
intentions alone are not sufficient to recognize a price risk (that is, 
the yet-to-be established pair of unfixed-price cash purchase and sales 
contracts). The Commission is concerned that exempting such a yet-to-be 
established cash position would make it difficult or impossible for the 
Commission to distinguish hedging from speculation. For example, a 
trader could maintain a derivatives position, exempt from position 
limits, until that trader enters into a subsequent cash market 
transaction that results in a book-out of the first unfixed-price cash 
market transaction. The trader could assert that changed conditions 
resulted in a change in intentions. Since market prices are continually 
changing to reflect new information and, thus, changing conditions, the 
Commission believes an exemption standard based on merchandizing 
intentions alone would be no standard at all.
    The Commission recognizes there can be a gradation of probabilities 
that an anticipated transaction will occur. However, the example above 
offers no context in which to evaluate the nature or probability of an 
anticipated merchandising transaction, and such context is essential to 
determining the nature of any price risk that has been realized and 
could support the existence of a bona fide hedge. The Commission notes 
that in such cases, the only way to evaluate the nature of any price 
risk would be for the Commission to be provided with particulars of the 
transaction. This can be done, under the current proposal, either by 
requesting a staff interpretive letter under Sec.  140.99 or seeking 
CEA section 4a(a)(7) exemptive

[[Page 75720]]

relief. Furthermore, in instances where an entity can establish that 
the nature of their commercial operation is such that they have 
committed physical or financial resources towards the anticipated 
transaction, they should consider whether they can avail themselves of 
the exemption for unsold anticipated production or unfilled anticipated 
requirements exemptions.
    Request Four. Binding, Irrevocable Bids or Offers: The Working 
Group requests that referenced contracts used to hedge exposure to 
market price volatility associated with binding and irrevocable fixed-
price bids or offers be treated as bona fide hedging positions.
    The contemplated transactions are not consistent with the 
enumerated hedges in proposed paragraphs (3)(i), as a hedge of a 
purchase contract, or (3)(ii), as a hedge of a sales contract, because 
the cash transaction is tentative and, therefore, neither a sale nor a 
purchase agreement.
    In the Commission's view, a binding bid or offer by itself is too 
tenuous to serve as the basis for an exemption from speculative 
position limits, since it is an uncompleted merchandising transaction 
that, historically, has not been recognized as the basis for a bona 
fide hedging transaction under Sec.  1.3(z)(2). Any related derivative 
would cover a conditional price risk for a bid or offer that would 
depend on that bid or offer being accepted and, therefore, would not be 
economically appropriate to the reduction of risk. The commercial 
entity submitting a binding, fixed-price bid or offer is essentially 
subject to a contingent price risk.\360\ The Commission also 
understands that some commercial entities submit bids or offers merely 
to obtain information about the request for proposal, without an 
intention of submitting a quote that is likely to be accepted.
---------------------------------------------------------------------------

    \360\ For example, if the entity submits a fixed-price bid, it 
runs the risk that either (a) it did not enter into a derivative 
hedge position that would cover an accepted bid, and before its bid 
was accepted, the cash market price decreased (so that it ends up 
paying an above-market price); or (b) it did enter into a 
derivatives position (a short position) that would cover an accepted 
bid, and before its bid was rejected, the derivative price increased 
so that the entity loses money when it lifts the short position. 
Either outcome would create a loss for the commercial entity.
---------------------------------------------------------------------------

    Moreover, the Working Group's suggestion that the Commission 
condition its relief on a good-faith showing and immediate 
reclassification of the portion of the position not awarded against the 
bid or offer does not protect the market against the prospect that 
multiple participants may hold such a good-faith belief and may also 
hold a position in the same direction as the cover transaction. If the 
Commission were to grant relief with respect to such positions, then 
all persons who made good-faith bids or offers on a particular cash 
market solicitation would be eligible to enter into derivatives to 
cover their potential exposure, in addition to holding speculative 
positions on the same side of the market at the limit. Under such 
relief, such persons, in the aggregate, could hold derivatives as cover 
in an amount several times larger than the total amount to be awarded 
under the solicitation. Undue volatility could result when the winning 
bid is accepted and all the losing bidders simultaneously reduce their 
total positions to get below the speculative position limit level.
    In contrast, under the Commission's proposed rules a commercial 
entity may cover the risk of a yet to be accepted bid or offer, 
provided its total position does not exceed the Commission's 
speculative position limits. Thus, when such person's bid or offer is 
not accepted and that person's speculative position is appropriately 
limited, that person need not liquidate any of its position to come 
into compliance with limits. As discussed further below, the Commission 
proposes to set speculative limits at relatively high levels. Thus, a 
commercial entity is not likely to be constrained in covering bids or 
offers unless it also has a relatively large speculative position on 
the same side of the market.
    Request Five. Timing of Hedging Physical Transactions: The Working 
Group requests that referenced contracts used to hedge a physical 
transaction that is subject to ongoing, good-faith negotiations, and 
that the hedging party reasonably expects to conclude, be treated as 
bona fide hedging transactions or positions.
    As with Request Four, the contemplated transactions are not 
consistent with the enumerated hedges in proposed paragraphs (3)(i), as 
a hedge of a purchase contract, or (3)(ii), as a hedge of a sales 
contract, because the cash transaction is tentative (here, subject to 
negotiation) and, therefore, neither a sale nor a purchase agreement.
    The Commission is concerned that a trader has not established a 
definite exposure to a value change when that trader has only entered 
into negotiations for a fixed-price purchase or sales contract. This 
tentative cash position thus fails the change in value requirement.
    Further, a trader could assert that changed conditions resulted in 
a change in intentions and a failure to complete negotiations. Since 
market prices are continually changing to reflect new information and, 
thus, changing conditions, the Commission believes an exemption 
standard based on merchandizing intentions alone (even if the merchant 
were engaged in good faith negotiations) would be no standard at all.
    In the case where the anticipated merchandizing transaction is 
``naked,'' or not backed by any existing physical exposure, the 
Commission is not aware of a methodology for distinguishing naked 
merchandizing from speculation. In the case of a firm bid or offer not 
offset by existing physical exposure, an entity can, at the time the 
bid or offer is accepted, enter into a corresponding hedge transaction 
or, in the alternative, an entity can enter into a corresponding hedge 
transaction at the time the bid or offer is made provided the entity 
remains within the speculative position limits. The Commission invites 
comment on why hedging in this manner is insufficient to offset 
physical risks. The Commission asks that parties submitting comments 
detail the nature of their merchandizing operations and how they 
realize and account for physical risks related to anticipatory 
merchandizing transactions not offset by anticipated production or 
processing requirements. In particular, the Commission requests comment 
on appropriate measures to address the risks for contingent bids or 
offers. Under what circumstances should the Commission recognize 
contingent bids or offers as the basis of a bona fide hedging position? 
If the Commission were to do so, should only the expected value of the 
risk of such position be recognized? And what would be an appropriate 
methodology for distinguishing naked merchandizing from speculation? 
How should the Commission address the varying ex ante subjective 
probability of completion of such bids or offers? For example, is an ex 
post measure of completion, e.g., the ratio of completed transactions 
to bids or offers, an acceptable proxy to impute the probability of 
acceptance for purposes of determining an ex ante hedge ratio, 
regardless of the expected probability of completion on a particular 
bid or offer? Should the Commission require a person, seeking to claim 
an exemption based on contingent bids or offers, keep complete records 
of all such cash market bids or offers? If so, what record format and 
specific data elements should be kept?
    Request Six. Local Natural Gas Utility Hedging of Customer 
Requirements: The Working Group requests that long positions in 
referenced contracts purchased by a state-regulated public

[[Page 75721]]

utility to hedge the anticipated natural gas requirements of its retail 
customers be treated as bona fide hedging transactions or positions.
    The proposed definition of bona fide hedging position would permit 
Request Six under proposed paragraph (3)(iii)(B), discussed above.
    Request Seven. Use of Physical-Delivery Referenced Contracts to 
Hedge Physical Transactions Using Calendar Month Average Pricing: The 
Working Group argues that referenced contracts used to hedge in 
connection with calendar month average (``CMA'') pricing are not 
speculative in nature and should be exempt from speculative position 
limits. The Working Group requests that firms engaged in CMA-priced 
transactions involving physical-delivery referenced contracts be 
permitted to hold those positions through the spot month as bona fide 
hedging positions.
    The discussion below summarizes and addresses the petitioner's 
scenarios under Request Seven and notes the proposed exemptions that 
would be applicable or the reasons for denial.
    Summary of Scenario 1: Refinery hedging unfilled anticipatory 
requirements for crude oil on a calendar month average basis and cross-
hedging the sale of anticipated processed distillate products \361\
---------------------------------------------------------------------------

    \361\ The petitioner separately requested relief for a seller of 
crude oil on a CMA basis that had contracted to deliver crude oil 
ratably to a refiner during a month at the daily average spot price. 
That is, the seller entered into an unfixed price forward sales 
contract to the refiner. Such a transaction would be covered by the 
existing bona fide hedging rules. Such an unfixed price sales 
contract would become partially fixed as each day in the month 
locked in the daily spot price that would be used to fix the price 
of deliveries in the forward delivery period. Thus, to the extent 
the price of the forward contract was partially fixed, a seller 
could use long positions in commodity derivative contracts to offset 
the risk of the partially-fixed-price sales contract under the 
provisions of proposed paragraph (3)(i).
---------------------------------------------------------------------------

    The Working Group noted that a refinery may buy crude oil on a CMA 
basis. The petitioner describes a three-step program whereby a refinery 
might buy crude oil on a CMA basis and subsequently sell distillate 
products on a CMA basis. First, on each trading day over approximately 
a one month period prior to expiration of the nearby NYMEX light sweet 
crude oil (WTI) futures contract, the refinery purchases futures 
contracts in the nearby contract month and sells an equivalent amount 
of futures in the next two deferred contract months in that same 
futures contract. The resulting positions are calendar month spreads in 
WTI futures contracts that are acquired at an average price over the 
one-month period. Second, following the establishment of the spread 
positions in WTI futures contracts, the refinery engages in exchange of 
futures for physical commodity (EFP) transactions, obtaining a short 
nearby WTI futures position in exchange for entering into cash market 
contracts for purchase of crude oil at a fixed price over the following 
calendar month.\362\ These nearby short WTI futures positions offset 
the nearby long WTI futures positions of the calendar month spread. 
Alternatively, the refinery stands for delivery on the nearby long WTI 
futures positions. As a result, the refinery holds only short deferred 
month WTI futures positions. Third, as the refinery takes deliveries of 
crude oil over the following calendar month on the cash market 
contracts (or alternatively under the physical delivery provisions of 
the futures contracts), the refinery processes the crude oil then sells 
the distillate products on the spot market. As the sales of distillate 
products occur, the refinery buys back the short WTI futures positions 
in the next two contract months.
---------------------------------------------------------------------------

    \362\ Under NYMEX rules regarding EFP transactions in WTI 
futures, the buyer and seller of futures must be the seller and 
buyer of an approximately equivalent quantity of the physical 
product underlying the futures. See NYMEX rule 200.20 (available at 
http://www.cmegroup.com/rulebook/NYMEX/2/200.pdf), and NYMEX rule 
538 (available at http://www.cmegroup.com/rulebook/NYMEX/1/5.pdf).
---------------------------------------------------------------------------

    The contemplated long positions are consistent with proposed 
paragraph (3)(iii) to the extent a refinery does not establish a long 
position in excess of that refinery's unfilled anticipated requirements 
for crude oil for the next two months. Further, in the case of a 
refinery, the Commission notes that, unless the refinery has fixed 
price sales \363\ or offsetting short positions of the expected 
processed cash products, such contemplated long positions in WTI 
futures alone may not be economically appropriate to the reduction of 
risk in the conduct and management of a commercial enterprise; hence, 
the Commission also views the short positions in WTI futures to be an 
integral component of the contemplated calendar spreads.
---------------------------------------------------------------------------

    \363\ A refinery with fixed price sales contracts may, as 
appropriate, enter into a long position in commodity derivative 
contracts as a bona fide hedging position or cross-commodity hedging 
position under proposed paragraphs (3)(ii) and (5).
---------------------------------------------------------------------------

    Regarding the short positions, the Commission considers the 
economic consequences of the positions over two time periods: (1) the 
period of time the refinery holds a calendar spread position (long 
nearby and short deferred WTI contract months); and (2) the subsequent 
period of time when the refinery holds only a short position in WTI 
futures \364\ and has a fixed price purchase contract on which it 
receives crude oil that it processes into distillate products.
---------------------------------------------------------------------------

    \364\ The refinery's long position in WTI futures would be 
liquidated as a result of the EFP transaction that established the 
fixed price purchase contract.
---------------------------------------------------------------------------

    Regarding the first time period, when considered as a whole with 
the long positions covering the unfilled anticipated requirements, the 
refinery's short positions would be risk reducing transactions, and 
therefore would qualify under proposed paragraphs (4)(i) and (5), so 
long as the long futures positions (meeting the unfilled anticipated 
requirements of paragraph (3)(iii)) fix the input price and the short 
futures positions fix a significant portion of the price of the 
expected output of petroleum distillate products that are not yet sold 
at a fixed price. The refinery's short position in referenced contracts 
would be an economically appropriate cross-commodity hedge, as 
contemplated by paragraph (5), to the extent the fluctuations in value 
of the anticipated processed cash commodities (that is, the petroleum 
distillates) are substantially related to fluctuations in value of the 
referenced contracts in crude oil.\365\
---------------------------------------------------------------------------

    \365\ Regarding the first time period, there is another 
enumerated bona fide hedging exemption involving offsetting 
commodity derivative contracts. Offsetting sales and purchases of 
commodity derivative contracts would be recognized as bona fide 
hedging positions to reduce the risk of unfixed price purchase and 
sales contracts of the cash commodity (paragraph (4)(ii)). This 
provision does not recognize positions as bona fide hedges under the 
five-day rule (i.e., during the lesser of the last five days of 
trading or the spot month for physical-delivery commodity derivative 
contracts). The refinery short positions are not similar to 
positions established to offset the risk of unfixed price sales and 
purchases, in that the refinery has not entered into open price 
purchase and sales contracts.
---------------------------------------------------------------------------

    During the second time period, the refinery, for example, contracts 
for the purchase of crude oil at a fixed price (as a result of the EFP 
transaction) or subsequently holds crude oil in inventory (e.g., 
through taking delivery on the WTI futures contracts). Thus, the 
refinery in the second time period initially holds a bona fide hedging 
position under paragraph (3)(A). Once the crude oil is processed, the 
refinery also may continue to hold short crude oil futures contracts as 
a cross-hedge of distillate products under paragraph (5). Proposed 
paragraph (5) permits a cross-commodity hedge when the fluctuations in 
value of the position in the commodity derivative contract are 
substantially related to the fluctuations in value of the actual or 
anticipated cash

[[Page 75722]]

position. In this example, the aggregate price fluctuations of all of 
the distillate products of crude oil are substantially related to the 
price fluctuations of crude oil, with such prices expected to differ by 
refining costs and an expected processing margin. Thus, the refinery in 
the second time period holds a short futures position that is a bona 
fide inventory hedge or a bona fide cross-commodity hedge permitted 
under existing and proposed rules.
    Summary of Scenario 2: Merchant short hedge of CMA price purchase 
of crude oil from producer, and long position to cover anticipated re-
sale of crude oil at CMA.
    In its January 20, 2012, petition, the Working Group gives the 
example of a producer that sells oil at the price at which it was 
valued (basis WTI futures) on each day it was extracted from the earth. 
The buyer is an aggregator that pays each producer for crude oil on a 
CMA basis for the production of the prior month. The aggregator seeks 
to ensure the CMA selling price for the oil purchased from the 
producers.
    The aggregator sells the nearby WTI futures each trading day over a 
one month period and buys an equivalent quantity of WTI futures 
contracts in the subsequent two deferred WTI contract months.
    Subsequently, the aggregator intends, in an EFP transaction, to 
exchange long futures in the nearby contract month, for a sales 
contract to be delivered ratably over the delivery period of that 
nearby contract month. (The long futures from the EFP transaction would 
offset the short WTI futures in the nearby contract month.) The 
aggregator would sell the long futures contracts each day as oil is 
delivered ratably during the month. By ratably selling the long futures 
as the physical barrels are delivered, the aggregator effectively 
realizes the price of the prompt barrel on that trading day.
    Alternatively, in its April 17, 2012 supplement, the Working Group 
argues that it should be sufficient that an aggregator wants to lock in 
CMA pricing for a sales commitment by entering into the spread position 
described above, regardless of the facts relating to the purchase side 
of the transaction.
    Because the aggregator is selling futures daily as the price on the 
aggregator's contractual purchase commitment is being fixed for each 
day's production, the aggregator builds a short futures position to 
offset the crude oil it will eventually purchase from the producer 
under the CMA cash contract at a price that is partially fixed each day 
the short position is acquired. Once the aggregator is committed at a 
fixed price to take delivery of the oil, the aggregator holds a bona 
fide hedging position under paragraph (3)(A), which continues to be a 
bona fide hedging position under that rule after the aggregator takes 
delivery of the oil.
    The Commission has not recognized as bona fide hedging a long 
futures position (as a synthetic sales price for the same commodity), 
when a person holds either inventory or a fixed-price purchase 
contract, the price risk of which has been offset using a short futures 
position. From the scenario and alternative presented, it is not clear 
that there is a price risk that is being reduced. Rather, the 
aggregator appears to seek to establish a sales price, without a 
corresponding uncovered price risk in either inventory or fixed-price 
sales or fixed-price purchase contracts. Thus, the transactions do not 
satisfy the requirements of the proposed definition of bona fide 
hedging position.
    In considering the petition, the Commission reviewed its historical 
policy position with respect to bona fide hedges in light of position 
information regarding physical-delivery energy futures contracts. The 
Commission reviewed three years of confidential large trader data in 
cash-settled and physical-delivery energy contracts.\366\ The review 
covered actual positions held in the physical-delivery energy futures 
markets during the three-day spot period, among all traders (including 
those who had received hedge exemptions from their D.C.M). It showed 
that, historically, there have been relatively few positions held in 
excess (and those few not greatly in excess) of the spot month limits. 
Accordingly, the Commission does not propose to grant the Working 
Group's requests regarding Scenario 2.
---------------------------------------------------------------------------

    \366\ The Commission typically does not publish ``general 
statistical information'' as authorized by CEA section 8(a)(1) 
regarding large trader positions in the expiring physical-delivery 
energy futures contracts because of concerns that such data may 
reveal information about the amount of market power a person may 
need to ``mark the close'' or otherwise manipulate the price of an 
expiring contract. Marking the close refers to, among other things, 
the practice of acquiring a substantial position leading up to the 
closing period of trading in a futures contract, followed by 
offsetting the position before the end of the close of trading, in 
an attempt to manipulate prices in the closing period. The 
Commission gathers large trader position reports on reportable 
traders in futures under part 17 of the Commission's rules. That 
data generally is confidential pursuant to section 8 of the Act. The 
Commission does, however, publish summary statistics for all-months-
combined in its Commitments of Traders Report, available at http://www.cftc.gov/MarketReports/CommitmentsofTraders/index.htm.
---------------------------------------------------------------------------

    Nonetheless, the Commission notes that a person desiring to 
establish a synthetic sales price may hold a position subject to the 
spot month limit, but cautions that such person should trade so as not 
to disrupt the settlement price of the physical-delivery contract.
Working Group Petition Requests Eight, Nine, and Ten
    Request Eight. Holding a Hedge Using a Physical-Delivery Contract 
into the Spot Month; Generally: The Working Group requests that firms 
that use physical-delivery referenced contracts (in commodities other 
than metals or agriculture) as bona fide hedging transactions or 
positions be permitted to hold these hedges into the spot month.
    Request Nine. Holding a Cross-Commodity Hedge Using a Physical 
Delivery Contract into the Spot Month: The Working Group requests that 
firms that use physical-delivery referenced contracts as a cross-
commodity hedge be permitted to hold these hedges into the spot month.
    Request Ten. Holding a Cross-Commodity Hedge Using a Physical-
Delivery Contract to Meet Unfilled Anticipated Requirements: \367\ The 
Working Group argued that the Commission should ``reinstate'' Sec.  
1.3(z)(2)(ii)(C) \368\ to permit firms to hold cross-commodity hedges 
involving physical-delivery referenced contracts into the spot month in 
order to meet their unfilled anticipated requirements.
---------------------------------------------------------------------------

    \367\ Request Ten is similar to Request Eight, which also deals 
with unfilled anticipated requirements. However, Request Eight deals 
with requirements for the same commodity, whereas Request Ten 
involves cross-hedging in a different commodity.
    \368\ Prior to the court's order vacating part 151, Sec.  1.3(z) 
was amended to in November 2011 to apply only to excluded (i.e., 
financial, not physical) commodities. Therefore, by requesting that 
this particular section of Sec.  1.3(z) be ``reinstated,'' 
petitioner is asking that it be applied once again to physical 
delivery (exempt and agricultural) commodities. However, Sec.  
1.3(z)(2)(iv) has never permitted a cross-commodity hedge under 
Sec.  1.3(z)(2)(ii)(C) to be held into the five last trading days.
---------------------------------------------------------------------------

    The proposed definition of bona fide hedging position would permit 
Request Eight under proposed paragraphs (3)(C), discussed above, for 
hedges of unfilled anticipated requirements.\369\
---------------------------------------------------------------------------

    \369\ The CME Petition also requested that the Commission 
recognize as bona fide hedges positions held into the five last 
trading days in physical-delivery referenced contracts that reduce 
the risk of two months unfilled anticipated requirements in the same 
cash commodity, as provided in Sec.  1.3(z)(2)(ii)(C).
---------------------------------------------------------------------------

    However, the proposed definition does not recognize the other 
requests as bona fide hedging positions. As discussed above, the 
Commission continues to believe that, as a physical-delivery commodity 
derivative contract approaches expiration, it is necessary to protect 
orderly trading and the integrity of the markets. A person holding a 
large physical-delivery futures position who

[[Page 75723]]

has no intention to make or take delivery may cause an unwarranted 
price fluctuation by demanding to liquidate such position deep into the 
delivery period in a physical-delivery agricultural contract or a metal 
futures contract or during the three-day spot period in a physical-
delivery energy futures contract. Further, as noted above, a review of 
large trader positions in physical-delivery energy futures contracts 
does not show a current practice of traders holding large positions in 
the spot period of the physical-delivery energy referenced contracts 
relative to the exchange spot month limits.
    The Commission invites comments on all aspects of the Working 
Group's petition and the Commission review.
2. Section 150.2--Position limits
i. Current Sec.  150.2
    The Commission currently sets and enforces speculative position 
limits with respect to certain enumerated agricultural products.\370\ 
Current Sec.  150.2 provides in its entirety that ``[n]o 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 
[enumerated levels].'' \371\ As such, the speculative position limits 
set forth in current Sec.  150.2 apply only to specific futures 
contracts traded on specific exchanges and, on a futures-equivalent 
basis, to specific option contracts thereon.\372\ ``Futures-
equivalent'' is defined in current Sec.  150.1(f) as ``an option 
contract,'' and nothing else.\373\ Accordingly, current Sec.  150.2 
establishes federal position limits only for specifically enumerated 
futures contracts on ``legacy'' agricultural commodities and options on 
those futures contracts.
---------------------------------------------------------------------------

    \370\ The ``enumerated'' agricultural products refer to the list 
of commodities contained in the definition of ``commodity'' in CEA 
section 1a; 7 U.S.C. 1a. This list of agricultural contracts 
includes nine currently traded contracts: Corn (and Mini-Corn), 
Oats, Soybeans (and Mini-Soybeans), Wheat (and Mini-wheat), Soybean 
Oil, Soybean Meal, Hard Red Spring Wheat, Hard Winter Wheat, and 
Cotton No. 2. See 17 CFR 150.2. The position limits on these 
agricultural contracts are referred to as ``legacy'' limits because 
these contracts on agricultural commodities have been subject to 
federal positions limits for decades.
    \371\ 17 CFR 150.2. Footnote 1 to Sec.  150.2 adds, ``for 
purposes of compliance with these limits, positions in the regular 
sized and mini-sized contracts shall be aggregated.'' Id.
    \372\ See id.
    \373\ See 17 CFR 150.1(f).
---------------------------------------------------------------------------

    In 2010, the Commission proposed to implement additional 
speculative position limits for futures and option contracts in certain 
energy commodities (``2010 Energy Proposal'').\374\ In the 2010 Energy 
Proposal, the Commission included a discussion of past and present 
position limits for certain agricultural contracts under part 150 
stating that current Sec.  150.2 applies only to specific agricultural 
futures and options contracts:
---------------------------------------------------------------------------

    \374\ 75 FR 4142, Jan. 26, 2010.

    [t]he current Federal speculative position limits of regulation 
150.2 apply only to specific futures contracts [and] (on a futures-
equivalent basis) specific option contracts. Historically, all 
trading volume in a specific contract tended to migrate to a single 
[futures] contract on a single exchange. Consequently, speculative 
position limits that applied to a single [futures] contract and 
options thereon effectively applied to a single market. The current 
speculative position limits of regulation 150.2 for certain 
agricultural contracts follow this approach.\375\
---------------------------------------------------------------------------

    \375\ Id. at 4152-54.

The Commission withdrew the 2010 Energy Proposal when the Dodd-Frank 
Act became law.\376\
---------------------------------------------------------------------------

    \376\ 75 FR 50950, Aug. 18, 2010.
---------------------------------------------------------------------------

    The limited scope and applicability of the speculative position 
limits in current Sec.  150.2, as well as in the 2010 Energy Proposal, 
are inconsistent with the congressional shift evidenced in the Dodd-
Frank Act amendments to section 4a of the Act, upon which the 
Commission relies in this release. Amended CEA section 4a(a)(1) 
authorizes the Commission to extend position limits beyond futures and 
option contracts to swaps traded on a DCM or SEF and swaps not traded 
on a DCM or SEF that perform or affect a significant price discovery 
function with respect to regulated entities (``SPDF swaps'').\377\ 
Further, new CEA section 4a(a)(5) requires that speculative position 
limits apply to swaps that are ``economically equivalent'' \378\ to DCM 
futures and option contracts for agricultural and exempt commodities 
under new CEA section 4a(a)(2).\379\ Similarly, new CEA section 
4a(a)(6) requires the Commission to apply position limits on an 
aggregate basis to contracts based on the same underlying commodity 
across: (1) DCMs; (2) with respect to foreign boards of trade 
(``FBOTs''), contracts that are price-linked to a DCM or SEF contract 
and made available from within the United States via direct access; and 
(3) SPDF swaps.\380\
---------------------------------------------------------------------------

    \377\ 7 U.S.C. 6a(a)(1).
    \378\ Section 4a(a)(5) of the Act requires the Commission to 
impose the same limits on ``swaps'' that are ``economically 
equivalent'' to futures and options contracts. The statute does not 
define the term. But the Commission construes it, consistent with 
the policy objectives of the Dodd-Frank amendments, to require the 
Commission to expeditiously impose limits on physical commodity 
swaps that are price-linked to futures contracts, or to satisfy 
other defined equivalence criteria. The Commission accordingly 
construes the term ``economically equivalent'' to require swaps to 
satisfy the definition of ``referenced'' contract in proposed Sec.  
150.1. It requires that a swap be, among other things, ``directly or 
indirectly linked, including being partially or fully settled on, or 
priced at a fixed differential to, the price of that particular core 
referenced futures contract; or . . . directly or indirectly linked, 
including being partially or fully settled on, or priced at a fixed 
differential to, the price of the same commodity underlying that 
particular core referenced futures contract for delivery at the same 
location or locations as specified in that particular core 
referenced futures contract . . .'' Other similarities or 
differences that exist between futures and swaps are not material to 
the Commission's interpretation of economic equivalence under 7 
U.S.C. 6a(a)(5).
    \379\ 7 U.S.C. 6a(a)(2), (5).
    \380\ 7 U.S.C. 6a(a)(6). The Commission refers to this 
requirement in section 4a(a)(6) of the Act as a requirement for 
position aggregation.
---------------------------------------------------------------------------

    In 2011, the Commission proposed and, after comment, adopted rules 
to establish an expanded position limits regime pursuant to the mandate 
contained in the Dodd-Frank Act amendments to CEA section 4a.\381\ 
However, in an Order dated September 28, 2012, the U.S. District Court 
for the District of Columbia vacated the 2011 Position Limits 
Rulemaking, with the exception of the revised position limit levels in 
amended Sec.  150.2.\382\ Therefore, part 150 continues to apply, as 
amended, as if part 151 had not been finally adopted by the 
Commission.\383\
---------------------------------------------------------------------------

    \381\ The Commission instructed market participants to continue 
to comply with the existing position limit regime contained in part 
150 and any applicable DCM position limits or accountability levels 
until the compliance date for the position limits rules in new part 
151. After such date, part 150 would have been revoked and 
compliance with part 151 would have been required. 76 FR 71632.
    \382\ See 887 F. Supp. 2d 259 (D.D.C. 2012).
    \383\ The District Court's order vacated the final rule and the 
interim final rule promulgated in the 2011 Position Limits 
Rulemaking, with the exception of the rule's amendments to 17 CFR 
150.2.
---------------------------------------------------------------------------

    Vacated part 151 would have established federal position limits and 
limit formulas for 28 physical commodity futures and option contracts, 
or ``Core Referenced Futures Contracts,'' and would have applied these 
limits to all derivatives that are directly or indirectly linked to the 
price of a Core Referenced Futures Contract (collectively, ``Referenced 
Contracts'').\384\ Therefore, the position limits in vacated part 151 
would have applied across different trading venues to economically 
equivalent Referenced Contracts (as specifically defined in part 151) 
that are based on the same underlying commodity, a concept known as 
aggregate limits. Vacated

[[Page 75724]]

Sec.  151.1 defined ``Referenced Contract'' to mean:
---------------------------------------------------------------------------

    \384\ 76 FR at 71629.

on a futures equivalent basis with respect to a particular Core 
Referenced Futures Contract, a Core Referenced Futures Contract 
listed in Sec.  151.2, or a futures contract, options contract, swap 
or swaption, other than a basis contract or commodity index 
contract, that is: (1) Directly or indirectly linked, including 
being partially or fully settled on, or priced at a fixed 
differential to, the price of that particular Core Referenced 
Futures Contract; or (2) Directly or indirectly linked, including 
being partially or fully settled on, or priced at a fixed 
differential to, the price of the same commodity underlying that 
particular Core Referenced Futures Contract for delivery at the same 
location or locations as specified in that particular Core 
Referenced Futures Contract.\385\
---------------------------------------------------------------------------

    \385\ Id. at 71685.

    In addition to establishing federal position limits for all 
Referenced Contracts, vacated part 151 would have, among other things, 
implemented a new statutory definition of bona fide hedging 
transactions, revised the standards for position aggregation, and 
established position visibility reporting requirements.\386\
---------------------------------------------------------------------------

    \386\ See generally 76 FR 71626, Nov. 18, 2011.
---------------------------------------------------------------------------

ii. Proposed Sec.  150.2
    Proposed Sec.  150.2 would list spot month, single month, and all-
months-combined position limits for 28 core referenced futures 
contracts. Consistent with section 4a(a)(5) of the Act, proposed Sec.  
150.2 would apply such position limits to all referenced contracts (as 
that term is defined in the proposed amendments to Sec.  150.1) \387\ 
including economically equivalent swaps.\388\ Consistent with section 
4a(a)(6) of the Act, proposed Sec.  150.2 would apply position limits 
across all trading venues subject to the Commission's jurisdiction. 
Proposed Sec.  150.2 would also specify Commission procedures for 
computing position limits levels.
---------------------------------------------------------------------------

    \387\ See discussion of proposed Sec.  150.1 above.
    \388\ Section 4a(a)(5) of the Act requires the Commission to 
impose the same limits on ``swaps'' that are ``economically 
equivalent'' to futures and options contracts. The statute does not 
define the term. But the Commission construes it, consistent with 
the policy objectives of the Dodd-Frank amendments, to require the 
Commission to expeditiously impose limits on physical commodity 
swaps that are price-linked to futures contracts, or to satisfy 
other defined equivalence criteria. The Commission accordingly 
construes the term ``economically equivalent'' to require swaps to 
satisfy the definition of ``referenced'' contract in proposed Sec.  
150.1. It requires that a swap be, among other things, ``directly or 
indirectly linked, including being partially or fully settled on, or 
priced at a fixed differential to, the price of that particular core 
referenced futures contract; or . . . directly or indirectly linked, 
including being partially or fully settled on, or priced at a fixed 
differential to, the price of the same commodity underlying that 
particular core referenced futures contract for delivery at the same 
location or locations as specified in that particular core 
referenced futures contract. . . .'' Other similarities or 
differences that exist between futures and swaps are not material to 
the Commission's interpretation of economic equivalence under 7 
U.S.C. 6a(a)(5).
---------------------------------------------------------------------------

a. Spot Month Limits
    Proposed Sec.  150.2(a) provides that no person may hold or control 
positions in referenced contracts in the spot month, net long or net 
short, in excess of the level specified by the Commission for physical-
delivery referenced contracts and, specified separately, for cash-
settled referenced contracts.\389\ Proposed Sec.  150.2(a) requires 
that a trader's positions in the physical-delivery referenced contract 
and cash-settled referenced contract are to be calculated separately 
under the separate spot month position limits fixed by the Commission. 
Therefore, a trader may hold positions up to the spot month limit in 
the physical-delivery contracts, as well as positions up to the 
applicable spot month limit in cash-settled contracts (i.e., cash-
settled futures and swaps), but a trader in the spot month may not net 
across physical-delivery and cash-settled contracts. Absent such a 
restriction in the spot month, a trader could stand for 100 percent of 
deliverable supply during the spot month by holding a large long 
position in the physical-delivery contract along with an offsetting 
short position in a cash-settled contract, which effectively would 
corner the market. The Commission will closely monitor the effects of 
its spot-month position limits.
---------------------------------------------------------------------------

    \389\ The Commission proposes to adopt an amended definition of 
spot month in proposed Sec.  150.1 (as discussed above), simplified 
from the spot-month definitions listed in vacated Sec.  151.3. The 
term ``spot month'' does not refer to a month of time.
---------------------------------------------------------------------------

b. Single-Month and All-Months-Combined Limits
    Proposed Sec.  150.2(b) provides that no person may hold or control 
positions, net long or net short, in referenced contracts in a single-
month or in all-months-combined in excess of the levels specified by 
the Commission. Proposed Sec.  150.2(b) permits traders to net all 
positions in referenced contracts (regardless of whether such 
referenced contracts are physical-delivery or cash-settled) when 
calculating the trader's positions for purposes of the proposed single-
month or all-months-combined position limits.\390\
---------------------------------------------------------------------------

    \390\ The Commission would allow traders to net positions in 
physical-delivery and cash-settled contracts outside the spot month 
because the Commission is less concerned about corners and squeezes 
outside the spot month. Permitting such netting will significantly 
reduce the number of traders with positions over the levels of non-
spot month limits. The Commission discusses how many traders 
historically held positions over the levels of non-spot month limits 
below.
---------------------------------------------------------------------------

    The Commission also proposes to amend Sec.  150.2 by deleting the 
potentially ambiguous phrase ``separately or in combination.'' The 
Commission first proposed adding the phrase ``separately or in 
combination'' to Sec.  150.2 in 1992.\391\ While the text of current 
Sec.  150.2 could be read in context to apply limits to futures or 
option positions, separately or in combination, the preamble to that 
rulemaking proposal stated otherwise, indicating the Commission was 
proposing a ``unified approach'' to limits on futures and options 
positions combined.\392\ When considering at that time whether to 
extend the existing federal position limits on futures contracts also 
to option contracts (on a futures equivalent basis), the Commission 
explained that a unified futures and options level limit was ``more 
appropriate for several reasons'' than position limits on futures that 
are separate from position limits on options.\393\ Further, the 
Commission noted in the 1992 preamble that ``proposed Rule 150.2 
provides that `[n]o person may hold or control net long or net short 
positions in excess of the stated limits.'' \394\ Although the 1992 
preamble stated the limit rule was to apply on a net basis to futures 
and options combined, the regulatory text could be read to suggest a 
different approach, i.e., applying to futures or options on both a 
separate basis and a combined basis. The phrase ``separately or in 
combination'' was not discussed in any subsequent Federal Register 
notice.\395\
---------------------------------------------------------------------------

    \391\ See Revision of Federal Speculative Position Limits, 
Proposed Rules, 57 FR 12766, Apr. 13, 1992.
    \392\ Id. at 12768.
    \393\ Id. at 12769.
    \394\ Id. at 12770.
    \395\ Indeed, the Commission noted in 1993 when it adopted an 
interim final rule that ``as proposed, speculative position limits 
for both futures and options thereon are being combined into a 
single limit.'' See interim final rule at 58 FR 17973, Apr. 7, 1993. 
The Commission noted it ``proposed to unify speculative position 
limits for both futures and options thereon, reasoning that, because 
price movements in the two markets are highly related, the unified 
system more readily reflects the economic reality of a position in 
its totality. Moreover, unified speculative limits provide the 
trader with greater flexibility. Further, traders should find such a 
unified speculative position limit easier to use and to understand. 
Finally, as a consequence of the simpler structure, unified 
speculative position limits would be easier to administer, resulting 
in more accurate and timely market surveillance.'' Id. at 17974.
    In discussing comments on the 1992 proposed rule, the Commission 
noted an objection by a DCM to the proposed unified futures and 
options limits, preferring the DCM's proposed separate futures and 
options limits. Id. at 17976. The Commission discussed views of 
other commenters regarding the proposed ``unified limits.'' Id. at 
17977. The Commission concluded that it would adopt the unified 
limits, noting it ``will combine futures and option limits.'' The 
preamble also made clear the limits would not apply separately, 
noting further that ``because such positions would be netted 
automatically under a unified speculative position limit, the 
Commission is removing and reserving Sec.  150.3(a)(2) which exempts 
from Federal speculative position limits positions in option 
contracts which offset the futures positions.'' Id. at 17978-79.

---------------------------------------------------------------------------

[[Page 75725]]

c. Selection of Initial Commodity Derivative Contracts in Physical 
Commodities
    As discussed above, the Commission interprets the CEA to mandate 
position limits for futures contracts in physical commodities other 
than excluded commodities (i.e., position limits are required for 
futures contracts in agricultural and exempt commodities).
    The Commission is proposing a phased approach to implement the 
statutory mandate. The Commission is proposing in this release to 
establish speculative position limits on 28 core referenced futures 
contracts in physical commodities.\396\ The Commission anticipates that 
it will, in subsequent releases, propose to expand the list of core 
referenced futures contracts in physical commodities. The Commission 
believes that a phased approach will (i) reduce the potential 
administrative burden by not immediately imposing position limits on 
all commodity derivative contracts in physical commodities at once, and 
(ii) facilitate adoption of monitoring policies, procedures and systems 
by persons not currently subject to positions limits (such as traders 
in swaps that are not significant price discovery contracts).
---------------------------------------------------------------------------

    \396\ The 28 core referenced futures contracts are: Chicago 
Board of Trade Corn, Oats, Rough Rice, Soybeans, Soybean Meal, 
Soybean Oil and Wheat; Chicago Mercantile Exchange Feeder Cattle, 
Lean Hog, Live Cattle and Class III Milk; Commodity Exchange, Inc., 
Gold, Silver and Copper; ICE Futures U.S. Cocoa, Coffee C, FCOJ-A, 
Cotton No. 2, Sugar No. 11 and Sugar No. 16; Kansas City Board of 
Trade Hard Winter Wheat (on September 6, 2013, CBOT and the Kansas 
City Board of Trade (``KCBT'') requested that the Commission permit 
the transfer to CBOT, effective December 9, of all contracts listed 
on the KCBT, and all associated open interest); Minneapolis Grain 
Exchange Hard Red Spring Wheat; and New York Mercantile Exchange 
Palladium, Platinum, Light Sweet Crude Oil, NY Harbor ULSD, RBOB 
Gasoline and Henry Hub Natural Gas.
---------------------------------------------------------------------------

    The Commission proposes, initially, to establish position limits on 
these 28 core referenced futures contracts, and related swap and 
futures contracts, on the basis that such contracts (i) have high 
levels of open interest \397\ and significant notional value of open 
interest \398\ or (ii) serve as a reference price for a significant 
number of cash market transactions.\399\ Thus, in the first phase, the 
Commission generally is proposing limits on those contracts that it 
believes are likely to play a larger role in interstate commerce than 
that played by other physical commodity derivative contracts.
---------------------------------------------------------------------------

    \397\ Open interest for this purpose is the sum of open 
contracts, as defined in Sec.  1.3(t), in futures contracts and in 
futures option contracts converted to a futures-equivalent amount, 
as defined in Sec.  150.1(f), and open swaps, as defined in Sec.  
20.1, on a future equivalent basis, as defined in Sec.  20.1, where 
such swaps are significant price discovery contracts as determined 
by the Commission under Sec.  36.3(d).
    \398\ Notional value of open interest for this purpose is open 
interest times the unit of trading for the relevant futures contract 
times the price of that futures contract.
    \399\ The Commission, in the vacated part 151 Rulemaking, 
selected for what was also intended as a first phase, the same 28 
core referenced futures contracts on the same basis. 76 FR at 71629. 
As was noted when part 151 was adopted, the 28 core referenced 
futures contracts were selected on the basis that such contracts: 
(1) had high levels of open interest and significant notional value; 
or (2) served as a reference price for a significant number of cash 
market transactions. Id.
---------------------------------------------------------------------------

    In selecting the list of 28 core referenced futures contracts in 
proposed Sec.  150.2(d), the Commission calculated the open interest 
and notional value of open interest for all futures, futures options, 
and significant price discovery contracts as of December 31, 2012 in 
all agricultural and exempt commodities. The Commission identified 
those commodities with the largest notional value of open interest and 
open interest for agricultural commodities, energy commodities, and 
metals commodities. The Commission then selected 16 agricultural 
commodities, 4 energy commodities, and 5 metals commodities. Once these 
commodities were selected, the Commission determined the most important 
futures contract, or contracts, within each commodity, generally by 
selecting the physical-delivery contracts with the highest levels of 
open interest, and deemed these as the core referenced futures 
contracts for which position limits would be established in this 
release. As such, the Commission proposes in this release to set 
position limits in 19 core referenced futures contracts for 
agricultural commodities, 4 core referenced futures contracts for 
energy commodities, and 5 core referenced futures contracts for metals 
commodities. The Commission currently sets limits for 9 legacy 
agricultural contracts under part 150.\400\
---------------------------------------------------------------------------

    \400\ 17 CFR 150.2.
---------------------------------------------------------------------------

    In selecting the 16 agricultural commodities, the Commission used 
oats as its baseline since oats has the lowest notional value of open 
interest and the lowest open interest among the 9 legacy agricultural 
contracts. Hence, the Commission selected all agricultural commodities 
that have notional value of open interest and open interest that exceed 
that of oats.\401\ The Commission has determined to defer consideration 
of speculative position limits on contracts in other agricultural 
commodities because the Commission must marshal its resources. The 
Commission anticipates that it will consider speculative position 
limits on contracts in other agricultural commodities in a subsequent 
rulemaking.
---------------------------------------------------------------------------

    \401\ While cheese has a notional value of open interest that is 
higher than oats, it has an open interest that is lower than that of 
oats (the open interest of the cheese contract was less than 10,000 
contracts as of year-end 2012). Furthermore, all futures and options 
contracts in cheese are on the same DCM (which currently has a 
single month position limit set at 1,000 contracts) and had no Large 
Trader Reporting for physical commodity swaps as reported under part 
20 during January 2013. The Commission intends to address cheese 
when it proposes, in subsequent releases, expansions to the list of 
referenced contracts in physical commodities.
---------------------------------------------------------------------------

    Table 6 below provides the notional value of open interest and open 
interest for agricultural contracts by type of commodity contract 
reported under the Commission's reporting rules.\402\ With respect to 
the type of commodity, it should be noted, for example, that ``wheat'' 
refers to the general type of physical commodity, and includes 
contracts listed on three different DCMs.
---------------------------------------------------------------------------

    \402\ 17 CFR Part 16. Commission staff computed notional values 
of open interest from data reported under Sec.  16.01. Data reported 
under Sec.  16.01 includes significant price discovery contracts in 
compliance with core principle VI for exempt commercial markets, 
app. B to part 36.

[[Page 75726]]



Table 6--Largest Agricultural Commodities Ranked by Notional Value of Open Interest in Futures, Futures Options,
                       and Significant Price Discovery Contracts, as of December 31, 2012
----------------------------------------------------------------------------------------------------------------
   Type and rank within type by                               Number of      Notional value of
   notion value of open interest          Commodity           contracts        open interest       Open interest
----------------------------------------------------------------------------------------------------------------
Agricultural:
    1.............................  Soybeans.............               6  $54.07 billion.......         765,030
    2.............................  Corn.................               6  $51.54 billion.......       1,545,135
    3.............................  Wheat................              10  $41.06 billion.......         767,006
    4.............................  Sugar................               5  $39.06 billion.......         896,082
    5.............................  Live Cattle..........               2  $19.91 billion.......         394,385
    6.............................  Coffee...............               3  $13.89 billion.......         211,147
    7.............................  Soybean Oil..........               4  $11.01 billion.......         344,412
    8.............................  Soybean Meal.........               2  $10.46 billion.......         253,361
    9.............................  Cotton...............               3  $9.75 billion........         234,367
    10............................  Lean Hogs............               1  $9.68 billion........         280,451
    11............................  Cocoa................               1  $5.13 billion........         218,224
    12............................  Feeder Cattle........               1  $2.64 billion........          34,816
    13............................  Milk.................               3  $1.45 billion........          40,690
    14............................  Frozen Orange Juice..               1  $609 million.........          29,652
    15............................  Rice.................               1  $445 million.........          14,783
    16............................  Cheese...............               2  $282 million.........           8,601
    17............................  Oats.................               1  $187 million.........          10,755
----------------------------------------------------------------------------------------------------------------

    For exempt commodity contracts, the Commission proposes to 
initially select the commodities in the energy and metals markets that 
have the largest open interest and notional value of interest. For 
metals, the Commission proposes to initially target the 5 largest 
commodities in terms of notional value of open interest, as listed in 
Table 7 below, and selected 1 core referenced futures contract for each 
of the 5 metals. In selecting these 5 core referenced futures 
contracts, the Commission would establish federal position limits on 
ninety-eight percent of the open interest in U.S. metals markets.
    The next largest commodity in metals after palladium in terms of 
notional value is iron ore, which has open interest that is about one-
quarter that of palladium.\403\ Furthermore, there are less than 50 
reportable traders \404\ in iron ore, while in the 5 selected metals, 
each has more than 200 reportable traders. The Commission has 
determined to defer consideration of speculative position limits on 
contracts in iron ore and other metal commodities because the 
Commission must marshal its resources. The Commission anticipates that 
it will consider speculative position limits on contracts in iron ore 
and other metal commodities in a subsequent rulemaking.

     Table 7--Largest Metals Commodities by Notional Value of Open Interest in Futures, Futures Options, and
                         Significant Price Discovery Contracts, as of December 31, 2012
----------------------------------------------------------------------------------------------------------------
   Type and rank within type by                               Number of      Notional value of
   notion value of open interest          Commodity           contracts        open interest       Open interest
----------------------------------------------------------------------------------------------------------------
Metals:
    1.............................  Gold.................               6  $100.41 billion......         604,853
    2.............................  Silver...............               5  $27.77 billion.......         180,576
    3.............................  Copper...............               3  $13.28 billion.......         146,865
    4.............................  Platinum.............               1  $4.78 billion........          61,467
    5.............................  Palladium............               1  $2.08 billion........          32,293
----------------------------------------------------------------------------------------------------------------

    For energy commodities, the Commission similarly proposes to select 
the 4 largest commodities for this first phase of the expansion of 
speculative position limits and selected 1 core referenced futures 
contract in each of these 4 commodities. Each of these commodities has 
a notional value of open interest in excess of $40 billion.
    The fifth largest commodity in energy is electricity, and the 
Commission has determined to defer consideration of speculative 
position limits on contracts in electricity and other energy 
commodities because the Commission must marshal its resources. The 
Commission anticipates that it will consider speculative position 
limits on contracts in electricity and other energy commodities in a 
subsequent rulemaking.
---------------------------------------------------------------------------

    \403\ The open interest in iron ore futures, futures options, 
and significant price discovery contracts as of December 31, 2012, 
was 8,195 contracts and the notional value of open interest was 
$236.63 million.
    \404\ A reportable trader is a trader with a reportable position 
as defined in Sec.  15.00(p).

[[Page 75727]]



     Table 8--Largest Energy Commodities by Notional Value of Open Interest in Futures, Futures Options, and
                         Significant Price Discovery Contracts, as of December 31, 2012
----------------------------------------------------------------------------------------------------------------
   Type and rank within type by                               Number of      Notional value of
   notion value of open interest          Commodity           contracts        open interest       Open interest
----------------------------------------------------------------------------------------------------------------
Energy:
    1.............................  Crude Oil............              76  $516.42 billion......       6,188,201
    2.............................  Heating Oil/Diesel...              89  $470.69 billion......       1,192,036
    3.............................  Natural Gas..........             216  $225.74 billion......      21,335,777
    4.............................  Gasoline.............              54  $46.13 billion.......         402,369
----------------------------------------------------------------------------------------------------------------

d. Setting Levels of Spot-Month Limits
    Proposed Sec.  150.2(e)(1) establishes the initial levels of 
speculative position limits for each referenced contract at the levels 
listed in appendix D to this part. These levels would become effective 
60 days after publication in the Federal Register of a final rule 
adopted by the Commission. The Commission proposes to set the initial 
spot month position limit levels for referenced contracts at the 
existing DCM-set levels for the core referenced futures contracts 
because the Commission believes this approach is consistent with the 
regulatory objectives of the Dodd-Frank Act amendments to the CEA and 
many market participants are already used to these levels.\405\
---------------------------------------------------------------------------

    \405\ DCMs currently set spot-month position limits based on 
their own estimates of deliverable supply. Federal spot-month limits 
can, therefore, be implemented by the Commission relatively 
expeditiously.
---------------------------------------------------------------------------

    As an alternative to the initial spot month limits in proposed 
appendix D to part 150, the Commission is considering setting the 
initial spot month limits based on estimated deliverable supplies 
submitted by the CME Group in correspondence dated July 1, 2013.\406\ 
Under this alternative, the Commission would use the exchange's 
estimated deliverable supplies and apply the 25 percent formula to set 
the level of the spot month limits in a final rule if the Commission 
verifies the exchange's estimated deliverable supplies are reasonable. 
For purposes of setting initial spot month limits in a final rule, in 
the event the Commission is not able to verify an exchange's estimated 
deliverable supply for any commodity as reasonable, then the Commission 
may determine to adopt the initial spot month limits in proposed 
appendix D for such commodity, or such higher level based on the 
Commission's estimated deliverable supply for such commodity, but not 
greater than would result from the exchange's estimated deliverable 
supply. The Commission requests comment on whether the initial spot 
month limits should be based on the exchange's July 1, 2013, 
estimations of deliverable supplies, once verified. The spot month 
limits that would result from the CME's estimated deliverable supplies 
are show in Table 9 below.
---------------------------------------------------------------------------

    \406\ Letter from Terrance A. Duffy, Executive Chairman and 
President, CME Group, to CFTC Chairman Gensler, Commissioner 
Chilton, Commissioner Sommers, Commissioner O'Malia, Commissioner 
Wetjen, and Division of Market Oversight Director Richard Shilts, 
dated July 1, 2013 (available at www.cftc.gov). The Commission notes 
the CME Group did not propose to set the level of spot month limits 
using the 25 percent formula in this letter.

   Table 9--Alternative Proposed Initial Spot Month Limit Levels for Certain Core Referenced Futures Contracts
        (Based on CME Group Estimates of Deliverable Supply Submitted to the Commission on July 1, 2013)
----------------------------------------------------------------------------------------------------------------
                                                          Alternative
                                                        proposed spot-
                                                          month limit                                CME Group
                                         Current spot-      (25% of       CME Group deliverable     deliverable
               Contract                   month limit     deliverable        supply estimate          supply
                                                        supply rounded                              estimate in
                                                        up to the next                               contracts
                                                        100 contracts)
----------------------------------------------------------------------------------------------------------------
                                               Legacy Agricultural
----------------------------------------------------------------------------------------------------------------
Chicago Board of Trade Corn (C).......             600           1,000  19,590,000 bushels......           3,918
Chicago Board of Trade Oats (O).......             600           1,500  29,470,000 bushels......           5,894
Chicago Board of Trade Soybeans (S)...             600           1,200  23,900,000 bushels......           4,780
Chicago Board of Trade Soybean Meal                720           4,400  1,753,047 tons..........          17,531
 (SM).
Chicago Board of Trade Soybean Oil                 540           5,300  1,253,000 lbs...........          20,883
 (SO).
Chicago Board of Trade Wheat (W)......             600           3,700  73,790,000 bushels......          14,757
Kansas City Board of Trade Hard Winter             600           4,100  81,710,000 bushels......          16,342
 Wheat (KW).
----------------------------------------------------------------------------------------------------------------
                                               Other Agricultural
----------------------------------------------------------------------------------------------------------------
Chicago Board of Trade Rough Rice (RR)             600           1,800  14,100,000 cwt..........           7,050
Chicago Mercantile Exchange Class III             1500           5,300  4,170,000,000 lbs.......          20,850
 Milk (DA).
----------------------------------------------------------------------------------------------------------------
                                                     Energy
----------------------------------------------------------------------------------------------------------------
New York Mercantile Exchange Henry Hub           1,000           3,900  154,200,000 mmBtu.......          15,420
 Natural Gas (NG).

[[Page 75728]]

 
New York Mercantile Exchange Light               3,000          12,100  48,100,000 barrels......          48,100
 Sweet Crude Oil (CL).
New York Mercantile Exchange NY Harbor           1,000           5,500  20,000,000 barrels......          22,000
 ULSD (HO).
New York Mercantile Exchange RBOB                1,000           7,300  29,000,000 barrels......          29,000
 Gasoline (RB).
----------------------------------------------------------------------------------------------------------------
                                                      Metal
----------------------------------------------------------------------------------------------------------------
Commodity Exchange, Inc. Copper (HG)..           1,200           1,700  161,850,000 lbs.........           6,474
Commodity Exchange, Inc. Gold (GC)....           3,000          27,300  10,911,100 troy ounces..         109,111
Commodity Exchange, Inc. Silver (SI)..           1,500           5,700  113,375,000 troy ounces.          22,675
New York Mercantile Exchange Palladium             650           1,500  578,900 troy ounces.....           5,789
 (PA).
New York Mercantile Exchange Platinum              500             800  152,150 troy ounces.....           3,043
 (PL).
----------------------------------------------------------------------------------------------------------------

    The Commission is considering a further alternative to setting the 
spot month limit at a level based on 25 percent of estimated 
deliverable supply. This alternative would permit the Commission, in 
its discretion, both for setting an initial spot month limit and 
subsequent resets, to use the recommended level, if any, of the spot 
month limit as submitted by each DCM listing a CRFC (if lower than 25 
percent of estimated deliverable supply). Under this alternative, the 
Commission would have discretion to set the level of any spot month 
limit to the DCM's recommended level, a level corresponding to 25 
percent of estimated deliverable supply, or a level in proposed 
appendix D. The Commission requests comment on all aspects of this 
alternative. Specifically, is the Commission's discretion in 
administering levels of spot month limits appropriately constrained by 
the choice, in its discretion, of the DCM's recommended level or the 
level corresponding to 25 percent of deliverable supply or a level in 
proposed appendix D?
    Proposed Sec.  150.2(e)(3) explains how the Commission will 
calculate spot month position limit levels. The Commission proposes to 
fix the levels of the spot-month limits for referenced contracts based 
on one-quarter of the estimated spot-month deliverable supply in the 
relevant core referenced futures contract, no less frequently than 
every two calendar years.\407\ Under the proposal, each DCM listing a 
core referenced futures contract would be required to report to the 
Commission an estimate of spot-month deliverable supply, accompanied by 
a description of the methodology used to derive the estimate and any 
statistical data supporting the estimate.\408\ Proposed Sec.  
150.2(e)(3) provides a cross-reference to appendix C to part 38 for 
guidance on how to estimate deliverable supply.\409\ The Commission 
proposes to utilize the estimated spot-month deliverable supply 
provided by a DCM unless the Commission decides to rely on its own 
estimate of deliverable supply.
---------------------------------------------------------------------------

    \407\ Federal spot month limits have historically been set at 
one-quarter of estimated deliverable supply. See, e.g., 64 FR 24038, 
24041, May 5, 1999. Further, current guidance on complying with DCM 
core principle 5 calls for spot month levels to be set at ``no 
greater than one-quarter of the estimated spot month deliverable 
supply. . . .'' 17 CFR 150.5(c)(1).
    \408\ The timing for submission of such reports varies by 
commodity type--see proposed Sec.  150.2(e)(ii)(A)-(D).
    \409\ See 17 CFR part 38, appendix C, at section (b)(1)(i).
---------------------------------------------------------------------------

    The Commission proposes to update spot-month limits every two years 
for each of the 28 referenced contracts, and to stagger the dates on 
which DCMs must submit estimates of deliverable supply. The Commission 
has re-evaluated data on the frequency with which DCMs historically 
have changed the levels of spot month limits in the 28 physical-
delivery core referenced futures contracts. Given the low frequency of 
changes to DCM spot month limits, the Commission has reconsidered 
requiring annual updates for referenced contracts in agricultural 
commodities.\410\ When compared with annual updates to the spot month 
position limits, biennial updates would reduce the burden on market 
participants in updating speculative position limit monitoring 
systems.\411\
---------------------------------------------------------------------------

    \410\ In any event, core principle 5 in section 5(d)(5) of the 
Act imposes a continuing obligation on a DCM, where the DCM has set 
a position limit as necessary and appropriate, to ensure levels of 
position limits are set to reduce the potential threat of market 
manipulation or congestion (especially during the spot month). 7 
U.S.C. 7(d)(5). Thus, a DCM appropriately would reduce the level of 
its exchange-set spot month limit if the level of deliverable supply 
declined significantly. Core principle 6 in section 5h(f)(6) of the 
Act imposes a similar obligation on a SEF that is a trading 
facility. 7 U.S.C. 7b-3(f)(6).
    \411\ Proposed Sec.  150.2(e)(3) also provides the Commission 
with flexibility to reset spot month position limits more frequently 
than every two years, but the proposed rule would require DCMs to 
submit estimated deliverable supplies only every two years. This 
means, for example, that a DCM may with discretion provide the 
Commission with updated estimated deliverable supplies and petition 
the Commission to reset spot month limits more frequently than every 
two years. Similarly, proposed Sec.  150.2(e)(4) provides the 
Commission with flexibility to change non-spot month position limits 
more frequently than every two years. This means, for example, that 
a DCM may petition the Commission to reset non-spot month position 
limits based on the most recent calendar-year's open interest.
---------------------------------------------------------------------------

    The term ``estimated deliverable supply'' means the amount of a 
commodity that can reasonably be expected to be readily available to 
short traders to make delivery at the

[[Page 75729]]

expiration of a futures contract.\412\ The use of estimated deliverable 
supply to set spot-month limits is wholly consistent with DCM core 
principles 3 and 5.\413\ Currently, in determining whether a physical-
delivery contract complies with core principle 3, the Commission 
considers whether the specified contract terms and conditions may 
result in an estimated deliverable supply that is sufficient to ensure 
that the contract is not readily susceptible to price manipulation or 
distortion. The Commission has previously indicated that it would be an 
acceptable practice for a DCM to set spot-month limits pursuant to core 
principle 5 based on an analysis of estimated deliverable 
supplies.\414\ Accordingly, the Commission is adopting estimated 
deliverable supply as the basis of setting spot-month limits.
---------------------------------------------------------------------------

    \412\ As part of its recently published guidance for complying 
with DCM core principle 3, the Commission provided guidance on how 
to calculate deliverable supplies in appendix C to part 38 (at 
paragraph (b)(1)(i)). 77 FR 36612, 36722, Jun. 19, 2012. Typically, 
deliverable supply reflects the quantity of the commodity that 
potentially could be made available for sale on a spot basis at 
current prices at the contract's delivery points. For a physical-
delivery commodity contract, this estimate might represent product 
which is in storage at the delivery point(s) specified in the 
futures contract or can be moved economically into or through such 
points consistent with the delivery procedures set forth in the 
contract and which is available for sale on a spot basis within the 
marketing channels that normally are tributary to the delivery 
point(s).
    \413\ DCM core principle 3 specifies that a board of trade shall 
list only contracts that are not readily susceptible to 
manipulation. See CEA section 5(d)(3); 7 U.S.C. 7(d)(3). DCM core 
principle 5 (discussed in detail below) requires a DCM to establish 
position limits or position accountability provisions where 
necessary and appropriate ``to reduce the threat of market 
manipulation or congestion, especially during the delivery month.'' 
CEA section 5(d)(5); 7 USC 7(d)(5). See also guidance and discussion 
of estimated deliverable supply in Core Principles and Other 
Requirements for Designated Contract Markets, Final Rule, 77 FR 
36612, 36722, Jun. 19, 2012.
    \414\ See 17 CFR 150.5(b).
---------------------------------------------------------------------------

    The Commission proposes to adopt the 25 percent level of estimated 
deliverable supply for setting spot-month limits because, based on the 
Commission's surveillance and enforcement experience, this formula 
narrowly targets the trading that may be most susceptible to, or likely 
to facilitate, price disruptions. The Commission believes this spot 
month limit formula best maximizes the statutory objectives expressed 
in CEA section 4a(a)(3)(B) of preventing excessive speculation and 
market manipulation, ensuring market liquidity for bona fide hedgers, 
and promoting efficient price discovery. This formula is consistent 
with the longstanding acceptable practices for DCM core principle 5 
which provide that, for physical-delivery contracts, the spot-month 
limit should not exceed 25 percent of the estimated deliverable 
supply.\415\ The Commission believes, based on its experience and 
expertise, that the formula would be an effective prophylactic tool to 
reduce the threat of corners and squeezes, and promote convergence 
without compromising market liquidity.\416\
---------------------------------------------------------------------------

    \415\ Id.
    \416\ The Commission also has established requirements for a DCM 
to monitor a physical-delivery contract's terms and conditions as 
they relate to the convergence between the futures contract price 
and the cash price of the underlying commodity. 17 CFR 38.252. See 
the preamble discussion of Sec.  38.252 in the final part 38 
rulemaking. 77 FR 36612, 36635, June 19, 2012. The spot month limits 
will be set at levels that target only extraordinarily large 
traders. For example, the spot month limit for CBOT Wheat will be 
set at 600 contracts. The contract size for CBOT Wheat is 5,000 
bushels (~136 metric tons). The current price of a bushel of wheat 
is approximately $7 per bushel. Therefore, a speculative trader 
would be permitted to carry a ~$21 million position in wheat into 
the spot month under the proposed position limits regime.
---------------------------------------------------------------------------

    Furthermore, the Commission has observed generally low usage among 
all traders of the physical-delivery futures contract during the spot 
month, relative to the existing exchange spot-month position limits. 
Thus, the Commission infers that few, if any, traders offset the risk 
of swaps in physical-delivery futures contracts during the spot month 
with positions in excess of the exchange's current spot month 
limits.\417\ The Commission invites comments as to the extent to which 
traders actually have offset the risk of swaps during the spot month in 
a physical-delivery futures contract with a position in excess of an 
exchange's spot-month position limit.
---------------------------------------------------------------------------

    \417\ See 76 FR at 71635 (n. 100-01) (discussing data in CME 
natural gas contract).
---------------------------------------------------------------------------

    Additionally, the Commission imposes spot-month limits using the 
same formula to restrict the size of positions in cash-settled 
contracts that would potentially benefit from a trader's distortion of 
the price of the underlying referenced contract (or other cash price 
series) that serves as the basis of cash settlement.\418\ The 
Commission has found that traders with positions in look-alike cash-
settled contracts have an incentive to manipulate and undermine price 
discovery in the physical-delivery contract to which the cash-settled 
contract is linked by price. This practice is known as ``banging'' or 
``marking the close,'' \419\ a manipulative practice that the 
Commission prosecutes and that this proposal seeks to prevent.\420\
---------------------------------------------------------------------------

    \418\ The Commission also has established requirements for DCMs 
to monitor the pricing of cash-settled contracts. 17 CFR 38.253.
    \419\ Section 4c(a)(5) of the Act lists certain unlawful 
disruptive trading practices, including ``any trading, practice, or 
conduct on or subject to the rules of a registered entity that . . . 
demonstrates intentional or reckless disregard for the orderly 
execution of transactions during the closing period.'' 7 U.S.C. 
6c(a)(5)(B). ``Banging'' or ``marking the close'' is discussed in 
the Commission's Antidisruptive Practices Authority, Interpretive 
guidance and policy statement, 78 FR 31890, 31894-96, May 28, 2013.
    \420\ See, e.g., DiPlacido v. CFTC, 364 Fed. Appx. 657 (2d Cir. 
2009) (upholding Commission finding that DiPlacido manipulated the 
market where DiPlacido's closing trades accounted for 14% of the 
market).
---------------------------------------------------------------------------

    In the final part 38 rulemaking, the Commission instructed DCMs, 
when estimating deliverable supplies, to take into consideration the 
individual characteristics of the underlying commodity's supply and the 
specific delivery features of the futures contract.\421\ In this 
regard, the Commission notes that DCMs historically have set or 
maintained exchange spot month limits at levels below 25 percent of 
deliverable supply. Setting such a lower level of a spot month limit 
may also serve the objectives of preventing excessive speculation, 
manipulation, squeezes and corners, while ensuring sufficient market 
liquidity for bona fide hedgers in the view of the listing DCM and 
ensuring the price discovery function of the market is not disrupted. 
Hence, the Commission observes that there may be a range of spot month 
limits, including limits set at levels below 25 percent of deliverable 
supply, which may serve as practicable to maximize these policy 
objectives.
---------------------------------------------------------------------------

    \421\ See 77 FR 36611, 36723, Jun. 12, 2012. DCM estimates of 
deliverable supplies (and the supporting data and analysis) will 
continue to be subject to Commission review.
---------------------------------------------------------------------------

e. Setting Levels of Single-Month and All-Months-Combined Limits
    Proposed Sec.  150.2(e)(4) explains how the Commission would 
calculate non-spot-month position limit levels, which the Commission 
proposes to fix no less frequently than every two calendar years. In 
contrast to spot month position limits which are set as a function of 
estimated deliverable supply, the formula for the non-spot-month 
position limits is based on total open interest for all referenced 
contracts in a commodity. The actual position limit level will be set 
based on a formula: 10 percent of the open interest for the first 
25,000 contracts and 2.5 percent of the open interest thereafter.\422\ 
The Commission has used the 10, 2.5 percent formula in administering 
the level of the legacy all-

[[Page 75730]]

months position limits since 1999.\423\ The Commission believes the 
non-spot month position limits would restrict the market power of a 
speculator that could otherwise be used to cause unwarranted price 
movements. The Commission solicits comment on its single-month and all-
months-combined limits, including whether the proposed formula has 
effectively addressed and will continue to address the Sec.  4a(a)(3) 
regulatory objectives.
---------------------------------------------------------------------------

    \422\ The Commission proposes to use the futures position limits 
formula (the 10, 2.5 percent formula) to determine non-spot-month 
position limits for referenced contracts. The 10, 2.5 percent 
formula is identified in 17 CFR 150.5(c)(2).
    \423\ See 64 FR 24038, 24039, May 5, 1999. The Commission 
applies the open interest criterion by using a formula that 
specifies appropriate increases to the limit level as a percentage 
of open interest. As the total open interest of a futures market 
increases, speculative position limit levels can be raised. The 
Commission proposed using the 10, 2.5 percent formula in 1992. See 
Revision of Federal Speculative Position Limits, Proposed Rules, 57 
FR 12766, 12770, Apr. 13, 1992. The Commission implemented the 10, 
2.5 percent formula in two steps, the first step in 1993 and the 
second step in 1999. See Revision of Federal Speculative Limits, 
Interim Final Rules, 58 FR 17973, 17978, Apr. 7, 1993. See also 
Establishment of Speculative Position Limits, 46 FR 50938, Oct. 16, 
1981 (``[T]he prevention of large or abrupt price movements which 
are attributable to the extraordinarily large speculative positions 
is a congressionally endorsed regulatory objective of the 
Commission. Further, it is the Commission's view that this objective 
is enhanced by the speculative position limits since it appears that 
the capacity of any contract to absorb the establishment and 
liquidation of large speculative positions in an orderly manner is 
related to the relative size of such positions, i.e., the capacity 
of the market is not unlimited.'').
---------------------------------------------------------------------------

    The Commission also proposes to estimate average open interest in 
referenced contracts based on the largest annual average open interest 
computed for each of the past two calendar years, using either month-
end open contracts or open contracts for each business day in the time 
period, as the Commission finds in its discretion to be reliable.
(1) Initial Levels
    For setting the levels of initial non-spot month limits, the 
Commission proposes to use open interest for calendar years 2011 and 
2012 in futures contracts, options thereon, and in swaps that are 
significant price discovery contracts that are traded on exempt 
commercial markets.

                Table 10--Open Interest and Calculated Limits by Core Futures Referenced Contract, January 1, 2011, to December 31, 2012
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                  Open
                                        Core referenced futures                 interest       Open        Limit        Limit
            Commodity type                     contract              Year        (daily      interest      (daily    (month end)     Limit
                                                                                average)   (month end)    average)
---------------------------------------------------------------------------------------------------------------------------------------------
Legacy Agricultural..................  CBOT Corn (C)...........         2011    2,063,231    1,987,152       53,500       51,600       53,500
                                       ........................         2012    1,773,525    1,726,096       46,300       45,100
                                       CBOT Oats (O)...........         2011       15,375       15,149        1,600        1,600        1,600
                                       ........................         2012       12,291       11,982        1,300        1,200
                                       CBOT Soybeans (S).......         2011      822,046      798,417       22,500       21,900       26,900
                                       ........................         2012      997,736      973,672       26,900       26,300
                                       CBOT Soybean Meal (SM)..         2011      237,753      235,945        7,900        7,800        9,000
                                       ........................         2012      283,304      281,480        9,000        9,000
                                       CBOT Soybean Oil (SO)...         2011      392,658      382,100       11,700       11,500       11,900
                                       ........................         2012      397,549      388,417       11,900       11,600
                                       CBOT Wheat (W)..........         2011      565,459      550,251       16,100       15,700       16,200
                                       ........................         2012      572,068      565,490       16,200       16,100
                                       ICE Cotton No. 2 (CT)...         2011      275,799      272,613        8,800        8,700        8,800
                                       ........................         2012      259,608      261,789        8,400        8,500
                                       KCBT Hard Winter Wheat           2011      183,400      177,998        6,500        6,400        6,500
                                        (KW).
                                       ........................         2012      155,540      155,074        5,800        5,800
                                       MGEX Hard Red Spring             2011       55,938       54,546        3,300        3,300        3,300
                                        Wheat (MWE).
                                       ........................         2012       40,577       40,314        2,900        2,900
Other Agricultural...................  CBOT Rough Rice (RR)....         2011       21,788       21,606        2,200        2,200        2,200
                                       ........................         2012       15,262       14,964        1,600        1,500
                                       CME Milk Class III (DA).         2011       55,567       57,490        3,300        3,400        3,400
                                       ........................         2012       47,378       47,064        3,100        3,100
                                       CME Feeder Cattle (FC)..         2011       44,611       43,730        3,000        3,000        3,000
                                       ........................         2012       44,984       43,651        3,000        3,000
                                       CME Lean Hog (LH).......         2011      284,211      288,281        9,000        9,100        9,400
                                       ........................         2012      296,822      297,882        9,300        9,400
                                       CME Live Cattle (LC)....         2011      433,581      440,229       12,800       12,900       12,900
                                       ........................         2012      409,501      417,037       12,200       12,400
                                       ICUS Cocoa (CC).........         2011      191,801      198,290        6,700        6,900        7,100
                                       ........................         2012      202,886      206,808        7,000        7,100
                                       ICE Coffee C (KC).......         2011      174,845      176,079        6,300        6,300        7,100
                                       ........................         2012      204,268      207,403        7,000        7,100
 
                                       ICE FCOJ-A (OJ).........         2011       37,347       36,813        2,900        2,800        2,900
                                       ........................         2012       30,788       29,867        2,700        2,700
                                       ICE Sugar No. 11 (SB)...         2011      814,234      806,887       22,300       22,100       23,500
                                       ........................         2012      855,375      862,446       23,300       23,500
                                       ICE Sugar No. 16 (SF)...         2011       11,532       11,662        1,200        1,200        1,200
                                       ........................         2012       10,485       10,530        1,100        1,100
Energy...............................  NYMEX Henry Hub Natural          2011    4,831,973    4,821,859      122,700      122,500      149,600
                                        Gas (NG).
                                       ........................         2012    5,905,137    5,866,365      149,600      148,600
                                       NYMEX Light Sweet Crude          2011    4,214,770    4,291,662      107,300      109,200      109,200
                                        Oil (CL).
                                       ........................         2012    3,720,590    3,804,287       94,900       97,000
                                       NYMEX NY Harbor ULSD             2011      559,280      566,600       15,900       16,100       16,100
                                        (HO).
                                       ........................         2012      473,004      485,468       13,800       14,100

[[Page 75731]]

 
                                       NYMEX RBOB Gasoline (RB)         2011      362,349      370,207       11,000       11,200       11,800
                                       ........................         2012      388,479      393,219       11,600       11,800
Metals...............................  COMEX Copper (HG).......         2011      134,097      131,688        5,300        5,200        5,600
                                       ........................         2012      148,767      147,187        5,600        5,600
                                       COMEX Gold (GC).........         2011      782,793      746,904       21,500       20,600       21,500
                                       ........................         2012      685,618      668,751       19,100       18,600
                                       COMEX Silver (SI).......         2011      179,393      172,567        6,400        6,200        6,400
                                       ........................         2012      165,670      164,064        6,100        6,000
                                       NYMEX Palladium (PA)....         2011       22,327       22,244        2,300        2,300        5,000
                                       ........................         2012       23,869       24,265        2,400        2,500
                                       NYMEX Platinum (PL).....         2011       40,988       40,750        2,900        2,900        5,000
                                       ........................         2012       54,838       54,849        3,300        3,300
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Given the levels of open interest for the calendar years of 2011 
and 2012 for futures contracts and for swaps that are significant price 
discovery contracts traded on exempt commercial markets, this formula 
would result in levels for non-spot month position limits that are high 
in comparison to the size of positions typically held in futures 
contracts.\424\ Few persons held positions over the levels of the 
proposed position limits in the past two calendar years, as illustrated 
in Table 11 below. To provide the public with additional information 
regarding the number of large position holders in the past two calendar 
years, the table also provides counts of persons over 60, 80, 100, and 
500 percent of the levels of the proposed position limits. Note that 
the 500 percent line is omitted from Table 11 where no person held a 
position over that level.
---------------------------------------------------------------------------

    \424\ A review of preliminary swap open interest reported under 
part 20 indicates that open interest in swap referenced contracts is 
low, in comparison to futures open interest. Any open interest in 
swap referenced contracts would serve to increase the levels of the 
positions limits.

  Table 11--Unique Persons Over Percentages of Proposed Position Limit Levels, January 1, 2011, to December 31,
                                                      2012
----------------------------------------------------------------------------------------------------------------
                                                                     Unique persons over level
                                                 ---------------------------------------------------------------
 Commodity type/core referenced     Percent of      Spot month
        futures contract               level        (physical-      Spot month     Single month     All months
                                                     delivery)    (cash-settled)
----------------------------------------------------------------------------------------------------------------
                                               Legacy Agricultural
----------------------------------------------------------------------------------------------------------------
CBOT Corn (C)...................              60             243               4               9              16
                                              80             167               *               6               8
                                             100              53               *               *               5
                                             500               7  ..............  ..............  ..............
CBOT Oats (O)...................              60               5  ..............              15              15
                                              80               4  ..............               8               9
                                             100               *  ..............               6               8
CBOT Soybeans (S)...............              60             119  ..............              14              17
                                              80              88  ..............               9              12
                                             100              27  ..............               6               8
                                             500               9  ..............  ..............  ..............
CBOT Soybean Meal (SM)..........              60              52               *              20              35
                                              80              32               *               9              16
                                             100              12               *               6               9
CBOT Soybean Oil (SO)...........              60             114  ..............              31              37
                                              80              70  ..............              15              20
                                             100              20  ..............              10              12
                                             500               *  ..............  ..............  ..............
CBOT Wheat (W)..................              60              46  ..............              22              32
                                              80              31  ..............              14              16
                                             100              14  ..............               9              12
                                             500               *  ..............  ..............  ..............
ICE Cotton No. 2 (CT)...........              60              12  ..............              16              19
                                              80               7  ..............              11              14
                                             100               6  ..............               9              11
                                             500               *  ..............  ..............  ..............
KCBT Hard Winter Wheat (KW).....              60              33  ..............              36              40
                                              80              18  ..............              13              21
                                             100              14  ..............               9              13
                                             500               *  ..............  ..............  ..............
MGEX Hard Red Spring Wheat (MWE)              60              11  ..............              17              24
                                              80              10  ..............              11              15
                                             100               6  ..............               9               9
----------------------------------------------------------------------------------------------------------------

[[Page 75732]]

 
                                               Other Agricultural
----------------------------------------------------------------------------------------------------------------
CBOT Rough Rice (RR)............              60               9  ..............               7               9
                                              80               6  ..............               5               5
                                             100  ..............  ..............               *               *
CME Milk Class III (DA).........              60              NA               6               *              19
                                              80              NA               4  ..............              14
                                             100              NA               *  ..............               7
CME Feeder Cattle (FC)..........              60              NA              76               4              13
                                              80              NA              55               *               7
                                             100              NA              16               *               *
CME Lean Hog (LH)...............              60              NA              52              20              30
                                              80              NA              41              11              18
                                             100              NA              28               7              13
                                             500              NA               *  ..............  ..............
CME Live Cattle (LC)............              60              37  ..............              13              27
                                              80               *  ..............               7              17
                                             100               *  ..............               4              12
ICUS Cocoa (CC).................              60               *  ..............              24              29
                                              80               *  ..............              14              18
                                             100               *  ..............              10              12
ICE Coffee C (KC)...............              60              14  ..............              19              24
                                              80              13  ..............               8              14
                                             100               8  ..............               5               6
                                             500               2  ..............  ..............  ..............
ICE FCOJ-A (OJ).................              60               8  ..............              13              16
                                              80               7  ..............               9               9
                                             100               6  ..............               6               7
ICE Sugar No. 11 (SB)...........              60              33  ..............              28              31
                                              80              23  ..............              20              24
                                             100              15  ..............              12              18
                                             500               *  ..............  ..............  ..............
ICE Sugar No. 16 (SF)...........              60               6  ..............              10              16
                                              80               5  ..............               7              14
                                             100               5  ..............               7              13
----------------------------------------------------------------------------------------------------------------
                                                     Energy
----------------------------------------------------------------------------------------------------------------
NYMEX Henry Hub Natural Gas (NG)              60             177             221               *               5
                                              80             131             183  ..............  ..............
                                             100              61             148  ..............  ..............
                                             500  ..............              35  ..............  ..............
NYMEX Light Sweet Crude Oil (CL)              60              98              89  ..............               4
                                              80              72              62  ..............               *
                                             100              39              33  ..............               *
                                             500  ..............  ..............  ..............  ..............
NYMEX NY Harbor ULSD (HO).......              60              76              45               9              18
                                              80              53              35               6              15
                                             100              33              24               5               8
                                             500  ..............               *  ..............  ..............
NYMEX RBOB Gasoline (RB)........              60              71              45              21              30
                                              80              48              32              12              16
                                             100              30              22               7              11
                                             500  ..............               *  ..............  ..............
----------------------------------------------------------------------------------------------------------------
                                                     Metals
----------------------------------------------------------------------------------------------------------------
COMEX Copper (HG)...............              60              14  ..............              29              28
                                              80              13  ..............              21              22
                                             100               *  ..............              16              16
COMEX Gold (GC).................              60              13  ..............              24              21
                                              80               9  ..............              19              19
                                             100               5  ..............              12              12
COMEX Silver (SI)...............              60               5  ..............              25              21
                                              80               *  ..............              15              13
                                             100               *  ..............              10               9
NYMEX Palladium (PA)............              60               6  ..............               5               5
                                              80               *  ..............               *               *

[[Page 75733]]

 
                                             100               *  ..............               *               *
NYMEX Platinum (PL).............              60              11  ..............              15              18
                                              80               5  ..............              11              12
                                             100               *  ..............               9             10
----------------------------------------------------------------------------------------------------------------
Legend:
* means fewer than 4 unique owners exceeded the level.
-- means no unique owners exceeded the level.
NA means not applicable.\425\

    The Commission has also reviewed preliminary data submitted to it 
under part 20. The Commission preliminarily has decided not to use the 
data currently reported under part 20 for purposes of setting the 
initial levels of the proposed single month and all-months-combined 
positions limits. Instead, the Commission is proposing to set initial 
levels based on open interest in futures, options on futures, and SPDC 
swaps. Thus, the proposed initial levels represent lower bounds for the 
initial levels the Commission may establish in final rules. The 
Commission is providing the public with average open positions reported 
under part 20 for the month of January 2013, in the table below. As 
discussed below, the data reported during the month of January 2013, 
reflected improved data reporting quality. However, the Commission is 
concerned that the longer time series of this data has been less 
reliable and thus has not used it for purposes of setting proposed 
initial position limit levels.
---------------------------------------------------------------------------

    \425\ Table notes: (1) Aggregation exemptions were not used in 
computing the counts of unique persons; (2) the position data was 
for futures, futures options and swaps that are significant price 
discovery contracts (SPDCs).

  Table 12--Swaps Reported Under Part 20--Average Daily Open Positions,
                    Futures Equivalent, January 2013
------------------------------------------------------------------------
                                             Uncleared
          Covered swap contract                swaps       Cleared swaps
------------------------------------------------------------------------
Chicago Board of Trade (``CBOT'') Corn..         110,533           3,060
CBOT Ethanol............................               *          15,905
CBOT Oats...............................  ..............  ..............
CBOT Rough Rice.........................  ..............  ..............
CBOT Soybean Meal.......................          20,594  ..............
CBOT Soybean Oil........................          35,760  ..............
CBOT Soybeans...........................          39,883           1,306
CBOT Wheat..............................          64,805           2,856
Chicago Mercantile Exchange (``CME'')     ..............  ..............
 Butter.................................
CME Cheese..............................  ..............  ..............
CME Dry Whey............................  ..............  ..............
CME Feeder Cattle.......................               *  ..............
CME Hardwood Pulp.......................  ..............  ..............
CME Lean Hog............................          12,809  ..............
CME Live Cattle.........................          17,617  ..............
CME Milk Class III......................  ..............  ..............
CME Non Fat Dry Milk....................  ..............  ..............
CME Random Length Lumbar................  ..............  ..............
CME Softwood Pulp.......................  ..............  ..............
Commodity Exchange, Inc. (``COMEX'')               9,259  ..............
 Copper Grade No. 1.....................
COMEX Gold..............................          38,295  ..............
COMEX Silver............................           5,753  ..............
ICE Futures U.S. (``ICE'') Cocoa........           8,933  ..............
ICE Coffee C............................           3,465  ..............
ICE Cotton No. 2........................          14,627  ..............
ICE Frozen Concentrated Orange Juice....               *  ..............
ICE Sugar No. 11........................         287,434  ..............
ICE Sugar No. 16........................  ..............  ..............
Kansas City Board of Trade (``KCBT'')              2,565  ..............
 Wheat..................................
Minneapolis Grain Exchange (``MGEX'')              2,419  ..............
 Wheat..................................
NYSE LIFFE (``NYL'') Gold, 100 Troy Oz..  ..............  ..............
NYL Silver, 5000 Troy Oz................  ..............  ..............
New York Mercantile Exchange (``NYMEX'')  ..............  ..............
 Cocoa..................................
NYMEX Brent Financial...................          93,825  ..............
NYMEX Central Appalachian Coal..........  ..............  ..............
NYMEX Coffee............................           2,320  ..............
NYMEX Cotton............................           8,315  ..............

[[Page 75734]]

 
NYMEX Crude Oil, Light Sweet............         507,710  ..............
NYMEX Gasoline Blendstock (RBOB)........          10,110  ..............
NYMEX Hot Rolled Coil Steel.............               *  ..............
NYMEX Natural Gas.......................       1,060,468          96,057
NYMEX No. 2 Heating Oil, New York Harbor          35,126  ..............
NYMEX Palladium.........................               *  ..............
NYMEX Platinum..........................               *  ..............
------------------------------------------------------------------------
Legend:
* means fewer than 1,000 futures equivalent contracts reported in the
  category.
Leaders mean no contracts reported.

    The part 20 data are comprised of positions resulting from cleared 
and uncleared swaps, which are reported by different reporting 
entities. Clearing members of derivative clearing organizations 
(``DCOs'') have reported paired swap positions in cleared swaps since 
November 11, 2011, and paired swap positions in uncleared swaps since 
January 20, 2012. DCOs have also reported aggregate positions of each 
clearing member's house and customer accounts for each paired swap 
since November 11, 2011. Data reports submitted by clearing members 
have had various errors (e.g., duplicate records, inconsistent 
reporting of data fields)--Commission staff continues to work with 
these reporting entities to improve data reporting.
    Beginning March 1, 2013, swap dealers that were not clearing 
members were required to submit data reports under Sec.  20.4(c). 
Additionally, some swap dealers began reporting such data voluntarily 
prior to March 1, 2013.\426\ As these new reporters submitted position 
data reports, the Commission observed a substantial increase in open 
interest for uncleared swaps that appeared unreasonable; it became 
apparent that part of this increase was caused by data reporting 
errors.\427\ The Commission believes it would be difficult to 
distinguish the true level of open interest because some reporting 
errors may cause open interest to be underestimated while others may 
cause open interest to be overestimated.
---------------------------------------------------------------------------

    \426\ Further, other firms have begun to report under part 20 
after March 1, 2013, following registration as swap dealers.
    \427\ For example, reported total open interest in swaps, both 
cleared and uncleared, linked to or based on NYMEX Natural Gas 
futures contracts averaged approximately 1.2 million contracts 
between January 1, 2013 and March 1, 2013 and approximately 97 
million contracts between March 1 and May 31, 2013 (with a peak 
value close to 300 million contracts).
---------------------------------------------------------------------------

    Alternatively, the Commission is considering using part 20 data, 
should it determine such data to be reliable, in order to establish 
higher initial levels in a final rule.\428\ Further, the Commission is 
considering using data from swaps data repositories, as practicable. In 
either case, the Commission is considering excluding inter-affiliate 
swaps, since such swaps would tend to inflate open interest.
---------------------------------------------------------------------------

    \428\ Several reporting entities have submitted data that 
contained stark errors. For example, certain reporting entities 
submitted position sizes that the Commission determined to be 1000 
times, or even 10,000 times, too large.
---------------------------------------------------------------------------

    Based on the forgoing, the Commission believes the initial levels 
proposed herein should ensure adequate liquidity for hedges yet 
nevertheless prevent a speculative trader from acquiring excessively 
large positions above the limits, and thereby help to prevent excessive 
speculation and to deter and prevent market manipulation.
(2) Subsequent Levels
    For setting subsequent levels of non-spot month limits, the 
Commission proposes to estimate average open interest in referenced 
contracts using data reported by DCMs and SEFs pursuant to parts 16, 
20, and/or 45.\429\ While the Commission does not currently possess all 
data needed to fully enforce the position limits proposed herein, the 
Commission believes that it should have adequate data to reset the 
overall concentration-based percentages for the position limits two 
years after initial levels are set.\430\ The Commission intends to use 
comprehensive positional data on physical commodity swaps once such 
data is collected by swap data repositories under part 45, and would 
convert such data to futures-equivalent open positions in order to fix 
numerical position limits through the application of the proposed open-
interest-based position limit formula. The resultant limits are 
purposely designed to be high enough to ensure sufficient liquidity for 
bona fide hedgers and to avoid disrupting the price discovery process 
given the limited information the Commission has with respect to the 
size of the physical commodity swap markets, including preliminary data 
collected under part 20 as of January 2013. The Commission further 
proposes to publish on the Commission's Web page such estimates of 
average open interest in referenced contracts on a monthly basis to 
make it easier for market participants to estimate changes in levels of 
position limits.
---------------------------------------------------------------------------

    \429\ Options listed on DCMs would be adjusted using an option 
delta reported to the Commission pursuant to 17 CFR part 16; swaps 
would be counted on a futures equivalent basis, equal to the 
economically equivalent amount of core referenced futures contracts 
reported pursuant to 17 CFR part 20 or as calculated by the 
Commission using swap data collected pursuant to17 CFR part 45.
    \430\ While the Commission has access to some data on physical-
commodity swaps from swaps data repositories, the Commission 
continues to work with SDRs and other market participants to fully 
implement the swaps data reporting regime.
---------------------------------------------------------------------------

f. Grandfather of Pre-Existing Positions
    The Commission proposes in new Sec.  150.2(f)(2) to conditionally 
exempt from federal non-spot-month speculative position limits any 
referenced contract position acquired by a person in good faith prior 
to the effective date of such limit, provided that such pre-existing 
referenced contract position is attributed to the person if such 
person's position is increased after the effective date of such 
limit.\431\ This conditional exemption for pre-existing positions is 
consistent with the provisions of CEA section 4a(b)(2) in

[[Page 75735]]

that it is designed to phase in position limits without significant 
market disruption, while attributing such pre-existing positions to the 
person if such person's position is increased after the effective date 
of a position limit is consistent with the provisions of CEA section 
22(a)(5)(B). Notwithstanding this exemption for pre-existing positions 
in non-spot months, proposed Sec.  150.2(f)(1) would require a person 
holding a pre-existing referenced contract position (in a commodity 
derivative contract other than a pre-enactment and transition period 
swaps as defined in proposed Sec.  150.1) to comply with spot month 
speculative position limits.\432\ The Commission remains particularly 
concerned about protecting the spot month in physical-delivery futures 
contracts from squeezes and corners.
---------------------------------------------------------------------------

    \431\ Such pre-existing positions that are in excess of the 
proposed position limits would not cause the trader to be in 
violation based solely on those positions. To the extent a trader's 
pre-existing positions would cause the trader to exceed the non-
spot-month limit, the trader could not increase the directional 
position that caused the positions to exceed the limit until the 
trader reduces the positions to below the position limit. As such, 
persons who established a net position below the speculative limit 
prior to the enactment of a regulation would be permitted to acquire 
new positions, but the Commission would calculate the combined 
position of a person based on pre-existing positions with any new 
position.
    \432\ Nothing in proposed Sec.  150.2(f) would override the 
exemption set forth in proposed Sec.  150.3(d) for pre-enactment and 
transition period swaps from speculative position limits. See 
discussion of proposed Sec.  150.3(d) below.
---------------------------------------------------------------------------

    Proposed Sec.  150.2(g) would apply position limits to foreign 
board of trade (``FBOT'') contracts that are both: (1) Linked 
contracts, that is, a contract that settles against the price 
(including the daily or final settlement price) of one or more 
contracts listed for trading on a DCM or SEF; and (2) direct-access 
contracts, that is, the FBOT makes the contract available in the United 
States through direct access to its electronic trading and order 
matching system through registration as an FBOT or via a staff no 
action letter.\433\ Proposed Sec.  150.2(g) is consistent with CEA 
section 4a(a)(6)(B), which directs the Commission to apply aggregate 
position limits to FBOT linked, direct-access contracts.\434\
---------------------------------------------------------------------------

    \433\ Proposed Sec.  150.2(g) is identical in substance to 
vacated Sec.  151.8. Compare 76 FR 71693.
    \434\ See supra discussion of CEA section 4a(a)(6) concerning 
aggregate position limits and the treatment of FBOT contracts.
---------------------------------------------------------------------------

3. Section 150.3--Exemptions
i. Current Sec.  150.3
    CEA section 4a(c)(1) exempts bona fide hedging transactions or 
positions, which terms are to be defined by the Commission, from any 
rule promulgated by the Commission under CEA section 4a concerning 
speculative position limits.\435\ Current Sec.  150.3, adopted by the 
Commission before the Dodd-Frank Act was enacted, contains an exemption 
from federal position limits for bona fide hedging transactions.\436\ 
Additionally, Dodd-Frank added section 4a(a)(7) to the CEA, which gives 
the Commission authority to provide exemptions from any requirement the 
Commission establishes under section 4a with respect to speculative 
position limits.\437\
---------------------------------------------------------------------------

    \435\ 7 U.S.C. 6a(c)(1).
    \436\ Bona fide hedging transactions and positions for excluded 
commodities are currently defined at 17 CFR Sec.  1.3(z). As 
discussed above, the Commission has proposed a new comprehensive 
definition of bona fide hedging positions in proposed Sec.  150.1.
    \437\ 7 U.S.C. 6a(a)(7). Section 4a(a)(7) of the CEA provides 
the Commission plenary authority to grant exemptive relief from 
position limits. Specifically, under Section 4a(a)(7), the 
Commission ``by rule, regulation, or order, may exempt, 
conditionally or unconditionally, any person, or class of persons, 
any swap or class of swaps, any contract of sale of a commodity for 
future delivery or class of such contracts, any option or class of 
options, or any transaction or class of transactions from any 
requirement it may establish . . . with respect to position 
limits.''
---------------------------------------------------------------------------

    The existing exemptions promulgated under pre-Dodd-Frank CEA 
section 4a and set forth in current Sec.  150.3 are fundamental to the 
Commission's regulatory framework for speculative position limits. 
Current Sec.  150.3 specifies the types of positions that may be 
exempted from, and thus may exceed, the federal speculative position 
limits. First, the exemption for bona fide hedging transactions and 
positions as defined in current Sec.  1.3(z) permits a commercial 
enterprise to exceed positions limits to the extent the positions are 
reducing price risks incidental to commercial operations.\438\ Second, 
the exemption for spread or arbitrage positions between single months 
of a futures contract (and/or, on a futures-equivalent basis, options) 
outside of the spot month, permits any trader's spread position to 
exceed the single month limit.\439\ Third, positions carried for an 
eligible entity \440\ in the separate account of an independent account 
controller (``IAC'') \441\ that manages customer positions need not be 
aggregated with the other positions owned or controlled by that 
eligible entity (the ``IAC exemption'').\442\
---------------------------------------------------------------------------

    \438\ 17 CFR 150.3(a)(1). The current definition of bona fide 
hedging transactions and positions in 1.3(z) is discussed above.
    \439\ The Commission clarifies that a spread or arbitrage 
position in this context means a short position in a single month of 
a futures contract and a long position in another contract month of 
that same futures contract, outside of the spot month, in the same 
crop year. The short and/or long positions may also be in options on 
that same futures contract, on a futures equivalent basis. Such 
spread or arbitrage positions, when combined with any other net 
positions in the single month, must not exceed the all-months limit 
set forth in current Sec.  150.2, and must be in the same crop year. 
17 CFR 150.3(a)(3).
    \440\ ``Eligible entity'' is defined in current 17 CFR 150.1(d).
    \441\ ``Independent account controller'' is defined in 17 CFR 
150.1(e).
    \442\ See 17 CFR 150.3(a)(4). See also discussion of the IAC 
exemption in the Aggregation NPRM.
---------------------------------------------------------------------------

ii. Proposed Sec.  150.3
    In this release, the Commission proposes organizational and 
substantive amendments to Sec.  150.3, generally resulting in an 
increase in the number of exemptions to speculative position limits. 
First, the Commission proposes to amend the three exemptions from 
federal speculative limits currently contained in Sec.  150.3. These 
amendments would update cross references, relocate the IAC exemption 
and consolidate it with the Commission's separate proposal to amend the 
aggregation requirements of Sec.  150.4,\443\ and delete the calendar 
month spread provision which is unnecessary under proposed changes to 
Sec.  150.2 that would increase the level of the single month position 
limits. Second, the Commission proposes to add exemptions from the 
federal speculative position limits for financial distress situations, 
certain spot-month positions in cash-settled referenced contracts, and 
grandfathered pre-Dodd-Frank and transition period swaps. Third, the 
Commission proposes to revise recordkeeping and reporting requirements 
for traders claiming any exemption from the federal speculative 
position limits.
---------------------------------------------------------------------------

    \443\ See Aggregation NPRM.
---------------------------------------------------------------------------

a. Proposed Amendments to Existing Exemptions
(1) New Cross-References
    Because the Commission proposes to replace the definition of bona 
fide hedging in 1.3(z) with the definition in proposed Sec.  150.1, 
proposed Sec.  150.3(a)(1)(i) updates the cross-references to reflect 
this change.\444\ Proposed Sec.  150.3(a)(3) would add a new cross-
reference to the reporting requirements proposed to be amended in part 
19.\445\ As is currently the case for bona fide hedgers, persons who 
wish to claim any exemption from federal position limits, including 
hedgers, would need to satisfy the reporting requirements in part 
19.\446\ As discussed elsewhere in this release, the Commission is 
proposing amendments to update part 19 reporting.\447\ For purposes of 
simplicity, the Commission is retaining the current placement of many 
reporting requirements, including those related to claimed exemptions 
from the federal position limits, within

[[Page 75736]]

parts 15-21 of the Commission's regulations.\448\ Lastly, proposed 
Sec.  150.3(i) would add a cross-reference to the updated aggregation 
rules in proposed Sec.  150.4.\449\ The Commission proposes to retain 
the current practice of considering entities required to aggregate 
accounts or positions under proposed Sec.  150.4 to be the same person 
when determining whether they are eligible for a bona fide hedging 
position exemption.\450\
---------------------------------------------------------------------------

    \444\ See supra discussion of the Commission's revised 
definition of bona fide hedging position in proposed Sec.  150.1.
    \445\ See infra discussion of proposed revisions of 17 CFR part 
19.
    \446\ See 17 CFR part 19.
    \447\ See infra discussion of proposed revisions of 17 CFR part 
19.
    \448\ The Commission notes this is a change from the 
organization of vacated Sec.  151.5, that included both exemptions 
and related reporting requirements in a single section.
    \449\ See Aggregation NPRM.
    \450\ See Aggregation NPRM. The Commission clarifies that 
whether it is economically appropriate for one entity to offset the 
cash market risk of an affiliate depends, in part, upon that 
entity's ownership interest in the affiliate. It would not be 
economically appropriate for an entity to offset all the risk of an 
affiliate's cash market exposure unless that entity held a 100 
percent ownership interest in the affiliate. For less than a 100 
percent ownership interest, it would be economically appropriate for 
an entity to offset no more than a pro rata amount of any cash 
market risk of an affiliate, consistent with the entity's ownership 
interest in the affiliate.
---------------------------------------------------------------------------

(2) Deleting Exemption for Calendar Spread or Arbitrage Positions
    The Commission proposes to delete the exemption in current Sec.  
150.3(a)(3) for spread or arbitrage positions between single months of 
a futures contract or options thereon, outside the spot month.\451\ The 
Commission has proposed to maintain the current practice in Sec.  
150.2, which the district court did not vacate, of setting single-month 
limits at the same levels as all-months limits, rendering the 
``spread'' exemption unnecessary. The spread exemption set forth in 
current Sec.  150.3(a)(3) permits a spread trader to exceed single 
month limits only to the extent of the all months limit.\452\ Since 
proposed Sec.  150.2 sets single month limits at the same level as all 
months limits, the spread exemption no longer provides useful relief. 
Furthermore, as discussed below in this release, the Commission would 
codify guidance in proposed Sec.  150.5(a)(2)(B) that would allow a DCM 
or SEF to grant exemptions for intramarket and intermarket spread 
positions (as those terms are defined in proposed Sec.  150.1) 
involving commodity derivative contracts subject to the federal 
limits.\453\
---------------------------------------------------------------------------

    \451\ In its entirety, 17 CFR 150.3(a)(3) sets forth an 
exemption from federal position limits for [s]pread or arbitrage 
positions between single months of a futures contract and/or, on a 
futures-equivalent basis, options thereon, outside of the spot 
month, in the same crop year; provided however, that such spread or 
arbitrage positions, when combined with any other net positions in 
the single month, do not exceed the all-months limit set forth in 
Sec.  150.2.
    \452\ See id.
    \453\ As discussed above.
---------------------------------------------------------------------------

(3) Relocating Independent Account Controller (``IAC'') Exemption to 
proposed Sec.  150.4
    In a separate rulemaking, the Commission has proposed Sec.  
150.4(b)(5) to replace the existing IAC exemption in current Sec.  
150.3(a)(4).\454\ Proposed Sec.  150.4(b)(5) sets forth an exemption 
for accounts carried by an IAC that is substantially similar to current 
Sec.  150.3(a)(4). Thus, the Commission is proposing to delete the IAC 
exemption in current Sec.  150.3(a)(4) because it is duplicative.
---------------------------------------------------------------------------

    \454\ For purposes of simplicity, the IAC exemption would be 
placed within the regulatory section providing for aggregation of 
positions. See Aggregation NPRM.
---------------------------------------------------------------------------

b. Proposed Additional Exemptions From Position Limits
    As discussed above, CEA section 4a(a)(7) provides that the 
Commission may ``by rule, regulation, or order . . . exempt . . . any 
person or class of persons'' from any requirement that the Commission 
may establish under section 4a of the Act. Pursuant to this authority, 
the Commission proposes to add new exemptions in Sec.  150.3 for 
financial distress situations and qualifying positions in cash-settled 
referenced contracts. The Commission also proposes to add guidance to 
persons seeking exemptive relief for certain qualifying non-enumerated 
risk-reducing transactions. Additionally, the Commission proposes to 
grandfather pre-Dodd-Frank enactment swaps and transition swaps entered 
into before from position limits.
(1) Financial Distress Exemption
    The Commission proposes to add an exemption from position limits 
for certain market participants in certain financial distress scenarios 
to Sec.  150.3(b). During periods of financial distress, it may be 
beneficial for a financially sound entity to take on the positions (and 
corresponding risk) of a less stable market participant. The Commission 
historically has provided for an exemption from position limits in 
these types of situations, to avoid sudden liquidations that could 
potentially reduce liquidity, disrupt price discovery, and/or increase 
systemic risk.\455\ Therefore, the Commission now proposes to codify in 
regulation its prior exemptive practices to accommodate situations 
involving, for example, a customer default at a FCM, or in the context 
of potential bankruptcy. The Commission historically has not granted 
such an exemption by Commission Order due to concerns regarding 
timeliness and flexibility. Furthermore, the Commission clarifies that 
this exemption for financial distress situations is not a hedging 
exemption.
---------------------------------------------------------------------------

    \455\ See Release 5551-08, ``CFTC Update on Efforts Underway to 
Oversee Markets,'' September 19, 2008 (available at http://www.cftc.gov/PressRoom/PressReleases/pr5551-08).
---------------------------------------------------------------------------

(2) Conditional Spot-Month Limit Exemption
    Proposed Sec.  150.3(c) would provide a conditional spot-month 
limit exemption that permits traders to acquire positions up to five 
times the spot-month limit if such positions are exclusively in cash-
settled contracts. This conditional exemption would only be available 
to traders who do not hold or control positions in the spot-month 
physical-delivery referenced contract. Historically, the Commission and 
Congress have been particularly concerned about protecting the spot 
month in physical-delivery futures contracts.\456\ For example, new CEA 
section 4c(a)(5)(B) makes it unlawful for any person to engage in any 
trading, practice, or conduct on or subject to the rules of a 
registered entity that demonstrates intentional or reckless disregard 
for the orderly execution of transactions during the closing period. 
The Commission interprets the closing period to be defined generally as 
the period in the contract or trade when the settlement price is 
determined under the rules of a trading facility such as a DCM or SEF, 
and may include the time period in which a daily settlement price is 
determined and the expiration day for a futures contract.\457\
---------------------------------------------------------------------------

    \456\ See, for example, the guidance for DCMs to establish a 
spot month limit in physical-delivery futures contracts that is no 
greater than 25 percent of estimated deliverable supply in 17 CFR 
150.5(b).
    \457\ See Antidisruptive Practices Authority, Interpretive 
guidance and policy statement, 78 FR 31890, 31894, May 28, 2013. See 
also the discussion above of ``banging the close'' and the DiPlacido 
case.
---------------------------------------------------------------------------

    This proposed conditional exemption for cash-settled contracts 
generally tracks exchange-set position limits currently implemented for 
certain cash-settled energy futures and swaps.\458\ The

[[Page 75737]]

Commission has examined market data on the effectiveness of conditional 
spot-month limits for cash-settled energy futures swaps, including the 
data submitted as part of the prior position limits rulemaking,\459\ 
and preliminarily believes that the conditional approach effectively 
addresses the Sec.  4a(a)(3) regulatory objectives. Since spot-month 
limit levels for cash-settled referenced contracts will be set at no 
more than 25% of the estimated spot-month deliverable supply in the 
relevant core referenced futures contract, the proposed conditional 
exemption would therefore permit a speculator to own positions in cash-
settled referenced contracts equivalent to no more than 125% of the 
estimated deliverable supply.
---------------------------------------------------------------------------

    \458\ For example, this is the same methodology for spot-month 
speculative position limits that applies to cash-settled Henry Hub 
natural gas contracts on NYMEX and ICE, beginning with the February 
2010 contract months (with the exception of the exchange-set 
requirement that a trader not hold large cash commodity positions). 
In response to concerns regarding increasing trading volumes in 
standardized swaps, in 2008 Congress amended section 2(h) of the Act 
to establish core principles for exempt commercial markets 
(``ECMs'') trading swap contracts that the Commission determined to 
be significant price discovery contracts (``SPDCs''). 7 U.S.C. 
2(h)(7) (2009). See also section 13201 of the Food, Conservation and 
Energy Act of 2008, H.R. 2419 (May 22, 2008). Core principle (IV) 
directed ECMs to ``adopt, where necessary and appropriate, position 
limitations or position accountability for speculators . . . to 
reduce the potential threat of market manipulation or congestion, 
especially during trading in the delivery month.'' 7 U.S.C. 
2(h)(7)(C)(ii)(IV)(2009). Under the Commission's rules for ECMs 
trading SPDCs, the Commission provided an acceptable practice that 
an ECM trading a SPDC that is economically-equivalent to a contract 
traded on a DCM should set the spot-month limit at the same level as 
that specified for the economically-equivalent DCM contract. 17 CFR 
part 36 (2010). In practice, for example, ICE complied with this 
requirement by establishing a spot month limit for its natural gas 
SPDC at the same level as the spot month limit in the economically-
equivalent NYMEX Henry Hub Natural Gas futures contract. Both ICE 
and NYMEX established conditional spot month limits in their cash-
settled natural gas contracts at a level five times the level of the 
spot month limit in the physical-delivery futures contract.
    \459\ See 76 FR 71635 (n. 100-01)(discussing data for the CME 
natural gas contract).
---------------------------------------------------------------------------

    As proposed, this broad conditional spot month limit exemption for 
cash-settled contracts would be similar to the conditional spot month 
limit for cash-settled contracts in proposed Sec.  151.4.\460\ However, 
unlike proposed Sec.  151.4, proposed Sec.  150.3(c) would not require 
a trader to hold physical commodity inventory of less than or equal to 
25 percent of the estimated deliverable supply in order to qualify for 
the conditional spot month limit exemption. Rather, the Commission 
proposes to require enhanced reporting of cash market holdings of 
traders availing themselves of the conditional spot month limit 
exemption, as discussed in the proposed changes to part 19, below.\461\ 
The Commission preliminarily believes that an enhanced reporting regime 
may serve to provide sufficient information to conduct an adequate 
surveillance program to detect and potentially deter excessively large 
positions or manipulative schemes involving the cash market.
---------------------------------------------------------------------------

    \460\ With respect to cash-settled contracts, proposed Sec.  
151.4 incorporated a conditional spot-month limit permitting traders 
without a hedge exemption to acquire position levels that are five 
times the spot-month limit if such positions are exclusively in 
cash-settled contracts (i.e., the trader does not hold positions in 
the physical-delivery referenced contract) and the trader holds 
physical commodity positions that are less than or equal to 25 
percent of the estimated deliverable supply. See Proposed Rule, 76 
FR 4752, 4758, Jan. 26, 2011.
    \461\ See infra discussion of proposed revisions to part 19.
---------------------------------------------------------------------------

    The Commission notes that the proposed conditional spot month limit 
is a change of course from the expanded spot month limit that was only 
for natural gas referenced contracts in vacated Sec.  151.4.\462\ In 
proposing to expand the scope of derivatives contracts for which the 
conditional spot month limit is available, the Commission has 
reconsidered the risks to the market of permitting a speculative trader 
to hold an expanded position in a cash-settled contract when that 
speculative trader also is active in the underlying physical-delivery 
contract. The Commission preliminarily believes the conditional natural 
gas spot month limits of the exchanges generally have served to further 
the purposes Congress articulated for positions limits in sections 
4a(a)(3)(B) and 4c(a)(5)(B) of the Act, such as deterring market 
manipulation, ensuring the price discovery function of the underlying 
market is not disrupted, and deterring disruptive trading during the 
closing period. The Commission notes those exchange-set conditional 
limits, as is the case for the proposed rule, prohibit a speculative 
trader who is holding an expanded position in a cash-settled contract 
from also holding any position in the physical-delivery contract.
---------------------------------------------------------------------------

    \462\ Under vacated Sec.  151.4, the Commission would have 
applied spot-month position limits for cash-settled contracts using 
the same methodology as applied to the physical-delivery core 
referenced futures contracts, with the exception of natural gas 
contracts, which would have a class limit and aggregate limit of 
five times the level of the limit for the physical-delivery Core 
Referenced Futures Contract. 76 FR 71635.
---------------------------------------------------------------------------

    The proposed conditional exemption would satisfy the goals set 
forth in CEA section 4a(a)(3)(B) by: Eliminating all speculation in a 
physical-delivery contract during the spot period by a trader availing 
herself of the conditional spot month limit exemption; ensuring 
sufficient market liquidity in the cash-settled contract for bona fide 
hedgers, in light of the typically rapidly decreasing levels of open 
interest in the physical-delivery contract during the spot month as 
hedgers exit the physical-delivery contract; and protecting the price 
discovery process in the physical-delivery contract from the risk that 
traders with leveraged positions in cash-settled contracts (in 
comparison to the level of the limit in the physical-delivery contract) 
would otherwise attempt to mark the close or distort physical-delivery 
prices to benefit their leveraged cash-settled positions. Thus, the 
exemption would establish a higher conditional limit for cash-settled 
contracts than for physical delivery contracts, so long as such 
positions are decoupled from positions in physical delivery contracts 
which set or affect the value of such cash-settled positions.
    The Commission preliminarily believes this proposed exemption would 
not encourage price discovery to migrate to the cash-settled contracts 
in a way that would make the physical-delivery contract more 
susceptible to sudden price movements near expiration. The Commission 
has observed, repeatedly, that open interest in physical-delivery 
contracts typically declines markedly in the period immediately 
preceding the spot month. Open interest typically declines to minimal 
levels prior to the close of trading in physical-delivery contracts. 
The Commission notes a hedger with a long position need not stand for 
delivery when the price of a physical-delivery contract has adequately 
converged to the underlying cash market price; rather, such long 
position holder may offset and purchase needed commodities in the cash 
market at a comparable price that meets the hedger's specific location 
and quality needs. Similarly, the Commission notes a hedger with a 
short position need not give notice of intention to deliver and deliver 
when the price of a physical-delivery contract has adequately converged 
to the underlying cash market price; rather, such short position holder 
may offset and sell commodities held in inventory or current production 
in the cash market at a comparable price that is consistent with the 
hedger's specific storage location and quality of inventory or 
production.\463\ Concerns regarding corners and squeezes are most acute 
in the markets for physical contracts in the spot month, which is why 
speculative limits in physical delivery markets are generally set at 
levels that are stricter during the spot month. The Commission seeks 
comment on whether a conditional spot-month

[[Page 75738]]

limit exemption adequately protects the price discovery function of the 
underlying physical-delivery market. Further, the Commission solicits 
comment on its conditional spot month limit, including whether it is 
advisable to expand this conditional limit to all contracts. 
Additionally, the Commission solicits comment on whether the 
conditional spot-month limit has effectively addressed and will 
continue to address the CEA section 4a(a)(3) regulatory objectives. Are 
there other concerns or issues regarding the proposed conditional spot 
month limit exemption that the Commission has not addressed?
---------------------------------------------------------------------------

    \463\ Once the price of a physical-delivery contract has 
converged adequately to cash market prices, long and short position 
holders typically offset physical-delivery contracts. Prior to such 
adequate convergence, the Commission has observed when a physical-
delivery contract is trading at a price above prevailing cash market 
prices, commercials with inventory tend to sell contracts with the 
intent of making delivery, causing physical-delivery prices to 
converge to cash market prices. Similarly, the Commission has 
observed when a physical-delivery contract is trading at a price 
below prevailing cash market prices, commercials with a need for the 
commodity or merchants active in the cash market tend to buy the 
contract with the intent of taking delivery, causing physical-
delivery prices to converge to cash market prices.
---------------------------------------------------------------------------

    While traders who avail themselves of a conditional spot month 
limit exemption could not directly influence particular settlement 
prices by trading in the physical-delivery referenced contract, the 
Commission remains concerned about such traders' activities in the 
underlying cash commodity. Accordingly, the Commission proposes new 
reporting requirements in part 19, as discussed below.\464\ The 
Commission invites comment and empirical analysis as to whether these 
reporting requirements adequately address concerns regarding: (1) 
Protecting the price discovery function of the physical-delivery 
market, including deterring attempts to mark the close in the physical-
delivery contract; and (2) providing adequate liquidity for bona fide 
hedgers in the physical-delivery contracts. In light of these two 
concerns, the Commission is also proposing alternatives to the 
conditional spot-month limit exemption, as discussed below, including 
the possibility that it would not adopt the proposed conditional spot-
month limit exemption.
---------------------------------------------------------------------------

    \464\ See infra discussion of proposed revisions of part 19.
---------------------------------------------------------------------------

    As one alternative to the proposed conditional spot month limit, 
the Commission is considering whether to restrict a trader claiming the 
conditional spot-month limit exemption to positions in cash-settled 
contracts that settle to an index based on cash-market transactions 
prices. This would prohibit traders from claiming a conditional 
exemption if the trader held positions in the spot-month of cash-
settled contracts that settle to prices based on the underlying 
physical-delivery futures contract. If the Commission adopted this 
alternative instead of the proposal, would the physical-delivery 
futures contract market be better protected? Why or why not?
    The Commission is also considering a second alternative to the 
proposed conditional spot month limit: Setting an expanded spot-month 
limit for cash-settled contracts at five times the level of the limit 
for the physical-delivery core referenced futures contract, regardless 
of positions in the underlying physical-delivery contract. This 
alternative would not prohibit a trader from carrying a position in the 
spot-month of the physical-delivery contract. Consequently, this 
alternative would give more weight to protecting liquidity for bona 
fide hedgers in the physical-delivery contract in the spot month, and 
less weight to protecting the price discovery function of the 
underlying physical-delivery contract in the spot month.\465\ Given 
Congressional concerns regarding disruptive trading practices in the 
closing period, as discussed above, would this second alternative 
adequately address the policy factors in CEA section 4a(a)(3)(B)?
---------------------------------------------------------------------------

    \465\ This second alternative would effectively adopt for all 
commodity derivative contract limits certain provisions of vacated 
Sec.  151.4 (that would have been applicable only to contracts in 
natural gas). As noted above, under vacated Sec.  151.4, the 
Commission would have applied a spot-month position limit for cash-
settled contracts in natural gas at a level of five times the level 
of the limit for the physical-delivery Core Referenced Futures 
Contract in natural gas. Id.
---------------------------------------------------------------------------

    The Commission is also considering a third alternative: Limiting 
application of an expanded spot-month limit to a trader holding 
positions in cash-settled contracts that settle to an index based on 
cash-market transactions prices. Under this third alternative, cash-
settled contracts that settle to the underlying physical-delivery 
contract would be restricted by a spot-month limit set at the same 
level as that of the underlying physical-delivery contract. The 
Commission is considering an aggregate spot-month limit on all types of 
cash-settled contracts set at five times the level of the limit of the 
underlying physical-delivery contract for this alternative to the 
proposed conditional spot month limit. Would this third alternative 
adequately address the policy factors in CEA section 4a(a)(3)(B)? Would 
this third alternative better address such policy factors than the 
second alternative?
    The Commission requests comment on all aspects of the proposed 
conditional spot limit and the three alternatives discussed above, 
including whether conditional spot month limit exemptions should vary 
based on the underlying commodity. Should the Commission consider any 
other alternatives? If yes, please describe any alternative in detail. 
Would any of the proposed conditional spot month limit or the 
alternatives be more or less likely to increase or decrease liquidity 
in particular products? Would anti-competitive behavior be more or less 
likely to result from any of the proposed conditional spot month limit 
or the alternatives? Does any of the proposed conditional spot month 
limit or the alternatives increase the potential for manipulation? If 
yes, please provide detailed arguments and analyses.
(3) Exemption for Pre-Dodd-Frank Enactment Swaps and Transition Period 
Swaps
    Proposed Sec.  150.3(d) would provide an exemption from federal 
position limits for (1) swaps entered into prior to July 21, 2010 (the 
date of the enactment of the Dodd-Frank Act of 2010), the terms of 
which have not expired as of that date, and (2) swaps entered into 
during the period commencing July 22, 2010, the terms of which have not 
expired as of that date, and ending 60 days after the publication of 
final Sec.  150.3 in the Federal Register.\466\ However, the Commission 
would allow both pre-enactment and transition swaps to be netted with 
commodity derivative contracts acquired more than 60 after publication 
of final Sec.  150.3 in the Federal Register for the purpose of 
complying with any non-spot-month position limit.
---------------------------------------------------------------------------

    \466\ This exemption is consistent with CEA section 4a(b)(2). 
The time period for transition swaps for purposes of position limits 
differs from the time period for transition swaps for purposes of 
swap data recordkeeping and reporting requirements. In both cases, 
the time periods for transition swaps begins on the date of 
enactment of the Dodd-Frank Act. However, the time periods for 
transition swaps end prior to the compliance date for each relevant 
rule. Swap data recordkeeping and reporting requirements for pre-
enactment and transition period swaps are listed in 17 CFR part 46.
---------------------------------------------------------------------------

(4) Other Exemptions for Non-Enumerated Risk-Reducing Practices
    The Commission notes that the enumerated list of bona fide hedging 
positions as set forth in proposed Sec.  150.1 represents an expanded 
list of exemptions that has evolved over many years of the Commission's 
experience in administering speculative position limits. The Commission 
has carefully expanded the list of exemptions in light of the statutory 
directive to define a bona fide hedging position in section 4a(c)(2) of 
the Act.
    The Commission previously permitted a person to file an application 
seeking approval for a non-enumerated position to be recognized as a 
bona fide hedging position under Sec.  1.47. The Commission proposes to 
delete Sec.  1.47 for several reasons. First, Sec.  1.47 did not 
provide guidance as to the standards the Commission would use to 
determine whether a position was a bona fide

[[Page 75739]]

hedging position. Second, in the Commission's experience, the 
overwhelming number of applications filed under Sec.  1.47 were from 
swap intermediaries seeking to offset the risk of swaps. Section 
4a(c)(2) of the Act addresses the application of the bona fide hedging 
definition to certain positions that reduce risks attendant to a 
position resulting from certain swaps. As discussed in the definitions 
section above, those statutory provisions have been incorporated into 
the proposed definition of a bona fide hedging position under Sec.  
150.1; further, as discussed in the position limits section above, the 
provisions of proposed Sec.  150.2 include relief outside of the spot 
month to permit automatic netting of swaps that are referenced 
contracts with futures contracts that are referenced contracts and, 
where appropriate, to recognize as a bona fide hedging position the 
offset of certain non-referenced contract swaps with futures that are 
referenced contracts.\467\ Third, Sec.  1.47 provided specific, limited 
timeframes (of 30 days or 10 days) for the Commission to determine 
whether the position may be classified as bona fide hedging. The 
Commission preliminarily believes it should not constrain itself to 
such limited timeframes for review of potentially complex and novel 
risk-reducing transactions.
---------------------------------------------------------------------------

    \467\ All the exemptions granted by the Commission pursuant to 
Sec.  1.47 involving swaps were restricted to recognition of the 
futures offset as a bona fide hedging position only outside of the 
spot month.
---------------------------------------------------------------------------

    Nevertheless, the Commission proposes in Sec.  150.3(e) to provide 
guidance to persons seeking exemptive relief. A person that engages in 
risk-reducing practices commonly used in the market that the person 
believes may not be included in the list of enumerated bona fide 
hedging transactions may apply to the Commission for an exemption from 
position limits. As proposed, market participants would be guided in 
Sec.  150.3(e) first to consult proposed appendix C to part 150 to see 
whether their practices fall within a non-exhaustive list of examples 
of bona fide hedging positions as defined under proposed Sec.  150.1.
    A person engaged in risk-reducing practices that are not enumerated 
in the revised definition of bona fide hedging in proposed Sec.  150.1 
may use two different avenues to apply to the Commission for relief 
from federal position limits: The person may request an interpretative 
letter from Commission staff pursuant to Sec.  140.99 \468\ concerning 
the applicability of the bona fide hedging position exemption, or the 
person may seek exemptive relief from the Commission under section 
4a(a)(7) of the Act.\469\
---------------------------------------------------------------------------

    \468\ 17 CFR 140.99 defines three types of staff letters--
exemptive letters, no-action letters, and interpretative letters--
that differ in scope and effect. An interpretative letter is written 
advice or guidance by the staff of a division of the Commission or 
its Office of the General Counsel. It binds only the staff of the 
division that issued it (or the Office of the General Counsel, as 
the case may be), and third-parties may rely upon it as the 
interpretation of that staff. See description of CFTC Staff Letters, 
available at http://www.cftc.gov/lawregulation/cftcstaffletters/index.htm.
    \469\ See supra discussion of CEA section 4a(a)(7).
---------------------------------------------------------------------------

(5) Previously Granted Risk Management Exemptions
    Until about mid-2008, the Commission accepted and approved filings 
pursuant to Sec.  1.3(z) and Sec.  1.47 for recognition of transactions 
and positions described in such filings as bona fide hedging for 
purposes of compliance with Federal position limits. Since then, the 
Division of Market Oversight (the ``Division''), on behalf of the 
Commission, has only considered revisions to previously recognized 
filings.\470\ Prior to the Dodd-Frank Act and pursuant to authority 
delegated to it under Sec.  140.97,\471\ the Division recognized a 
broad range of transactions and positions as bona fide hedges based on 
facts and representations contained in such filings.\472\ In seeking 
these determinations and exemptions from Federal position limits, 
filers would furnish information to demonstrate, among other things, 
that the described transactions and positions were economically 
appropriate to the reduction of risk exposure attendant to the conduct 
and management of a commercial enterprise.\473\ On this basis, the 
Division provided relief to dealers, market makers and ``risk 
intermediaries'' facing not only producers and consumers of commodities 
but hedge funds, pension funds and other financial institutions who 
lacked the capacity to make or take delivery of, or otherwise handle, a 
physical commodity.\474\ The exemptions granted by the Division were 
not limited to futures to offset price risks associated with commodity 
index swaps that could be hedged in the component futures contracts. 
Filers obtained exemptions for futures transactions used to hedge price 
risks from transactions involving options, warrants, certificates of 
deposit, structured notes and various other structured products and 
hybrid instruments referencing commodities or embedding transactions 
linked to the payout or performance of a commodity or basket of 
commodities (collectively, ``financial products''). In sum, the 
Division provided relief to ``persons using the futures markets to 
manage risks associated with financial investment portfolios'' and 
granted exemptions from speculative position limits to a broad range of 
``trading strategies to reduce financial risks, regardless of whether a 
matching transaction ever took place in a cash market for a physical 
commodity.'' \475\ In

[[Page 75740]]

recognizing such trading strategies as bona fide hedges, the Commission 
was responding to Congressional direction\476\ to update its approach 
at a time when many sought to encourage what was then thought to be 
benign or beneficial financial innovation. In hindsight, the sum of 
these determinations may have exceeded what would be appropriate ``to 
permit producers, purchasers, sellers, middlemen, and users of a 
commodity or product derived therefrom to hedge their legitimate 
anticipated business needs'' and adequate ``to prevent unwarranted 
price pressures by large hedgers.'' \477\
---------------------------------------------------------------------------

    \470\ On May 29, 2008, the Commission announced a number of 
initiatives to increase transparency of the energy futures markets. 
In particular, the Commission would review the trading practices of 
index traders in the futures markets. CFTC Press Release 5503-08, 
May 29, 2008, available at http://www.cftc.gov/PressRoom/PressReleases/pr5503-08. On June 3, 2008, the Commission announced 
policy initiatives aimed at addressing concerns raised at an April 
22, 2008 roundtable regarding events affecting the agricultural 
futures markets. Among other things, the Commission withdrew 
proposed rulemakings that would have increased the Federal 
speculative position limits on certain agricultural futures 
contracts and created a risk-management hedge exemption from the 
Federal speculative position limits for agricultural futures and 
options contracts. At the time, Acting Chairman Lukken and 
Commissioners Dunn, Sommers and Chilton said, ``. . . the Commission 
will be cautious and guarded before granting additional exemptions 
in this area.'' CFTC Press Release 5504-08, June 3, 2008, available 
at http://www.cftc.gov/PressRoom/PressReleases/pr5504-08.
    \471\ 17 CFR 140.97.
    \472\ Almost all requests pursuant to Sec.  1.47 have been for 
``risk-management'' exemptions. See generally Risk Management 
Exemptions from Speculative Position Limits Approved under 
Commission Regulation 1.61, 52 FR 34633, Sep. 14, 1987; 
Clarification of Certain Aspects of the Hedging Definition, 52 FR 
27195, Jul. 20, 1987. The Commission first approved a request for a 
risk-management exemption in 1991. The Commission has also approved 
a request by a foreign government to recognize certain positions 
associated with a governmental agricultural support program that 
would be consistent with the examples of bona fide hedging positions 
in proposed appendix B to part 150.
    \473\ Section 1.3(z)(1) includes the language, ``economically 
appropriate to the reduction of risks in the conduct and management 
of a commercial enterprise.'' 17 CFR 1.3(z)(1). Section 1.47(b)(2) 
includes the language, ``economically appropriate to the reduction 
of risk exposure attendant to the conduct and management of a 
commercial enterprise.'' 17 CFR 1.47(b)(2).
    \474\ The Commission notes that both the filings received by the 
Commission requesting such exemptions and the responding exemption 
letters issued by the Division are confidential in light of section 
8 of the Act since, as noted above, the filings included information 
that described transactions and positions in order to demonstrate, 
among other things, that the transactions and positions were 
economically appropriate to the reduction of risk exposure attendant 
to the conduct and management of a commercial enterprise, while the 
Division's responding letters included information regarding the 
nature of the price risks that the transactions would entail.
    \475\ Staff Report, S. Permanent Subcomm. on Investigations, 
``Excessive Speculation in the Wheat Market,'' S. Hrg. 111-155 (Jul. 
21, 2009) at 13 (``Wheat Report''). The Wheat Report was issued 
before the Dodd-Frank Act became law.
    \476\ See generally CFTC Staff Report on Commodity Swap Dealers 
& Index Traders with Commission Recommendations (Sep. 2008) at 13-15 
(``Index Trading Report'').
    \477\ 7 U.S.C. 6a(c)(1).
---------------------------------------------------------------------------

    The Commission now proposes a definition of bona fide hedging 
position that would apply to all referenced contracts, and proposes to 
remove Sec.  1.47.\478\ The Commission is also proposing in Sec.  
150.3(f) that risk-management exemptions granted by the Commission 
under Sec.  1.47 shall not apply to swap positions entered into after 
the effective date of a final position limits rulemaking, i.e., 
revoking the exemptions for new swap positions.\479\ This means that 
certain transactions and positions (and, by extension, persons party to 
such transactions or holding such positions) heretofore exempt from 
Federal position limits may be subject to Federal position limits. This 
is because some transactions and positions previously characterized as 
``risk-management'' and recognized as bona fide hedges are inconsistent 
with the revised definition of bona fide hedging positions proposed in 
this release and the purposes of the Dodd-Frank Act amendments to the 
CEA.\480\ As noted above, some pre-Dodd-Frank Act exemptions recognized 
offsets of risks from financial products. But the Commission now 
proposes to incorporate the ``temporary substitute'' test of section 
4a(c)(2)(A)(i) of the Act in paragraph (2)(i) of the proposed 
definition of bona fide hedging position.\481\ Financial products are 
not substitutes for positions taken or to be taken in a physical 
marketing channel. Thus, the offset of financial risks arising from 
financial products is inconsistent with the proposed definition of bona 
fide hedging for physical commodities. Moreover, the Commission 
interprets CEA section 4a(c)(2)(B) as a direction from Congress to 
narrow the scope of what constitutes a bona fide hedge.\482\ Other 
things being equal, a narrower definition of bona fide hedging would 
logically subject more speculative positions to Federal limits.
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    \478\ Section 1.3(z), the definition of bona fide hedging 
transactions and positions for excluded commodities, was revised 
(but retained as amended) by the vacated part 151 Rulemaking. 
Section 1.47 of the Commission's regulations was removed and 
reserved by the vacated part 151 Rulemaking. On September 28, 2012, 
the District Court for the District of Columbia vacated the part 151 
Rulemaking with the exception of the amendments to Sec.  150.2. 887 
F. Supp. 2d 259 (D.D.C. 2012). Vacating the part 151 Rulemaking, 
with the exception of the amendments to Sec.  150.2, means that as 
things stand now, it is as if the Commission had never adopted any 
part of the part 151 Rulemaking other than the amendments to Sec.  
150.2. That is, the definition of bona fide hedging transactions and 
positions in Sec.  1.3(z) remains unchanged, and Sec.  1.47 is still 
in effect. As discussed above, the new definition of bona fide 
hedging positions in proposed Sec.  150.1 is different from the 
changes to Sec.  1.3(z) adopted by the Commission in the vacated 
part 151 Rulemaking. See 76 FR 71683-84. The Commission proposes to 
delete Sec.  1.47 for several reasons, as discussed above. Proposed 
Sec.  150.3(e) would provide guidance for persons seeking non-
enumerated hedging exemptions through filing of a petition under 
section 4a(a)(7) of the Act, 7 U.S.C. 6a(a)(7), replacing the 
current process, as discussed above, under Sec.  1.3(z)(3) and Sec.  
1.47 of the Commission's regulations.
    \479\ This approach is consistent with the limited exemption to 
provide for transition into position limits for persons with 
existing Sec.  1.47 exemptions under vacated Sec.  151.9(d) adopted 
in the vacated part 151 Rulemaking. See 76 FR 71655-56. This limited 
grandfather is similarly designed to limit market disruption.
    \480\ Section 4a(c)(1) of the CEA authorizes the Commission to 
define bona fide hedging transactions or positions ``consistent with 
the purposes of this Act.'' 7 U.S.C. 6a(c)(1).
    \481\ Section 4a(c)(2)(A)(i) of the Act provides that the 
Commission shall define what constitutes a bona fide hedging 
position as a position that represents a substitute for transactions 
made or to be made or positions taken or to be taken at a later time 
in a physical marketing channel. 7 U.S.C. 6a(c)(2)(A)(i). The 
proposed definition of bona fide hedging position requires that, for 
a position in a commodity derivative contracts in a physical 
contract to be a bona fide hedging position, such position must 
represent a substitute for transactions made or to be made or 
positions taken or to be taken, at a later time in a physical 
marketing channel. See supra discussion of the temporary substitute 
test.
    \482\ See discussion above.
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    Many of the Commission's bona fide hedging exemptions prior to the 
Dodd-Frank Act provided relief from Federal speculative position limits 
for persons acting as intermediaries in connection with index trading 
activities.\483\ For example, a pension fund enters into a swap to 
receive the rate of return on a particular commodity index (such as the 
Standard & Poor's-Goldman Sachs Commodity Index or the Dow Jones-UBS 
Commodity Index) with a swap dealer. The pension fund thus has a 
synthetic long position in the index. The swap dealer, in turn, must 
pay the rate of return on the index to the pension fund, and purchases 
commodity futures contracts to hedge its short exposure to the index. 
Prior to the Dodd-Frank Act, the swap dealer might have obtained a bona 
fide hedge exemption for its position. This would no longer be the 
case.
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    \483\ Index trading activities have emerged as an area of 
special concern to both Congress and the Commission. See generally 
the Wheat Report and the Index Trading Report. The Commission 
continues to consider the concerns of commenters who argue that some 
transactions and positions recognized before the Dodd-Frank Act as 
bona fide hedging may, in fact, facilitate excessive speculation. 
See, e.g., Testimony of Michael W. Masters before the Commodity 
Futures Trading Commission, Aug. 5, 2009, available at http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/hearing080509_masters.pdf; Comment Letter from Better Markets, 
Inc., Mar. 28, 2013, available at http://comments.cftc.gov/PublicComments/ViewComment.aspx?id=34010&SearchText=Better%20Markets. The 
speculative position limits that the Commission now proposes do not 
directly address these concerns as they relate to commodity index 
funds, commodity index speculation and passive investment in the 
commodity derivatives markets. The speculative position limits that 
the Commission proposes apply only to transactions involving one 
commodity or the spread between two commodities (e.g., the purchase 
of one delivery month of one commodity against the sale of that same 
delivery month of a different commodity). They do not apply to 
diversified commodity index contracts involving more than two 
commodities. This means that index speculators remain unconstrained 
on the size of positions in diversified commodity index contracts 
that they can accumulate so long as they can find someone with the 
capacity to take the other side of their trades. These commenters 
assert that such contracts, which this proposal does not address, 
consume liquidity and damage the price discovery function of the 
market. Contra Bessembinder et al., ``Predatory or Sunshine Trading? 
Evidence from Crude Oil Rolls'' (working paper, 2012) available at 
http://business.nd.edu/uploadedFiles/Faculty_and_Research/Finance/Finance_Seminar_Series/2012%20Fall%20Finance%20Seminar%20Series%20-%20Hank%20Bessembinder%20Paper.pdf.
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    The effect of revoking these exemptions for intermediaries may be 
mitigated in part by the absence of class limits in the proposed 
rules.\484\ The

[[Page 75741]]

absence of class limits means that market participants will be able to 
net economically equivalent derivatives contracts that are referenced 
contracts, i.e., futures against swaps, outside of the spot month, 
which would have the effect of reducing the size of a net position, 
perhaps below applicable speculative limits, in the case of an 
intermediary who enters into multiple swap positions in individual 
commodities to replicate a desired commodity index exposure in lieu of 
executing a swap on the commodity index.\485\ Netting would also permit 
larger speculative positions in futures alone outside of the spot month 
for traders who did not previously have a bona fide hedge exemption, 
but who have positions in swaps in the same commodity that would be 
netted against futures in the same commodity.\486\ Declining to impose 
class limits might seem to be at cross-purposes with narrowing the 
scope of the bona fide hedging definition. However, the Commission is 
concerned that class limits could impair liquidity in futures or swaps, 
as the case may be. For example, a speculator with a large portfolio of 
swaps near a particular class limit would be assumed to have a strong 
preference for executing futures transactions in order to maintain a 
swaps position below the class limit. If there were many similarly 
situated speculators, the market for such swaps could become less 
liquid. The absence of class limits should decrease the possibility of 
illiquid markets for contracts subject to Federal speculative position 
limits. Economically equivalent swaps and futures contracts outside of 
the spot month are close substitutes for each other. The absence of 
class limits should allow greater integration between the swaps and 
futures markets for contracts subject to Federal speculative position 
limits, and should also provide market participants with more 
flexibility when both hedging and speculating.
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    \484\ In the vacated part 151 Rulemaking Proposal, the 
Commission proposed to create two classes of contracts for non-spot 
month limits: (1) Futures and options on futures contracts and (2) 
swaps. The proposed part 151 rule would have applied single-month 
and all-months-combined position limits to each class separately. 
The aggregate position limits across contract classes would have 
been in addition to the position limits within each contract class. 
The class limits were designed to diminish the possibility that a 
trader could have market power as a result of a concentration in any 
one submarket and to prevent a trader that had a flat net aggregate 
position in futures and swap from establishing extraordinarily large 
offsetting positions. 76 FR at 71642. In response to comments 
received on the proposed part 151 rule, the Commission determined to 
eliminate class limits from the final rule. This is because the 
Commission believed that comments regarding the ability of market 
participants to net swaps and futures positions that are 
economically equivalent had merit. The Commission believed that 
concerns regarding the potential for market abuses through the use 
of futures and swaps positions could be addressed adequately, for 
the time being, by the Commission's large trader surveillance 
program. The Commission stated in the vacated part 151 Rulemaking 
that it would closely monitor speculative positions in Referenced 
Contracts and may revisit this issue as appropriate. 76 FR 71643. 
The Commission has determined to omit class limits from the rules 
proposed in this release for the same reasons that it eliminated 
class limits in the vacated part 151 Rulemaking.
    \485\ Netting of commodity index contracts with referenced 
contracts would not be permitted because a commodity index contract 
is not a substitute for a position taken or to be taken in a 
physical marketing channel.
    \486\ For example, a swap intermediary seeking to manage price 
risk on its books from serving as a counterparty to swap clients in 
commodity index swap contracts or commodity swap contracts could 
establish a portfolio of long futures positions in the commodities 
in the index or the commodity underlying the swap above applicable 
speculative limits if it had obtained a risk-management exemption. 
If the Commission adopts this proposal, the intermediary would not 
be able to hedge above the limits pursuant to the exemption, but 
could net economically equivalent contracts, which would have the 
effect of reducing the size of the position below applicable 
speculative limits.
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c. Proposed Recordkeeping Requirements
    Proposed Sec.  150.3(g) specifies recordkeeping requirements for 
persons who claim any exemption set forth in proposed Sec.  150.3. 
Persons claiming exemptions under proposed Sec.  150.3 must maintain 
complete books and records concerning all details of their related 
cash, forward, futures, options and swap positions and 
transactions.\487\ Furthermore, such persons must make such books and 
records available to the Commission upon request under proposed Sec.  
150.3(h), which would preserve the ``special call'' rule set forth in 
current Sec.  150.3(e). This ``special call'' rule sets forth that any 
person claiming an exemption under Sec.  150.3 must, upon request, 
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; the commodity derivative 
contracts or cash market positions which support the claim of 
exemption; and the relevant business relationships supporting a claim 
of exemption.\488\
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    \487\ Such positions and transactions include anticipated 
requirements, production and royalties, contracts for services, cash 
commodity products and by-products, and cross-commodity hedges.
    \488\ In order to capture information relating to swaps 
positions, the term ``futures, options'' in 17 CFR 150.3(e) would be 
replaced in proposed Sec.  150.3(g) with the broader term 
``commodity derivative contracts'' (defined in proposed Sec.  
150.1).
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    The proposed rules concerning detailed recordkeeping and special 
calls would help to ensure that any person who claims any exemption set 
forth in Sec.  150.3 can demonstrate a legitimate purpose for doing so.
4. Part 19--Reports by Persons Holding Bona Fide Hedge Positions 
Pursuant to Sec.  150.1 of This Chapter and by Merchants and Dealers in 
Cotton
i. Current Part 19
    The market and large trader reporting rules are contained in parts 
15 through 21 of the Commission's regulations.\489\ Collectively, these 
reporting rules effectuate the Commission's market and financial 
surveillance programs by providing information concerning the size and 
composition of the commodity futures, options, and swaps markets, 
thereby permitting the Commission to monitor and enforce the 
speculative position limits that have been established, among other 
regulatory goals. The Commission's reporting rules are implemented 
pursuant to the authority of CEA sections 4g and 4i, among other CEA 
sections. Section 4g of the Act imposes reporting and recordkeeping 
obligations on registered entities, and obligates FCMs, introducing 
brokers, floor brokers, and floor traders to file such reports as the 
Commission may require on proprietary and customer positions executed 
on any board of trade.\490\ Section 4i of the Act requires the filing 
of such reports as the Commission may require when positions equal or 
exceed Commission-set levels.\491\
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    \489\ 17 CFR parts 15-21.
    \490\ See CEA section 4g(a); 7 U.S.C. 6g(a).
    \491\ See CEA section 4i; 7 U.S.C. 6i.
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    Current part 19 of the Commission's regulations sets forth 
reporting requirements for persons holding or controlling reportable 
futures and option positions which constitute bona fide hedge positions 
as defined in Sec.  1.3(z) and for merchants and dealers in cotton 
holding or controlling reportable positions for future delivery in 
cotton.\492\ In the several markets with federal speculative position 
limits--namely those for grains, the soy complex, and cotton--hedgers 
that hold positions in excess of those limits must file a monthly 
report pursuant to part 19 on CFTC Form 204: Statement of Cash 
Positions in Grains,\493\ which includes the soy complex, and CFTC Form 
304 Report: Statement of Cash Positions in Cotton.\494\ These monthly 
reports, collectively referred to as the Commission's ``series '04 
reports,'' must show the trader's positions in the cash market and are 
used by the Commission to determine whether a trader has sufficient 
cash positions that justify futures and option positions above the 
speculative limits.\495\
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    \492\ See 17 CFR part 19. Current part 19 cross-references a 
provision of the definition of reportable position in 17 CFR 
15.00(p)(2). As discussed below, that provision would be 
incorporated into proposed Sec.  19.00(a).
    \493\ Current CFTC Form 204: Statement of Cash Positions in 
Grains is available at http://www.cftc.gov/ucm/groups/public/@forms/documents/file/cftcform204.pdf.
    \494\ Current CFTC Form 304 Report: Statement of Cash Positions 
in Cotton is available at http://www.cftc.gov/ucm/groups/public/@forms/documents/file/cftcform304.pdf.
    \495\ In addition, in the cotton market, merchants and dealers 
file a weekly CFTC Form 304 Report of their unfixed-price cash 
positions, which is used to publish a weekly Cotton On-call report, 
a service to the cotton industry. The Cotton On-Call Report shows 
how many unfixed-price cash cotton purchases and sales are 
outstanding against each cotton futures month.
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ii. Proposed Amendments to Part 19
    The Commission proposes to amend part 19 so that it conforms with 
the Commission's proposed changes to part

[[Page 75742]]

150. First, the Commission proposes to amend part 19 by adding new and 
modified cross-references to proposed part 150, including the new 
definition of bona fide hedging position in proposed Sec.  150.1. 
Second, the Commission proposes to amend Sec.  19.00(a) by extending 
reporting requirements to any person claiming any exemption from 
federal position limits pursuant to proposed Sec.  150.3. The 
Commission proposes to add three new series '04 reporting forms to 
effectuate these additional reporting requirements. Third, the 
Commission proposes to update the manner of part 19 reporting. Lastly, 
the Commission proposes to update both the type of data that would be 
required in series '04 reports, as well as the time allotted for filing 
such reports.
    For purposes of clarity and simplicity, the Commission seeks to 
retain the current organization of grouping many reporting 
requirements, including those related to claimed exemptions from the 
federal position limits, within parts 15-21 of the Commission's 
regulations. The Commission notes this is a change from the 
organization of vacated Sec.  151.5, which included both exemptions and 
related reporting requirements within a single section.
a. Amended Cross-References
    As discussed above, the Commission has proposed to replace the 
definition of bona fide hedging transaction found in Sec.  1.3(z) with 
a new proposed definition of bona fide hedging position in proposed 
Sec.  150.1. Therefore, proposed part 19 would replace cross-references 
to Sec.  1.3(z) with cross-references to the new definition of bona 
fide hedging positions in proposed Sec.  150.1.
    Proposed part 19 will be expanded to include reporting requirements 
for positions in swaps, in addition to futures and options positions, 
for any part of which a person relies on an exemption. Therefore, 
positions in ``commodity derivative contracts,'' as defined in proposed 
Sec.  150.1, would replace ``futures and option positions'' throughout 
amended part 19 as shorthand for any futures, option, or swap contract 
in a commodity (other than a security futures product as defined in CEA 
section 1a(45)).\496\ This amendment would harmonize the reporting 
requirements of part 19 with proposed amendments to part 150 that 
encompass swap transactions.
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    \496\ See discussion above.
---------------------------------------------------------------------------

    Proposed Sec.  19.00(a) would eliminate the cross-reference to the 
definition of reportable position in Sec.  15.00(p)(2). In this regard, 
the current reportable position definition essentially identifies 
futures and option positions in excess of speculative position limits. 
Proposed Sec.  19.00(a) simply makes clear that the reporting 
requirement applies to commodity derivative contract positions 
(including swaps) that exceed speculative position limits, as discussed 
below.
b. List of Persons Who Must File Series '04 Reports Extended To Include 
Any Person Claiming an Exemption Under Proposed Sec.  150.3
    The reporting requirements of current part 19 apply only to persons 
holding bona fide hedge positions and merchants and dealers in cotton 
holding or controlling reportable positions for future delivery in 
cotton.\497\ The Commission proposes to extend the reach of part 19 by 
requiring all persons who wish to avail themselves of any exemption 
from federal position limits under proposed Sec.  150.3 to file 
applicable series '04 reports.\498\ Collection of this information 
would facilitate the Commission's surveillance program with respect to 
detecting and deterring trading activity that may tend to cause sudden 
or unreasonable fluctuations or unwarranted changes in the prices of 
the referenced contracts and their underlying commodities. By 
broadening the scope of persons who must file series '04 reports, the 
Commission seeks to ensure that any person who claims any exemption 
from federal speculative position limits can demonstrate a legitimate 
purpose for doing so. The list of positions set forth in proposed Sec.  
150.3 that are eligible for exemption from the federal position 
includes, but is not limited to, bona fide hedging positions (including 
pass-through swaps and anticipatory bona fide hedge positions), 
qualifying spot month positions in cash-settled referenced contracts, 
and qualifying non-enumerated risk-reducing transactions.
---------------------------------------------------------------------------

    \497\ See 17 CFR part 19. Current part 19 cross-references the 
definition of reportable position in 17 CFR 15.00(p).
    \498\ Furthermore, anyone exceeding the federal limits who has 
received a special call must file a series '04 form.
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    Series '04 reports currently refers to Form 204 and Form 304, which 
are listed in current Sec.  15.02.\499\ The Commission proposes to add 
three new series '04 reporting forms to effectuate the expanded 
reporting requirements of part 19. The Commission will avoid using any 
form numbers with ``404'' to avoid confusion with the part 151 
Rulemaking.\500\ Proposed Form 504 would be added for use by persons 
claiming the conditional spot month limit exemption pursuant to 
proposed Sec.  150.3(c).\501\ Proposed Form 604 would be added for use 
by persons claiming a bona fide hedge exemption for either of two 
specific pass-through swap position types, as discussed further 
below.\502\ Proposed Form 704 would be added for use by persons 
claiming a bona fide hedge exemption for certain anticipatory bona fide 
hedging positions.\503\
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    \499\ 17 CFR 15.02.
    \500\ Forms 404, 404A and 404S were required under provisions of 
vacated part 151.
    \501\ See supra discussion of proposed Sec.  150.3(c).
    \502\ Proposed Form 604 would replace Form 404S (as contemplated 
in vacated part 151).
    \503\ The updated definition of bona fide hedging in proposed 
Sec.  150.1 incorporates several specific types of anticipatory 
transactions: unfilled anticipated requirements, unsold anticipated 
production, anticipated royalties, anticipated services contract 
payments or receipts, and anticipatory cross-commodity hedges. See, 
paragraphs (3)(iii), (4)(i), (iii), and (iv), and (5), respectively, 
of the Commission's amended definition of bona fide hedging 
transactions in proposed Sec.  150.1 as discussed above.
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c. Manner of Reporting
(1) Excluding Certain Source Commodities, Products or Byproducts of the 
Cash Commodity Hedged
    For purposes of reporting cash market positions under current part 
19, the Commission historically has allowed a reporting trader to 
``exclude certain products or byproducts in determining his cash 
positions for bona fide hedging'' if it is ``the regular business 
practice of the reporting trader'' to do so.\504\ The Commission has 
determined to clarify the meaning of ``economically appropriate'' in 
light of this reporting exclusion of certain cash positions.\505\ In 
order for a position to be economically appropriate to the reduction of 
risks in the conduct and management of a commercial enterprise, the 
enterprise generally should take into account all inventory or products 
that the enterprise owns or controls, or has contracted for purchase or 
sale at a fixed price. For example, in line with its historical 
approach to the reporting exclusion, the Commission does not believe 
that it would be economically appropriate to exclude large quantities 
of a source commodity held in inventory when an enterprise is 
calculating its value at risk to a source commodity and it intends to 
establish a long derivatives position as

[[Page 75743]]

a hedge of unfilled anticipated requirements. Therefore, under proposed 
Sec.  19.00(b)(1), a source commodity itself can only be excluded from 
a calculation of a cash position if the amount is de minimis, 
impractical to account for, and/or on the opposite side of the market 
from the market participant's hedging position.\506\
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    \504\ See 17 CFR 19.00(b)(1) (providing that ``[i]f the regular 
business practice of the reporting trader is to exclude certain 
products or byproducts in determining his cash position for bona 
fide hedging . . ., the same shall be excluded in the report'').
    \505\ See supra discussion of the ``economically appropriate 
test'' as it relates to the definition of bona fide hedging 
position.
    \506\ Proposed Sec.  19.00(b)(1) adds a caveat to the 
alternative manner of reporting: when reporting for the cash 
commodity of soybeans, soybean oil, or soybean meal, the reporting 
person shall show the cash positions of soybeans, soybean oil and 
soybean meal. This proposed provision for the soybean complex is 
included in the current instructions for preparing Form 204.
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    Originally, the Commission intended for the optional part 19 
reporting exclusion to cover only cash positions that were not capable 
of being delivered under the terms of any derivative contract.\507\ The 
Commission differentiated between ``products and byproducts'' of a 
commodity and the underlying commodity itself, the former capable of 
exclusion from part 19 reporting under normal business practices due to 
the absence of any derivative contract in such product or 
byproduct.\508\ This intention ultimately evolved to allow cross-
commodity hedging of products and byproducts of a commodity that were 
not necessarily deliverable under the terms of any derivative 
contract.\509\ The instructions to current Form 204 go a step further 
than current Sec.  19.00(b)(1) by allowing for a reporting trader to 
exclude ``certain source commodities, products, or byproducts in 
determining [ ] cash positions for bona fide hedging.'' (Emphasis 
added.)
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    \507\ 43 FR 45825, 45827, Oct. 4, 1978 (explaining that the 
allowance for eggs not kept in cold storage to be excluded from 
reporting a cash position in eggs under part 19 ``was appropriate 
when the only futures contract being traded in fresh shell eggs 
required delivery from cold storage warehouses.'').
    \508\ Prior to the Commission revising the part 19 reporting 
exclusion for eggs, see id., the exclusion allowed ``eggs not in 
cold storage or certain egg products'' not to be reported as a cash 
position. 26 FR 2971, Apr. 7, 1961 (emphasis added). Additionally, 
the title to the revised exclusion reads: ``Excluding products or 
byproducts of the cash commodity hedged.'' See 43 FR 45825, 45828, 
Oct. 4, 1978. So, in addition to a commodity itself that was not 
deliverable under any derivative contract, the Commission also 
recognized a separate class of ``products and byproducts'' that 
resulted from the processing of a commodity that it did not believe 
at the time was capable of being hedged by any derivative contract 
for purposes of a bona fide hedge.
    \509\ See 42 FR 42748, Aug. 24, 1977. Cross-commodity hedging is 
discussed as an enumerated hedge, below.
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    The Commission's proposed clarification of the Sec.  19.00(b)(1) 
reporting exclusion would prevent the definition of bona fide hedging 
positions in proposed Sec.  150.1 from being swallowed by this 
reporting rule. For it would not be economically appropriate behavior 
for a person who is, for example, long derivative contracts to exclude 
inventory when calculating unfilled anticipated requirements. Such 
behavior would call into question whether an offset to unfilled 
anticipated requirements is, in fact, a bona fide hedging position, 
since such inventory would fill the requirement. As such, a trader can 
only underreport cash market activities on the opposite side of the 
market from her hedging position as a regular business practice, unless 
the unreported inventory position is de minimis or impractical to 
account for. By way of example, the alternative manner of reporting in 
proposed Sec.  19.00(b)(1) would permit a person who has a cash 
inventory of 5 million bushels of wheat, and is short 5 million bushels 
worth of commodity derivative contracts, to underreport additional cash 
inventories held in small silos in disparate locations that are 
administratively difficult to count. This person could instead opt to 
calculate and report these hard-to-count inventories and establish 
additional short positions in commodity derivative contracts as a bona 
fide hedge against such additional inventories.
(2) Cross-Commodity Hedges
    Proposed Sec.  19.00(b)(2) sets forth instructions, which are 
consistent with the provisions in the current section, for reporting a 
cash position in a commodity that is different from the commodity 
underlying the futures contract used for hedging.\510\ A person who is 
unsure of whether a commodity may serve as the basis of a cross-
commodity hedge should refer to the deliverable commodities listed by 
the relevant DCM under the terms of a particular core referenced 
futures contract. Persons who wish to avail themselves of cross-
commodity hedges are required to file an appropriate series '04 
form.\511\
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    \510\ Proposed Sec.  19.00(b)(2) would add the term commodity 
derivative contracts (as defined in proposed Sec.  150.1). The 
proposed definition of cross-commodity hedge in proposed Sec.  150.1 
is discussed above.
    \511\ Vacated Sec.  151.5(g) would have required the filing of a 
Form 404, 404A, or 404S by persons availing themselves of cross-
commodity hedges.
---------------------------------------------------------------------------

    Under vacated Sec.  151.5(g), traders engaged in hedging commercial 
activity (or hedging swaps that in turn hedge commercial activity) that 
did not involve the same quantity or commodity as the quantity or 
commodity associated with positions in referenced contracts that are 
used to hedge would have been obligated to submit a description of the 
conversion methodology each time they cross-hedged.\512\ In lieu of 
that, the Commission proposes to instead maintain the special call 
status concerning such information as set forth in current Sec.  
19.00(b)(3).\513\ Furthermore, since proposed Sec.  19.00(b)(3) would 
maintain the requirement that cross-hedged positions be shown both in 
terms of the equivalent amount of the commodity underlying the 
commodity derivative contract used for hedging and in terms of the 
actual cash commodity (as provided for on the appropriate series '04 
form), the Commission will be able to determine the hedge ratio used 
merely by comparing the reported positions. Thus, the Commission will 
be positioned to review whether a hedge ratio appears reasonable in 
comparison to, for example, other similarly situated traders, without 
requiring reporting of the conversion methodology.
---------------------------------------------------------------------------

    \512\ See 76 FR at 71692.
    \513\ See discussion below.
---------------------------------------------------------------------------

(3) Standards and Conversion Factors
    Proposed Sec.  19.00(b)(3) maintains the requirement that standards 
and conversion factors used in computing cash positions for reporting 
purposes must be made available to the Commission upon request. 
Proposed Sec.  19.00(b)(3) would clarify that such information would 
include hedge ratios used to convert the actual cash commodity to the 
equivalent amount of the commodity underlying the commodity derivative 
contract used for hedging, and an explanation of the methodology used 
for determining the hedge ratio.
(4) Examples of Completed '04 Forms
    To assist filers in completing Forms 204, 304, 504, 604 and 704, 
illustrative examples are provided in appendix A to part 19, adjacent 
to the blank forms and instructions. Once finalized, filers would be 
able to contact Commission staff in the Office of Data and Technology 
(ODT) and/or surveillance staff in the Division of Market Oversight for 
additional guidance.
d. Information Required and Timing
    Proposed Sec.  19.01(b)(3) would require series `04 reports to be 
transmitted using the format, coding structure, and electronic data 
transmission procedures approved in writing by the Commission or its 
designee.\514\
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    \514\ For example, the Commission is considering requiring that 
series '04 reports should be sent to the Commission via FTP, unless 
otherwise specifically authorized by the Commission or its designee. 
Prior to submitting series '04 reports, persons would contact the 
CFTC at (312) 596-0700 to obtain the CFTC trader identification code 
required by such reports. Further instructions on submitting '04 
reports may be found at http://www.cftc.gov/Forms/index.htm. If 
submission through FTP is impractical, the reporting trader would 
contact the Commission at (312) 596-0700 for further instruction.
    CFTC Form 204 reports with respect to transactions in wheat, 
corn, oats, soybeans, soybean meal and soybean oil would no longer 
be sent to the Commission's office in Chicago, IL.
    Similarly, CFTC Form 304 reports with respect to transactions in 
cotton would no longer be sent to the Commission's office in New 
York, NY.

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[[Page 75744]]

(1) Bona Fide Hedgers and Cotton Merchants and Dealers
    Current Sec.  19.01(a) sets forth the data that must be provided by 
bona fide hedgers (on Form 204) and by merchants and dealers in cotton 
(on Form 304).\515\ The Commission proposes to continue using Forms 204 
and 304, which will feature only minor changes to the types of data to 
be reported.\516\ To accommodate open price pairs, proposed Sec.  
19.01(a)(3) would remove the modifier ``fixed price'' from ``fixed 
price cash position'' and would add a specific request for data 
concerning open price contracts. The Commission would maintain 
additional reporting requirements for cotton but will incorporate the 
monthly reporting, including the granularity of equity, certificated 
and non-certificated cotton stocks, on Form 204. Weekly reporting for 
cotton will be retained as a separate report made on Form 304 for the 
collection of data required by the Commission to publish its weekly 
public cotton ``on call'' report on www.cftc.gov.
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    \515\ Vacated Sec.  151.5 would have set forth the application 
procedure for bona fide hedgers and counterparties to bona fide 
hedging swap transactions that seek an exemption from the 
Commission-set Federal position limits for Referenced Contracts. 
Under vacated Sec.  151.5, had a bona fide hedger sought to claim an 
exemption from position limits because of cash market activities, 
then the hedger would have submitted a Form 404 filing pursuant to 
vacated Sec.  151.5(b). The Form 404 filing would have been 
submitted when the bona fide hedger exceeded the applicable position 
limit and claimed an exemption or when its hedging needs increased. 
Similarly, parties to bona fide hedging swap transactions would have 
been required to submit a Form 404S filing to qualify for a hedging 
exemption, which would also have been submitted when the bona fide 
hedger exceeded the applicable position limit and claimed an 
exemption or when its hedging needs increased.
    \516\ The list of data required for persons filing on Forms 204 
and 304 would be relocated from current Sec.  19.01(a) to proposed 
Sec.  19.01(a)(3).
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    Proposed Sec.  19.01(b) would maintain the requirement that reports 
on Form 204 be submitted to the Commission on a monthly basis, as of 
the close of business on the last Friday of the month.\517\ 
Accordingly, commercial firms would measure their respective cash 
positions on one day a month, as they currently do for Form 204, and 
submit a monthly report, as currently provided in Sec.  19.01. Proposed 
Sec.  19.02 provides that Form 304, but not Form 204, must be filed 
weekly to provide data for the Commission's weekly cotton ``on call'' 
report. The Commission would continue to utilize its special call 
authority in addition to the regular reporting on '04 forms to ensure 
that it has sufficient information.
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    \517\ Compare proposed Sec.  19.01(b) with 17 CFR 19.01(b). 
Additionally, compare proposed Sec.  19.01(b) with vacated Sec.  
151.5(c) which would have required that any person holding a 
derivatives position in excess of a position limit record and 
ultimately report information about such person's cash positions in 
the relevant commodity for each day that its derivatives position 
exceeds the applicable position limit.
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(2) Conditional Spot-Month Limit Exemption
    Proposed Sec.  19.01(a)(1) would require persons availing 
themselves of the conditional spot month limit exemption (pursuant to 
proposed Sec.  150.3(c)) to report certain detailed information 
concerning their cash market activities for any commodity specially 
designated by the Commission for reporting under Sec.  19.03 of this 
part. While traders who avail themselves of this exemption could not 
directly influence particular settlement prices by trading in the 
physical-delivery referenced contract, the Commission remains concerned 
about such traders' activities in the underlying cash commodity. 
Accordingly, proposed Sec.  19.01(b) would require that persons 
claiming a conditional spot month limit exemption must report on new 
Form 504 daily, by 9 a.m. Eastern Time on the next business day, for 
each day that a person is over the spot month limit in certain special 
commodity contracts specified by the Commission.\518\ The scope of 
reporting--purchase and sales contracts through the delivery area for 
the core referenced futures contract and inventory in the delivery 
area--differs from the scope of reporting for bona fide hedgers, since 
the person relying on the conditional spot month limit exemption may 
not be hedging any position.
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    \518\ Additionally, data under this provision may be required by 
way of special call, in addition to special commodity reporting.
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    Initially, the Commission would require reporting on new Form 504 
for conditional spot month limit exemptions in the natural gas 
commodity derivative contracts only. Based on its experience in 
surveillance of natural gas commodity derivative contracts, the 
Commission believes that enhanced reporting is warranted.\519\ The 
Commission would wait to impose similar reporting requirements for 
persons claiming conditional spot month limit exemptions in other 
commodity derivative contracts until the Commission gains additional 
experience with the limits in proposed Sec.  150.2. In this regard, the 
Commission will closely monitor the reporting associated with 
conditional spot month limit exemptions in natural gas and may require 
reporting on Form 504 for other commodity derivative contracts in the 
future in response to market developments and to facilitate 
surveillance.\520\
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    \519\ The Commission has observed dramatic instances of 
disruptive trading practices in the natural gas markets. See United 
States CFTC v. Amaranth Advisors, LLC, 2009 U.S. Dist. LEXIS 101406 
(S.D.N.Y. Aug. 12, 2009). The Commission endeavors to balance the 
cost of similar enhanced reporting for the other 27 commodities 
against its experience with observing disruptive trading practices.
    \520\ See proposed Sec.  19.03.
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(3) Pass-Through Swap Exemption
    Under the definition of bona fide hedging position in proposed 
Sec.  150.1, a person who uses a swap to reduce risks attendant to a 
position that qualifies as a bona fide hedging position may pass-
through those bona fides to the counterparty, even if the person's swap 
position is not in excess of a position limit.\521\ As such, positions 
in commodity derivative contracts that reduce the risk of pass-through 
swaps would qualify as bona fide hedging positions.
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    \521\ See supra discussion of the proposed definition of bona 
fide hedging position.
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    Proposed Sec.  19.01(a)(2) would require a person relying on the 
pass-through swap exemption who holds either of two position types to 
file a report with the Commission on new Form 604. The first type of 
position is a swap executed opposite a bona fide hedger that is not a 
referenced contract and for which the risk is offset with referenced 
contracts. The second type of position is a cash-settled swap executed 
opposite a bona fide hedger that is offset with physical-delivery 
referenced contracts held into a spot month, or, vice versa, a 
physical-delivery swap executed opposite a bona fide hedger that is 
offset with cash-settled referenced contracts held into a spot month.
    These reports on Form 604 would explain hedgers' needs for large 
referenced contract positions and would give the Commission the ability 
to verify the positions were a bona fide hedge, with heightened daily 
surveillance of spot month offsets. Persons holding any type of pass-
through swap position other than the two described above would report 
on Form 204.\522\
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    \522\ Persons holding pass-through swap positions that are 
offset with referenced contracts outside the spot month (whether 
such contracts are for physical delivery or are cash-settled) need 
not report on Form 604 because swap positions will be netted with 
referenced contract positions outside the spot month pursuant to 
proposed Sec.  150.2(b).

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[[Page 75745]]

(A) Non-Referenced Contract Swap Offset
    Proposed Sec.  19.01(a)(2)(i) lists the types of data that a person 
who executes a pass-through swap that is not a referenced contract and 
for which the risk is offset with referenced contracts must report on 
new Form 604. Such data requirements include details concerning the 
non-referenced contract in terms of commodity reference price,\523\ 
notional quantity, gross long or short position in terms of futures-
equivalents in the core referenced futures contract, and gross long or 
short position in the referenced contract used to offset risk.\524\ 
Under proposed Sec.  19.01(b), persons holding a non-referenced 
contract swap offset would submit reports to the Commission on a 
monthly basis, as of the close of business of the last Friday of the 
month. This data collection would permit staff to identify offsets of 
non-referenced-contract pass-through swaps on an ongoing basis for 
further analysis. The Commission believes collection of this data will 
be less burdensome on reporting entities than complying with special 
calls.
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    \523\ As defined in 17 CFR 20.1, a commodity reference price is 
the price series used by the parties to a swap or swaption to 
determine payments made, exchanged, or accrued under the terms of 
that swap or swaption.''
    \524\ In contrast to vacated Sec.  151.5(f) and (g), proposed 
Sec.  19.01(a)(2)(i) would not require the person to submit a 
description of the conversion methodology each time he or she cross-
hedged.
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(B) Spot Month Swap Offset
    Under proposed Sec.  150.2(a), a trader in the spot month may not 
net across physical-delivery and cash-settled contracts for the purpose 
of complying with federal position limits.\525\ If a person executes a 
cash-settled pass-through swap that is offset with physical-delivery 
contracts held into a spot month (or vice versa), then, pursuant to 
proposed Sec.  19.01(a)(2)(ii), that person must report additional 
information concerning the swap and offsetting referenced contract 
position on new Form 604. A person need not file a Form 604 if he or 
she executes a cash-settled pass-through swap that is offset with cash-
settled referenced contracts, or, vice versa, a physical delivery pass-
through swap offset with physical delivery referenced contracts.\526\ 
Pursuant to proposed Sec.  19.01(b), a person holding a spot month swap 
offset would need to file on Form 604 as of the close of business on 
each day during a spot month, and not later than 9 a.m. Eastern Time on 
the next business day following the date of the report. The Commission 
notes that pass-through swap offsets would not be permitted during the 
lesser of the last five days of trading or the time period for the spot 
month. However, the Commission remains concerned that a trader could 
hold an extraordinarily large position early in the spot month in the 
physical-delivery contract along with an offsetting short position in a 
cash-settled contract, which may disrupt the price discovery function 
of the underlying physical delivery core referenced futures contract. 
Hence, the Commission proposes to introduce this new daily reporting 
requirement within the spot month to identify and monitor such 
offsetting positions.
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    \525\ See supra discussion of proposed Sec.  150.2(a).
    \526\ To provide clarity in filings, a person may report cash-
settled referenced contracts used for bona fide hedging in a 
separate filing from physical-delivery referenced contracts used for 
bona fide hedging.
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5. Section 150.7--Reporting Requirements for Anticipatory Hedging 
Positions
    For reasons discussed above, the revised definition of bona fide 
hedging in proposed Sec.  150.1 incorporates hedges of five specific 
types of anticipated transactions: unfilled anticipated requirements, 
unsold anticipated production, anticipated royalties, anticipated 
services contract payments or receipts, and anticipatory cross-
hedges.\527\ The Commission proposes reporting requirements in new 
Sec.  150.7 for traders seeking an exemption from position limits for 
any of these five enumerated anticipated hedging transactions. Proposed 
Sec.  150.7 would build on, and replace, the special reporting 
requirements for hedging of unsold anticipated production and unfilled 
anticipated requirements in current Sec.  1.48.\528\
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    \527\ See paragraphs (3)(iii), (4)(i), (iii), and (iv), and (5), 
respectively, of the Commission's amended definition of bona fide 
hedging transactions in proposed Sec.  150.1 as discussed above.
    \528\ See 17 CFR 1.48. See also definition of bona fide hedging 
transactions in current 17 CFR 1.3(z)(2)(i)(B) and (ii)(C), 
respectively.
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i. Current Sec.  1.48
    Current Sec.  1.48 provides a procedure for persons to file for 
bona fide hedging exemptions for anticipated production or unfilled 
requirements when that person has not covered the anticipatory need 
with fixed-price commitments to sell a commodity, or inventory or 
fixed-price commitments to purchase a commodity. The Commission has 
long been concerned that distinguishing between what is the reduction 
of risk arising from anticipatory needs, and what is speculation, may 
be exceedingly difficult if anticipatory transactions are not well 
defined. Therefore, for more than fifty years, the position limit rules 
have set discrete reporting requirements in Sec.  1.48 for persons 
wishing to avail themselves of certain anticipatory bona fide hedging 
position exemptions.\529\ When first promulgated in 1956, Sec.  1.48 
set forth reporting requirements for persons hedging anticipated 
requirements for processing or manufacturing.\530\ In 1977, Sec.  1.48 
was amended to include similar reporting requirements for a second type 
of anticipatory hedge transaction: unsold anticipated production.\531\ 
Thereafter, the Commission did not substantively amend Sec.  1.48 until 
it adopted a new position limits regime in 2011.\532\
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    \529\ See Hedging Anticipated Requirements for Processing or 
Manufacturing under Section 4a(3) of the Commodity Exchange Act, 21 
FR 6913, Sep. 12, 1956.
    \530\ Id. The statutory definition also provided an anticipatory 
production hedge for twelve months agricultural production. 7 U.S.C. 
6a(3)(A) (1940) (1970). The statutory definition was deleted in 
1974, as discussed above in the definition of bona fide hedging 
position.
    \531\ See Definition of Bona Fide Hedging Requirements and 
Related Reporting Requirements, 42 FR 42748, Aug. 24, 1977. The 
Commission stated at that time that this amended reporting 
requirement was intended to conform Sec.  1.48 to the updated 
definition of bona fide hedging in Sec.  1.3(z), and to limit the 
potential for market disruption. Id. at 42750.
    \532\ See generally 76 FR 71626, November 18, 2011. Prior to 
compliance dates, the rule was vacated, as discussed below.
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    In January 2011, the Commission published a notice of proposed 
rulemaking to replace existing part 150, in its entirety, with a new 
federal position limits rules regime in the form of new part 151.\533\ 
Proposed Sec.  151.5 would have established exemptions from position 
limits for bona fide hedging transactions or positions in exempt and 
agricultural commodities.\534\ The referenced contracts subject to the 
proposed position limit framework would have been subject to the bona 
fide hedge provisions of proposed Sec.  151.5 and would have no longer 
been subject to the definition of bona fide hedging transactions in 
Sec.  1.3(z), which would have been retained only for excluded 
commodities.\535\ Proposed Sec.  151.5(c) specified reporting and 
approval requirements for traders seeking an anticipatory hedge 
exemption, incorporating the current requirements of Sec.  1.48 (and 
thereby rendering Sec.  1.48

[[Page 75746]]

duplicative).\536\ However, in an Order dated September 28, 2012, the 
United States District Court for the District of Columbia vacated part 
151.\537\ The District Court decision had the effect of reinstating 
Sec. Sec.  1.3(z) and 1.48.\538\ Therefore, Sec. Sec.  1.3(z) and 1.48 
continue to apply as if part 151 had not been finally adopted by the 
Commission.
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    \533\ Proposed Rule, 76 FR 4752, Jan. 26, 2011. The final 
rulemaking for new Part 151 required DCMs to comply with Part 150 
until such time that the Commission replaces Part 150 with the new 
Part 151. See 76 FR 71632.
    \534\ 76 FR 71643.
    \535\ 76 FR 71644.
    \536\ Id. This rulemaking would have removed and reserved Sec.  
1.48.
    \537\ See 887 F. Supp. 2d 259 (D.D.C. 2012).
    \538\ See Georgetown Univ. Hosp. v. Bowen, 821 F.2d 750, 757 
(D.C. Cir. 1987) (``This circuit has previously held that the effect 
of invalidating an agency rule is to `reinstate the rules previously 
in force.' '').
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ii. Proposed Sec.  150.7
a. Reporting Requirements for Anticipatory Hedging Positions
    The Commission's revised definition of bona fide hedging in 
proposed Sec.  150.1 would enumerate two new types of anticipatory bona 
hedging positions. Two existing types of anticipatory hedges would be 
carried forward from the existing definition of bona fide hedging in 
current Sec.  1.3(z): hedges of unfilled anticipated requirements and 
hedges of unsold anticipated production, as well as anticipatory cross-
commodity hedges of such requirements or production.\539\ Proposed 
Sec.  150.1 would expand the list of enumerated anticipatory bona fide 
hedging positions to include hedges of anticipated royalties and hedges 
of anticipated services contract payments or receipts, as well as 
anticipatory cross-commodity hedges of such contracts.\540\ As 
discussed above, Sec.  1.48 has long required special reporting for 
hedges of unfilled anticipated requirements and hedges of unsold 
anticipated production because the Commission remains concerned about 
distinguishing between anticipatory reduction of risk and speculation. 
Such concerns apply equally to any position undertaken to reduce the 
risk of anticipated transactions. Hence, the Commission proposes to 
extend the special reporting requirements in proposed Sec.  150.7 for 
all types of enumerated anticipatory hedges that appear in the 
definition of bona fide hedging positions in proposed Sec.  150.1.
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    \539\ See current definition of bona fide hedging transactions 
at 17 CFR 1.3(z)(2)(i)(B) and (ii)(C), respectively. Cross-commodity 
hedges are permitted under 17 CFR 1.3(z)(2)(iv). Compare with 
paragraphs (3)(iii) and (4)(i), respectively, of the definition of 
bona fide hedging positions in proposed Sec.  150.1, discussed 
above.
    \540\ See sections (4)(iii) and (iv) and (5), respectively, of 
the definition of bona fide hedging positions in proposed Sec.  
150.1, discussed above.
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    For purposes of simplicity, the proposed special reporting 
requirements for anticipatory hedges would be placed within the 
Commission's position limits regime in part 150, and alongside the 
Commission's updated definition of bona fide hedging positions in 
proposed Sec.  150.1. Thus, the Commission is proposing to delete the 
reporting requirements for anticipatory hedges in current Sec.  1.48 
because that section is duplicative.
b. New Form 704
    The Commission proposes to add a new series '04 reporting form, 
Form 704, to effectuate these additional and updated reporting 
requirements for anticipatory hedges. Persons wishing to avail 
themselves of an exemption for any of the anticipatory hedging 
transactions enumerated in the updated definition of bona fide hedging 
in proposed Sec.  150.1 would be required to file an initial statement 
on Form 704 with the Commission at least ten days in advance of the 
date that such positions would be in excess of limits established in 
proposed Sec.  150.2. Advance notice of a trader's intended maximum 
position in commodity derivative contracts to offset anticipatory risks 
would allow the Commission to review a proposed position before a 
trader exceeds the position limits and, thereby, would allow the 
Commission to prevent excessive speculation in the event that a trader 
were to misconstrue the purpose of these limited exemptions.\541\ The 
trader's initial statement on Form 704 would provide a detailed 
description of the person's anticipated activity (i.e., unfilled 
anticipated requirements, unsold anticipated production, etc.).\542\ 
Under proposed Sec.  150.7(b), the Commission may reject all or a 
portion of the position as not meeting the requirements for bona fide 
hedging positions under proposed Sec.  150.1. To support this 
determination, proposed Sec.  150.7(c) would allow the Commission to 
request additional specific information concerning the anticipated 
transaction to be hedged. Otherwise, Form 704 filings that conform to 
the requirements set forth in proposed Sec.  150.7 would become 
effective ten days after submission. Proposed Sec.  150.7(e) would 
require an anticipatory hedger to file a supplemental report on Form 
704 whenever the anticipatory hedging needs increase beyond that in its 
most recent filing.
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    \541\ Further, advance filing may serve to reduce the burden on 
a person who exceeds position limits and who may then otherwise be 
issued a special call to determine whether the underlying 
requirements for the exemption have been met. If the Commission were 
to reject such an exemption, such a person would have already 
violated position limits.
    \542\ Proposed 150.7(d)(2) would require additional information 
for cross hedges, for reasons discussed above.
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c. Annual and Monthly Reporting Requirements
    Proposed Sec.  150.7(f) would add a requirement for any person who 
files an initial statement on Form 704 to provide annual updates that 
detail the person's actual cash market activities related to the 
anticipated exemption. With an eye towards distinguishing bona fide 
hedging of anticipatory risks from speculation, annual reporting of 
actual cash market activities and estimates of remaining unused 
anticipated exemptions beyond the past year would enable the Commission 
to verify whether the person's anticipated cash market transactions 
closely track that person's real cash market activities. Proposed Sec.  
150.7(g) would similarly enable the Commission to review and compare 
the actual cash activities and the remaining unused anticipated hedge 
transactions by requiring monthly reporting on Form 204. Absent monthly 
filing, the Commission would need to issue a special call to determine 
why a person's commodity derivative contract position is, for example, 
larger than the pro rata balance of her annually reported anticipated 
production.
    As is the case under current Sec.  1.48, proposed Sec.  150.7(h) 
requires that a trader's maximum sales and purchases must not exceed 
the lesser of the approved exemption amount or the trader's current 
actual anticipated transaction.
d. Delegation
    The Commission is proposing to delete current Sec.  140.97, which 
delegates to the Director of the Division of Market Oversight or his 
designee authority regarding requests for classification of positions 
as bona fide hedging under current Sec. Sec.  1.47 and 1.48. For 
purposes of simplicity, this delegation of authority would be placed in 
proposed Sec.  150.7(j), within the Commission's position limits regime 
in part 150.
6. Miscellaneous Regulatory Amendments
i. Proposed Sec.  150.6--Ongoing Application of the Act and Commission 
Regulations
    The Commission is proposing to amend existing Sec.  150.6 to 
conform the provision with the general applicability of part 150 to 
SEFs that are trading facilities, and concurrently making non-
substantive changes to clarify the provision. The provision, as amended 
and clarified, provides this part shall only be construed as having an 
effect on

[[Page 75747]]

position limits and that nothing in part 150 shall affect any provision 
promulgated under the Act or Commission regulations including but not 
limited to those relating to manipulation, attempted manipulation, 
corners, squeezes, fraudulent or deceptive conduct, or prohibited 
transactions.\543\ For example, by requiring DCMs and SEFs that are 
trading facilities to impose and enforce exchange-set speculative 
position limits, the Commission does not intend for the fulfillment of 
such requirements alone to satisfy any other legal obligations under 
the Act and Commission regulations of DCMs and SEFs that are trading 
facilities to detect and deter market manipulation and corners. In 
another example, a market participant's compliance with position limits 
or an exemption does not confer any type of safe harbor or good faith 
defense to a claim that he had engaged in an attempted manipulation, a 
perfected manipulation or deceptive conduct.
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    \543\ The Commission notes that amended Sec.  150.6 matches 
vacated Sec.  151.11(h).
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ii. Proposed Sec.  150.8--Severability
    The Commission is proposing to add Sec.  150.8 to address the 
severability of individual provisions of part 150. Should any 
provision(s) of part 150 be declared invalid, including the application 
thereof to any person or circumstance, Sec.  150.8 provides that all 
remaining provisions of part 150 shall not be affected to the extent 
that such remaining provisions, or the application thereof, can be 
given effect without the invalid provisions.\544\ The Commission 
believes it is prudent to include a severability clause to avoid any 
further delay, as practicable, in carrying out Congress' mandate to 
impose position limits in a timely manner.
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    \544\ The Commission notes that proposed Sec.  150.8 matches 
vacated Sec.  151.13.
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iii. Part 15--Reports--General Provisions
    The Commission is proposing to amend the definition of the term 
``reportable position'' in current Sec.  15.00(p)(2) by clarifying 
that: (1) Such positions include swaps; (2) issued and stopped 
positions are not included in open interest against a position limit; 
and (3) special calls may be made for any day a person exceeds a limit. 
Additionally, the Commission is proposing to amend Sec.  15.01(d) by 
adding language to reference swaps positions. Lastly, the Commission is 
proposing to amend the list of reporting forms in current Sec.  15.02 
to account for new and updated series '04 reporting forms, as discussed 
above.\545\
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    \545\ See discussion of new and amended series '04 reports 
above.
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iv. Part 17--Reports by Reporting Markets, Futures Commission 
Merchants, Clearing Members, and Foreign Brokers
    The Commission is proposing to amend current Sec.  17.00(b) to 
delete aggregation provisions, since those provisions are duplicative 
of aggregation provisions in Sec.  150.4.\546\ Proposed Sec.  17.00(b) 
would provide that ``[e]xcept 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.'' In addition, proposed Sec.  17.03(h) 
would delegate to the Director of the Division of Market Oversight or 
his designee the authority to instruct persons pursuant to proposed 
Sec.  17.03.\547\
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    \546\ In a separate proposal approved on the same date as this 
proposal, the Commission is proposing amendments to Sec.  150.4--
aggregation of positions. See Aggregation NPRM (Nov. 5, 2013).
    \547\ In a separate final rulemaking (Oct. 30, 2013), the 
Commission adopted amendments to Sec.  17.03; the current proposal 
would amend Sec.  17.03 further by adding proposed Sec.  17.03(h).
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II. Revision of Rules, Guidance, and Acceptable Practices Applicable to 
Exchange-Set Speculative Position Limits--Sec.  150.5

A. Background

    Pursuant to 17 CFR part 150, the Commission administers speculative 
position limits on futures contracts for certain agricultural 
commodities.\548\ Prior to the CEA's amendment in 1974, which expanded 
its jurisdiction to all ``services, rights and interests'' in which 
futures contracts are traded, only certain designated agricultural 
commodities could be regulated. Both prior to and after the 1974 
amendments to the Act, futures markets that traded commodities not so 
enumerated applied speculative position limits by exchange rule, if at 
all. In 1981, the Commission promulgated Sec.  1.61, which required 
that, absent an exemption, exchanges must adopt and enforce speculative 
position limits for all contracts that are not subject to the 
Commission-set limits.\549\ The Commission has periodically reviewed 
and updated its policies and rules pertaining to each of the three 
basic elements of the regulatory framework for speculative position 
limits, namely, the levels of the limits, the exemptions from them (in 
particular, for hedgers), and the policy on aggregating accounts.\550\
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    \548\ See 17 CFR Part 150.
    \549\ See Establishment of Speculative Position Limits, 46 FR 
50938, Oct. 16, 1981, and 17 CFR 1.61 (removed and reserved May 5, 
1999). Section 1.61 permitted exchanges to adopt and enforce their 
own speculative position limits for those contracts that were 
covered by Commission-set speculative position limits, as long as 
the exchange limits were not higher than those set by the 
Commission. Furthermore, CEA 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 enforce directly violations of exchange-set speculative position 
limits as well as those provided under Commission rules.
    \550\ Initially, for example, the Commission redefined 
``hedging'' (see 42 FR 42748, Aug. 24, 1977), and raised speculative 
position limits in wheat (see 41 FR 35060, Aug. 19, 1976). 
Subsequently, for example, the Commission solicited public comment 
on, and subsequently approved, exchange requests for exemptions for 
futures and option contracts on certain financial instruments from 
the requirement specified by former Sec.  1.61 that speculative 
position limits be specified for all contracts. See 56 FR 51687, 
Oct. 15, 1991.
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    In 1999, the Commission relocated several of the rules and policies 
concerning exchange-set-position limits from Sec.  1.61 to current 
Sec.  150.5, thereby incorporating within part 150 most Commission 
rules relating to speculative position limits. The Commission codified 
as rules within Sec.  150.5 various staff policies and administrative 
practices that had developed over time. These policies and practices 
related to the speculative position limit levels that the staff had 
routinely recommended for approval by the Commission for newly 
designated futures and option contracts, as well as the magnitude of 
increases to the limit levels that it would approve for already-traded 
contracts. The Commission also codified within Sec.  150.5 various 
exemptions from the general requirement that exchanges must set 
speculative position limits for all contracts. The exemptions included 
permitting exchanges to substitute position accountability rules for 
position limits for physical commodity derivatives outside the spot 
month in high volume and liquid markets.\551\
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    \551\ See 17 CFR 150.5. See also Revision of Federal Speculative 
Position Limits and Associated Rules, Final Rules, 64 FR 24038, 
24040-42, May 5, 1999. As noted in the notice of proposed rulemaking 
for Sec.  150.5, promulgating these policies within a single section 
of the Commission's rules would increase significantly their 
accessibility and clarify their terms. See 63 FR 38537, Jul. 17, 
1998.
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    Less than two years after the Commission promulgated Sec.  150.5, 
the Commodity Futures Modernization Act

[[Page 75748]]

of 2000 (``CFMA'') \552\ amended the CEA to include a set of core 
principles that DCMs must comply with at the time of application, and 
on an ongoing basis after designation,\553\ including DCM core 
principle 5, which requires exchanges to adopt position limits or 
position accountability levels where necessary and appropriate to 
reduce the threat of market manipulation or congestion.\554\ The CFMA 
further amended the CEA to provide DCMs with ``reasonable discretion'' 
in determining how to comply with each core principle, including core 
principle 5 regarding exchange-set position limits.\555\ Since 2000, 
the Commission has continued to maintain Sec.  150.5, but only as 
guidance on, and acceptable practices for, compliance with DCM core 
principle 5. The Commission did not amend Sec.  150.5 following passage 
of the CFMA.
---------------------------------------------------------------------------

    \552\ Commodity Futures Modernization Act of 2000, Public Law 
106-554, 114 Stat. 2763 (Dec. 21, 2000). By enacting the CFMA, 
Congress intended ``[t]o reauthorize and amend the Commodity 
Exchange Act to promote legal certainty, enhance competition, and 
reduce systemic risk in markets for futures and over-the-counter 
derivatives . . . .'' Id.
    \553\ See CEA section 5(d); 7 U.S.C. 7(d). The CEA, as amended 
by the CFMA, required a DCM applicant to demonstrate its ability to 
comply with 18 core principles.
    \554\ CEA section 5(d)(5); 7 U.S.C. 7(d)(5).
    \555\ DCM core principle 1 states, among other things, that 
boards of trade ``shall have reasonable discretion in establishing 
the manner in which they comply with the core principles.'' This 
``reasonable discretion'' provision underpinned the Commission's use 
of core principle guidance and acceptable practices. See former CEA 
section 5(d)(1)(amended in 2010); U.S.C. 7(d)(1). As discussed 
above, the Dodd-Frank Act subsequently amended DCM core principle 1 
to specifically provide the Commission with discretion to determine, 
by rule or regulation, the manner in which boards of trade comply 
with the core principles.
---------------------------------------------------------------------------

    In 2010, the Dodd-Frank Act amended the CEA to explicitly provide 
that the Commission may mandate the manner in which DCMs must comply 
with the core principles.\556\ Specifically, the Dodd-Frank Act amended 
DCM core principle 1 to include the condition that ``[u]nless otherwise 
determined by the Commission by rule or regulation,'' boards of trade 
shall have reasonable discretion in establishing the manner in which 
they comply with the core principles.\557\
---------------------------------------------------------------------------

    \556\ See CEA section 5(d)(1)(B); 7 U.S.C. 7(d)(1)(B).
    \557\ See id. Congress limited the exercise of reasonable 
discretion by DCMs only where the Commission has acted by 
regulation.
---------------------------------------------------------------------------

    Additionally, the Dodd-Frank Act amended DCM core principle 5 to 
require that, for any contract that is subject to a position limitation 
established by the Commission pursuant to CEA section 4a(a), the DCM 
``shall set the position limitation of the board of trade at a level 
not higher than the position limitation established by the 
Commission.'' \558\ Furthermore, the Dodd-Frank Act added CEA section 
5h to provide a regulatory framework for Commission oversight of 
SEFs.\559\ Under SEF core principle 6, which parallels DCM core 
principle 5, Congress required that SEFs adopt for each swap, as is 
necessary and appropriate, position limits or position 
accountability.\560\ In addition, Congress required that, for any 
contract that is subject to a Federal position limit under CEA Section 
4a(a), the SEF shall set its position limits at a level no higher than 
the position limitation established by the Commission.\561\
---------------------------------------------------------------------------

    \558\ See CEA section 5(d)(5)(B) (amended 2010); 7 U.S.C. 
7(d)(5)(B).
    \559\ See CEA section 5h; 7 U.S.C. 7b-3.
    \560\ CEA section 5h(f)(6); 7 U.S.C. 7b-3(f)(6).
    \561\ Id.
---------------------------------------------------------------------------

    In view of these Dodd-Frank Act amendments, the Commission proposes 
several amendments to update and streamline the part 150 regulations. 
First, the Commission proposes new and amended clarifying definitions 
in Sec.  150.1 that relate particularly to position limits. Second, the 
Commission proposes to amend Sec.  150.5 to include SEFs and swaps. 
Third, the Commission proposes to codify rules and acceptable practices 
for compliance with DCM core principle 5 and SEF core principle 6 
within amended Sec.  150.5(a) for commodity derivative contracts that 
are subject to the federal position limits set forth in Sec.  150.2. 
Lastly, the Commission proposes to codify rules and revise guidance and 
acceptable practices for compliance with DCM core principle 5 and SEF 
core principle 6 within amended Sec.  150.5(b) for commodity derivative 
contracts that are not subject to the Federal position limits set forth 
in Sec.  150.2.

B. The Current Regulatory Framework for Exchange-Set Position Limits

1. Section 150.5
    The Commission currently sets and enforces position limits pursuant 
to its broad authority under CEA section 4a \562\ and does so only with 
respect to certain enumerated agricultural products.\563\ In 1981, the 
Commission promulgated what was then 17 CFR 1.61 (re-codified in 1999 
as 17 CFR 150.5), which required that, absent an exemption, exchanges 
must adopt and enforce speculative position limits for all futures 
contracts that were not subject to Commission-set limits.\564\
---------------------------------------------------------------------------

    \562\ CEA section 4a, as amended by the Dodd-Frank Act, provides 
the Commission with broad authority to set position limits. 7 U.S.C. 
6a. See supra discussion of CEA section 4a.
    \563\ The position limits on these agricultural contracts are 
referred to as ``legacy'' limits, and the listed commodities are 
referred to as the ``enumerated'' agricultural commodities. This 
list of agricultural contracts includes Corn (and Mini-Corn), Oats, 
Soybeans (and Mini-Soybeans), Wheat (and Mini-wheat), Soybean Oil, 
Soybean Meal, Hard Red Spring Wheat, Hard Winter Wheat, and Cotton 
No. 2. See 17 CFR 150.2.
    \564\ 46 FR 50938, Oct. 16, 1981. The Commission stated the 
purpose of such limits was to prevent ``excessive speculation . . . 
arising from those extraordinarily large positions which may cause 
sudden or unreasonable fluctuations or unwarranted changes in the 
price'' of commodity futures. Id. at 50945. Former Sec.  1.61(a)(2) 
specified that limits shall be based on ``such factors that will 
accomplish the purposes of this section. As appropriate, these 
factors shall include position sizes customarily held by speculative 
traders in the market . . . , which shall not be extraordinarily 
large relative to total open positions in the contract market . . . 
[or] breadth and liquidity of the cash market underlying each 
delivery month and the opportunity for arbitrage between the futures 
market and cash market in the commodity underlying the futures 
contract.'' 17 CFR 1.61 (removed and reserved on May 5, 1999).
---------------------------------------------------------------------------

    The Commission's 1981 rule requiring that exchanges set position 
limits was a watershed in its approach to position limits. The 
Commission first concluded that multiple provisions of the CEA vested 
it with authority to direct that exchanges impose position limits.\565\ 
The Commission explained that section 4a ``represents an express 
Congressional finding that excessive speculation is harmful to the 
market, and a finding that speculative limits are an effective 
prophylactic measure.'' \566\ Relying on those Congressional findings, 
the Commission directed exchanges to impose speculative position limits 
on all futures contracts subject to their jurisdiction.\567\
---------------------------------------------------------------------------

    \565\ 46 FR 50938, 50939-40, Oct. 16, 1981.
    \566\ Id. at 50940.
    \567\ Id. at 50945.
---------------------------------------------------------------------------

    In adopting this prophylactic approach, the Commission explained 
that comments it had received during the rulemaking that questioned 
``the general desirability of [position] limits [were] contrary to 
Congressional findings in sections 3 and 4a of the Act and considerable 
years of Federal and contract market regulatory experience.'' \568\ The 
Commission also explained that:
---------------------------------------------------------------------------

    \568\ Id. at 50940.

the prevention of large and/or abrupt price movements which are 
attributable to extraordinarily large speculative positions is a 
Congressionally endorsed regulatory objective of the Commission. 
Further . . . this objective is enhanced by speculative position 
limits since it appears that the capacity of any contract market to 
absorb the establishment and liquidation of large speculative 
positions in an orderly manner is related to the relative size of 
the positions,

[[Page 75749]]

i.e., the capacity of the market is not unlimited.\569\
---------------------------------------------------------------------------

    \569\ Id.

    Citing the recent disruption in the silver market, the Commission 
insisted that position limits be imposed prophylactically for all 
futures and options contracts, irrespective of the unique features of 
the cash market underlying a particular derivative.\570\ Thus, the 
Commission concluded that ``speculative limits are appropriate for all 
contract markets,'' \571\ and directed exchanges to impose them on an 
``omnibus basis,'' \572\ that is, on all futures contracts.\573\
---------------------------------------------------------------------------

    \570\ Id. at 50940-41. The Commission stated it would consider 
the particular characteristics of the cash markets in setting limit 
levels, but required that all futures contracts have position 
limits. Id. at 50941.
    \571\ Id. at 50941.
    \572\ Id. at 50939.
    \573\ See 17 CFR 1.61(a)(1) (1982). In addition, Sec.  1.61 
permitted exchanges to adopt and enforce their own speculative 
position limits for those contracts that have federal speculative 
position limits, as long as the exchange limits were not higher than 
those set by the Commission.
---------------------------------------------------------------------------

    Congress ratified the Commission's construction of section 4a and 
its promulgation of Sec.  1.61 in the Futures Trading Act of 1982 \574\ 
when it enacted section 4a(e) of the Act, which provides that limits 
set by exchanges and approved by the Commission are subject to 
Commission enforcement.\575\
---------------------------------------------------------------------------

    \574\ The Futures Trading Act of 1982, Public Law 97-444, 96 
Stat. 2294 (1983).
    \575\ See id; see also 7 U.S.C. 6a(e).
---------------------------------------------------------------------------

    During the 1990s, the Commission allowed exchanges to replace 
position limits with position accountability levels with respect to 
certain derivatives outside the spot month.\576\ Position 
accountability levels are not fixed limits, but rather position sizes 
that trigger an exchange review of a trader's position and at which an 
exchange may remediate perceived problems, such as preventing a trader 
from increasing his position or forcing a reduction in a position. In 
January 1992, the Commission approved the CME's request for an 
exemption from the position limits requirements and permitted the CME 
to establish position accountability for a variety of financial 
contracts. Initially, the Commission limited its approval of position 
accountability to financial instruments (i.e., excluded commodities) 
that had a high degree of liquidity. Six months later, the Commission 
determined it would also allow position accountability to be used for 
highly liquid energy and metals contracts.\577\
---------------------------------------------------------------------------

    \576\ See Speculative Position Limits--Exemptions from 
Commission Rule 1.61, 56 FR 51687, Oct. 15, 1991; and Speculative 
Position Limits--Exemptions from Commission Rule 1.61, 57 FR 29064, 
Jun. 30, 1992.
    \577\ See 57 FR 29064, Jun. 30, 1992.
---------------------------------------------------------------------------

    In 1999, the Commission simplified and reorganized its rules 
relating to speculative position limits by removing and reserving Sec.  
1.61 and relocating several of its rules and policies concerning 
exchange-set-position limits to new Sec.  150.5, thereby incorporating 
within part 150 most Commission rules relating to speculative position 
limits.\578\ The Commission codified within Sec.  150.5 various staff 
policies and administrative practices that had developed over time 
relating to: (1) The speculative position limit levels that the staff 
routinely had recommended for approval by the Commission for newly 
designated futures and option contracts; (2) the magnitude of increases 
to the limit levels that it would approve for traded contracts; and (3) 
various exemptions from the general requirement that exchanges set 
speculative position limits for all contracts, such as permitting 
exchanges to substitute position accountability rules for position 
limits for high volume and liquid markets.\579\ The Commission 
explained that codifying the prior administrative practices as part of 
new Sec.  150.5 would make the applicable standard for exchange-set 
position limits more transparent and thereby make compliance easier for 
exchanges to achieve.\580\
---------------------------------------------------------------------------

    \578\ 64 FR 24038, 24040, May 5, 1999. As noted in the notice of 
proposed rulemaking for Sec.  150.5, promulgating these policies 
within a single section of the Commission's rules would increase 
significantly their accessibility and clarify their terms. See 
Revision of Federal Speculative Position Limits and Associated 
Rules, Proposed Rules, 63 FR 38537, Jul. 17, 1998.
    \579\ 64 FR at 24040-42. As the Commission explained, 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, had been widely followed as a matter of administrative 
practice when reviewing proposed exchange speculative position 
limits under Commission rule 1.61. Id. at 24040. Additionally, in 
reviewing new contracts for tangible commodities, the staff had 
relied upon the Commission's formulation providing for a minimum 
level of 1,000 contracts for non-spot month speculative position 
limits. Id. Moreover, the Commission had routinely approved a level 
of 5,000 contracts in non-spot months for designation of financial 
futures and energy contracts, and that level had become a rule of 
thumb as a matter of administrative practice. Id.
    \580\ Id.
---------------------------------------------------------------------------

    Under Sec.  150.5(a), the Commission required each exchange to 
``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.'' \581\ The Commission noted that this 
provision does not apply to contracts for which position limits are set 
forth in Sec.  150.2 or to a futures or option contract on a major 
foreign currency.\582\ Furthermore, nothing in Sec.  150.5(a) was to be 
construed to prohibit an exchange from setting different limits for 
different futures contracts or delivery months, or from exempting 
positions normally known in the trade as spreads, straddles, or 
arbitrage.\583\
---------------------------------------------------------------------------

    \581\ 17 CFR 150.5(a).
    \582\ Id.
    \583\ Id.
---------------------------------------------------------------------------

    In Sec.  150.5(b), the Commission presented explicit numeric 
formulas and descriptive standards for the speculative position limit 
levels that it found to be appropriate for new contracts.\584\ 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.\585\ For 
cash-settled contracts, the Commission presented a descriptive 
standard: ``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.'' \586\ Individual 
non-spot-month or all-months-combined levels for such newly-designated 
contracts must be no greater than 1,000 contracts for tangible 
commodities other than energy products,\587\ and no greater than 5,000 
contracts for energy products and non-tangible commodities, including 
contracts on financial products.\588\ In Sec.  150.5(c), the Commission 
codified mandatory numeric formulas and descriptive standards for 
subsequent adjustments to spot, individual and all-months-combined 
position limit levels.\589\
---------------------------------------------------------------------------

    \584\ See 17 CFR 150.5(b). The Commission explained that the 
proposed limit levels for new contracts, which were based upon the 
formula and associated minimum levels used by the Commission in its 
1992 proposed rulemaking, had long been used as a matter of informal 
administrative practice. 64 FR 24040.
    \585\ 17 CFR 150.5(b)(1).
    \586\ Id.
    \587\ 17 CFR 150.5(b)(2).
    \588\ 17 CFR 150.5(b)(3).
    \589\ 17 CFR 150.5(c).
---------------------------------------------------------------------------

    The Commission explained that these explicit numeric formulas grew 
from administrative practices that had long required a deliverable 
supply of at least four times the spot month speculative position 
limit.\590\ The Commission

[[Page 75750]]

further explained that the descriptive standards for exchange-set 
limits in Sec.  150.5 grew from staff experience that had 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.\591\
---------------------------------------------------------------------------

    \590\ 64 FR at 24041 (citing 62 FR 60831, 60838, Nov. 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. Except for cash-settled contracts, 
Commission staff had used this standard to review every new 
contract, or proposals to increase existing exchange speculative 
position limits, since 1981, when Sec.  1.61 was issued. Id.
    \591\ 64 FR at 24041. 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. Id. 
Accordingly, codification of the standard only made explicit the 
standard which, since 1981, had been applied to, and met by, every 
physical delivery futures contract at the time of initial review and 
upon subsequent increases to the spot month speculative position 
limit. Id.
---------------------------------------------------------------------------

    In Sec.  150.5(d), the Commission explicitly precluded exchanges 
from applying exchange-set speculative position limits rules to bona 
fide hedging positions as defined by an exchange in accordance with 
Sec.  1.3(z)(1).\592\ However, that section also provided an exchange 
with the discretion to limit bona fide hedging positions that it 
determines are ``not in accord with sound commercial practices or 
[that] exceed an amount which may be established and liquidated in an 
orderly fashion.'' \593\ Under Sec.  150.5(d)(2), the Commission 
explicitly required traders to apply to the exchange for any exemption 
from its speculative position limit rules.\594\ Furthermore, under 
Sec.  150.5(f), an exchange is compelled to grant additional exemptions 
to positions acquired in good faith prior to the effective date of any 
exchange position limits rule.\595\ In addition to the express 
exemptions specified in Sec.  150.5, Sec.  150.5(f) permitted an 
exchange to propose other exemptions consistent with the purposes of 
Sec.  150.5.\596\
---------------------------------------------------------------------------

    \592\ 17 CFR 150.5(d)(1); 17 CFR 1.3(z).
    \593\ 17 CFR 150.5(d)(1).
    \594\ 17 CFR 150.5(d)(2). In considering whether to grant such 
an application for exemption, exchanges must take into account 
whether the hedging position is not in accord with sound commercial 
practices or exceeds an amount which may be established and 
liquidated in an orderly fashion. See id.
    \595\ 17 CFR 150.5(f). This exemption also applies to positions 
acquired in good faith prior to the effective date of any exchange 
position limits rule by 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 
for or on behalf of the account or benefit of such person.
    \596\ Id.
---------------------------------------------------------------------------

    In Sec.  150.5(e), the Commission codified its existing policies 
concerning the classes of contracts for which an exchange could replace 
the required speculative position limit with a position accountability 
rule.\597\ Under Sec.  150.5(e), at least twelve months after a 
contract's initial listing for trading, an exchange could apply to the 
Commission to substitute for the position limits required under part 
150 an exchange rule requiring traders to be accountable for large 
positions.\598\ The Commission explained that the type of position 
accountability rule that applies to a particular contract under Sec.  
150.5(e) is determined by the liquidity of the futures market, the 
liquidity of the cash market and the Commission's oversight 
experience.\599\ The Commission further explained that it used Sec.  
150.5(e) to restate these criteria with greater clarity and precision, 
particularly in measuring the necessary levels of liquidity of the 
futures and option markets.\600\ Furthermore, for purposes of Sec.  
150.5(e), trading volume and open interest must 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.\601\
---------------------------------------------------------------------------

    \597\ 17 CFR 150.5(e). Position accountability rules impose a 
level that triggers distinct reporting responsibilities by a trader 
at the request of the applicable exchange.
    \598\ Id. The Commission explained that a trading history of at 
least 12 months must first be established before a futures contract 
can meet the proposed rule's liquidity requirements. See Proposed 
Rule, 63 FR 38525, 38529, Jul. 17, 1998.
    \599\ Revision of Federal Position Limits and Associated Rules, 
Proposed Rule, 63 FR 38525, 38530, Jul. 17, 1998. The Commission 
explained that a liquid market is one which has sufficient trading 
activity to enable individual trades coming to a market to be 
transacted without significantly affecting the price. Id. A high 
degree of liquidity in the futures and option markets better enables 
traders to arbitrage these markets with the underlying cash markets. 
Id. Where the underlying cash markets in turn are very liquid and 
have extremely large deliverable supplies, the threat of market 
manipulation or distortions caused by large speculative positions is 
lessened. Id.
    \600\ See 17 CFR 150.5(e)(1)-(3); see also Proposed Rule, 63 FR 
38525, 38530, Jul. 17, 1998.
    \601\ 17 CFR 150.5(e)(4).
---------------------------------------------------------------------------

    Lastly, the Commission codified its aggregation policy relating to 
exchange-set position limits in Sec.  150.5(g).\602\
---------------------------------------------------------------------------

    \602\ To determine 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. 17 CFR 150.5(g).
---------------------------------------------------------------------------

2. The Commodity Futures Modernization Act of 2000 Caused Commission 
Sec.  150.5 To Become Guidance on and Acceptable Practices for 
Compliance With DCM Core Principle 5
    Just over a year after the Commission promulgated Sec.  150.5, the 
Commodity Futures Modernization Act of 2000 \603\ amended the CEA to 
establish DCMs as a registration category and create a set of 18 core 
principles with which DCMs must comply.\604\ DCM core principle 5 
requires exchanges to adopt position limits or position accountability 
levels ``where necessary and appropriate to reduce the threat of market 
manipulation or congestion.'' \605\ Under the CFMA, DCM core principle 
1 gave DCMs ``reasonable discretion'' in determining how to comply with 
the core principles.\606\ The CFMA, however, did not change the 
treatment of the enumerated agricultural commodities, which remain 
subject to Federal speculative position limits. Moreover, the CFMA did 
not alter the Commission's authority in CEA section 4a to establish 
position limits. The core principles regime set forth in the CFMA had 
the effect of undercutting the prescriptive rules of Sec.  150.5 
because DCMs were afforded ``reasonable discretion'' in determining how 
to comply with the position limits or accountability requirements of 
core principle 5. Nevertheless, the Commission has retained current 
Sec.  150.5 as guidance on, and acceptable practices for, compliance 
with DCM

[[Page 75751]]

core principle 5.\607\ The Commission did not amend Sec.  150.5 
following passage of CFMA.
---------------------------------------------------------------------------

    \603\ CFMA, Public Law 106-554, 114 Stat. 2763. By enacting the 
CFMA, Congress intended ``[t]o reauthorize and amend the Commodity 
Exchange Act to promote legal certainty, enhance competition, and 
reduce systemic risk in markets for futures and over-the-counter 
derivatives, and for other purposes.'' Id.
    \604\ See CEA section 5(d); 7 U.S.C. 7(d). DCMs were first 
established under the CFMA as one of two forms of Commission-
regulated markets for the trading of contracts for sale of a 
commodity for future delivery or commodity options (the other being 
registered DTEFs). In addition, the CFMA provided for two markets 
exempt from regulation: Exempt boards of trade (``EBOTs'') and 
exempt commercial markets (``ECMs''). See A New Regulatory Framework 
for Trading Facilities, Intermediaries and Clearing Organizations, 
Notice of Proposed Rulemaking, 66 FR 14262, Mar. 9, 2001; Final 
Rulemaking, 66 FR 42256, Aug. 10, 2001.
    \605\ CEA sections 5(d)(1), (5); 7 U.S.C. 7(d)(1), (5).
    \606\ CEA section 5(d)(1)(B); 7 U.S.C. 7(d)(1)(B). The 
Commission also undertakes due diligence reviews of each exchange's 
compliance with the core principles during rule and product 
certification reviews and periodic examinations of DCMs' compliance 
with the core principles under Rule Enforcement Reviews. As 
discussed above, DCM core principle 1 was amended by the Dodd-Frank 
Act to give the Commission authority to determine, by rule or 
regulation, the manner in which boards of trade must comply with the 
core principles.
    \607\ Guidance provides DCMs and DCM applicants with contextual 
information regarding the core principles, including important 
concerns which the Commission believes should be taken into account 
in complying with specific core principles. In contrast, the 
acceptable practices are more specific than guidance and provide 
examples of how DCMs may satisfy particular requirements of the core 
principles; they do not, however, establish mandatory means of 
compliance. Acceptable practices are intended to assist DCMs by 
establishing non-exclusive safe harbors. The safe harbors apply only 
to compliance with specific aspects of the core principle, and do 
not protect the exchange with respect to charges of violations of 
other sections of the CEA or other aspects of the core principle. In 
applying Sec.  150.5 as guidance and acceptable practices, most 
exchanges, in exercising their ``reasonable discretion,'' have 
continued to impose strict position limits in the spot month and to 
apply position accountability standards in non-spot months.
---------------------------------------------------------------------------

    In August 2001, the Commission adopted part 38 to govern trading on 
DCMs post-CFMA. Under Sec.  38.2, DCMs operating under part 38 were 
``exempt from all Commission rules not specifically reserved'' \608\ 
and Sec.  38.2 did not reserve Sec.  150.5.\609\ Accordingly, DCMs 
operating under part 38 in the post-CFMA environment have not been 
required to comply with Sec.  150.5. In this same rulemaking, the 
Commission adopted appendix B to part 38 as guidance on and acceptable 
practices for compliance with the DCM core principles, including core 
principle 5.\610\ Within appendix B to part 38, the Commission advised 
DCMs to, among other things, adopt spot-month limits for markets based 
on commodities having more limited deliverable supplies, or where 
otherwise necessary to minimize the susceptibility of the market to 
manipulation or price distortions.\611\ The Commission also advised 
DCMs on how they should set spot-moth limit levels and instructed DCMs 
that they could elect not to adopt all-months-combined and non-spot 
month limits.\612\ Appendix B to part 38 was subsequently amended in 
June 2012 to delete the guidance and acceptable practices section 
relevant to compliance with DCM core principle 5 in deference to parts 
150 and 151.\613\
---------------------------------------------------------------------------

    \608\ 17 CFR 38.2 (amended June 19, 2012); see also A New 
Regulatory Framework for Trading Facilities, Intermediaries and 
Clearing Organizations, Final Rules, 66 FR 42256, 42257, Aug. 10, 
2001.
    \609\ See id.
    \610\ 17 CFR part 38 app. B (2002); see also 66 FR 42256, Aug. 
10, 2001.
    \611\ Id.
    \612\ Id.
    \613\ See Core Principles and Other Requirements for Designated 
Contract Markets, Final Rule, 77 FR 36611, 36639, Jun. 19, 2012. The 
Commission published the final rules for Position Limits for Futures 
and Swaps on November 18, 2011, which required DCMs to comply with 
part 150 (Limits on Positions) until such time that the Commission 
replaces part 150 with the new part 151 (Limits on Positions). Id.
---------------------------------------------------------------------------

3. The CFTC Reauthorization Act of 2008
    In the CFTC Reauthorization Act of 2008, Congress, among other 
things, expanded the Commission's authority to set position limits to 
include significant price discovery contracts (``SPDCs'') on exempt 
commercial markets (``ECMs'').\614\ The Reauthorization Act's 
provisions regarding ECMs were based largely on the Commission's 
recommendations for improving oversight of ECMs whose contracts perform 
or affect a significant price discovery function. The legislation 
significantly expanded the Commission's regulatory authority over ECMs 
by adding section 2(h)(7) \615\ to the CEA, establishing criteria for 
the Commission to consider in determining whether a particular ECM 
contract performs a significant price discovery function, and providing 
for greater regulation of SPDCs traded on ECMs. The Reauthorization Act 
also required ECMs to adopt position limit and accountability level 
provisions for SPDCs, authorized the Commission to require the 
reporting of large trader positions in SPDCs, and established core 
principles governing ECMs with SPDCs. The core principles applicable to 
ECMs with SPDCs were largely derived from selected DCM core principles 
and designation criteria set forth in CEA section 5, and Congress 
intended that they be construed in a like manner.\616\
---------------------------------------------------------------------------

    \614\ CFTC Reauthorization Act of 2008, incorporated as Title 
XIII of the Food, Conservation and Energy Act of 2008, Public Law 
110-246, 122 Stat. 1651 (June 18, 2008).
    \615\ CEA sections 2(h)(3)-(7) were deleted by the Dodd-Frank 
Act on July 15, 2011, thus eliminating the ECM category.
    \616\ See Joint Explanatory Statement of the Committee of 
Conference, H.R. Rep. No. 110-627, 110 Cong., 2d Sess. at 985 
(2008). Section 723 of the Dodd-Frank Act subsequently repealed the 
ECM SPDC provisions. See Section 723 of the Dodd-Frank Act, Pub. L. 
111-203, 124 Stat. 1376 (2010).
---------------------------------------------------------------------------

    Much like DCM core principle 5, ECM core principle IV of CEA 
section 2(h)(7)(C) required electronic trading facilities to adopt 
where necessary and appropriate, position limits or position 
accountability provisions, especially during trading in the delivery 
month, and taking into account fungible positions at a derivative 
clearing organization.\617\
---------------------------------------------------------------------------

    \617\ CEA section 2(h)(7)(C) (amended 2010).
---------------------------------------------------------------------------

    In a Notice of Final Rulemaking in March 2009, the Commission 
adopted Appendix B to Part 36 as guidance on and acceptable practices 
for compliance with ECM core principles.\618\ The guidance on and 
acceptable practices for compliance with ECM core principle IV 
generally tracked those for DCM core principle 5 as listed in Sec.  
150.5.\619\ Furthermore, the Commission indicated within this Notice of 
Final Rulemaking that Sec.  150.5 was not binding on DCMs once part 38 
was finalized.\620\ The Commission rejected a commenter's suggestion 
that a proposed ECM-SPDCs core principle for position limits and 
accountability should adopt the existing standards in CEA section 
4a(b)(2) (barring trading or positions in excess of federal limits) 
and, especially, incorporate a broader good faith exemption in Sec.  
150.5(f).\621\ The Commission responded that section 4a(b)(2) applies 
to federal limits, not exchange-set limits.\622\ The Commission further 
explained that Sec.  150.5(f) ``no longer has direct application to 
DCM-set limits'' because ``the statutory authority governing [those] 
limits is found in CEA section 5(d)(5)--DCM core principle 5.'' \623\ 
That core principle does not, the Commission explained, contain any of 
the exemptive language found in CEA section 4a or Sec.  150.5(f).\624\ 
The Commission observed that the part 38 rules specifically exempt DCMs 
and DCM-traded contracts from all rules other than those specifically 
reserved in Sec.  38.2, and Sec.  38.2 did not retain

[[Page 75752]]

Sec.  150.5(f).\625\ Accordingly, the Commission explained, ``the part 
150 rules essentially constitute guidance for DCMs administering 
position limit regimes, [and] Commission staff in overseeing such 
regimes has not required that position limits include an exemption for 
positions acquired in good faith.'' \626\
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    \618\ Significant Price Discovery Contracts on Exempt Commercial 
Markets, Final Rulemaking, 74 FR 12178, Mar. 23, 2009; See also 17 
CFR part 36 app. B (2009).
    \619\ For example, ECMs were advised to adopt spot-month limits 
for SPDCs. If there was an economically-equivalent SPDC, or a 
contract on a DCM, then the spot-month limit should be set at the 
same level as that specified for such other contract. If there was 
not an economically-equivalent SPDC or contract traded on a DCM, 
then in the case of a physical delivery contact, the spot-month 
limit should be set based upon an analysis of deliverable supplies 
and the history of spot-month liquidations and at no more than 25 
percent of the estimated deliverable supply or, in the case of a 
cash settlement provision, the spot month limit should be set at a 
level that minimizes the potential for price manipulation or 
distortion in the significant price discovery contract itself; in 
related futures and options contracts traded on a DCM or DTEF; in 
other significant price discovery contracts; in other fungible 
agreements, contracts and transactions; and in the underlying 
commodity. ECMs were also advised to adopt position accountability 
provisions for non-spot month and all-months combined or, in lieu of 
position accountability, an ECM could establish non-spot individual 
month position limits and all-months-combined position limits for 
its SPDC. See 17 CFR part 36 app. B (2009).
    \620\ See 74 FR 12178, 12183, Mar. 23, 2009.
    \621\ See id.
    \622\ See id.
    \623\ See id.
    \624\ See id; see also CEA Section 4a and 17 CFR 150.5(f).
    \625\ See 74 FR 12178, 12183, Mar. 23, 2009; see also 17 CFR 
Part 38. The Commission acknowledged that the acceptable practices 
in former appendix B to part 38 incorporate many provisions of Sec.  
150.5, but not Sec.  150.5(f).
    \626\ 74 FR 12183. In a 2010 notice of proposed rulemaking, the 
Commission similarly noted that former appendix B to part 38 
``specifically reference[d] part 150'' in order to provide 
``guidance'' to DCMs on how to comply with the core principle on 
position limits/accountability. 75 FR 4144, 4147, Jan. 26, 2010.
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4. The Dodd-Frank Act Amendments to CEA Section 5
    On July 21, 2010, President Obama signed The Dodd-Frank Wall Street 
Reform and Consumer Protection Act.\627\ The legislation was enacted to 
reduce risk, increase transparency, and promote market integrity within 
the financial system by, among other things, enhancing the Commission's 
rulemaking and enforcement authorities with respect to all registered 
entities and intermediaries subject to the Commission's oversight.\628\ 
The Dodd-Frank Act repealed certain sections of the CEA, amended 
others, and added many new provisions and vastly expanded the 
Commission's jurisdiction. The Commission has finalized 65 rules, 
orders, and guidance to implement sweeping changes to the regulatory 
framework established by the Dodd-Frank Act.\629\ This proposed 
rulemaking would make several conforming amendments to part 150 of the 
Commission's regulations, most prominently to Sec.  150.5, in order to 
integrate that section more fully within the statutory framework 
created by the Dodd-Frank Act.
---------------------------------------------------------------------------

    \627\ See generally the Dodd-Frank Wall Street Reform and 
Consumer Protection Act, Public Law 111-203, 124 Stat. 1376 (2010).
    \628\ Furthermore, the Dodd-Frank Act amended the DCM core 
principles by: (1) Eliminating the eight criteria for designation as 
a contract market; (2) amending most of the core principles, 
including incorporating the substantive requirements of the 
designation criteria; and (3) adding five new core principles. 
Accordingly, all DCMs and DCM applicants must comply with a total of 
23 core principles as a condition of obtaining and maintaining 
designation as a contract market.
    \629\ 77 FR 66288, Nov. 2, 2012. See also amendments to CEA 
section 4a, discussed above.
---------------------------------------------------------------------------

i. The Dodd-Frank Act Added Provisions That Permit the Commission To 
Override the Discretion of DCMs in Determining How To Comply With the 
Core Principles
    As discussed above, DCM core principle 1, set out in CEA section 
5(d)(1), states that boards of trade ``shall have reasonable discretion 
in establishing the manner in which they comply with the core 
principles.'' \630\ However, section 735 of the Dodd-Frank Act amended 
section 5(d)(1) of the CEA to include the proviso that ``[u]nless 
otherwise determined by the Commission by rule or regulation . . . ,'' 
boards of trade shall have reasonable discretion in establishing the 
manner in which they comply with the core principles.\631\ In view of 
amended CEA section 5(d)(1), which gives the Commission authority to 
determine, by rule or regulation, the manner in which boards of trade 
must comply with the core principles, the Commission has proposed a 
number of new and revised rules, guidance, and acceptable practices to 
implement the new and revised Dodd-Frank Act core principles.
---------------------------------------------------------------------------

    \630\ CEA section 5(d)(1); 7 U.S.C. 7(d)(1).
    \631\ See CEA section 5(d)(1)(B); 7 U.S.C. 7(d)(1)(B).
---------------------------------------------------------------------------

ii. The Dodd-Frank Act Established a Comprehensive New Statutory 
Framework for Swaps
    The Dodd-Frank Act tasked the Commission with overseeing the U.S. 
market for swaps (except for security-based swaps). Title VII of the 
Dodd-Frank Act amended the CEA to establish a comprehensive new 
regulatory framework for swaps, including requirements for SEFs.\632\ 
This new regulatory framework includes: (1) Registration, operation, 
and compliance requirements for SEFs; and (2) fifteen core principles 
with which SEFs must comply. As a condition of obtaining and 
maintaining their registration as a SEF, applicants and registered SEFs 
are required to comply with the SEF core principles and with any 
requirement that the Commission may impose by rule or regulation.\633\ 
The Dodd-Frank Act also amended the CEA to provide that, under new 
section 5h, the Commission may determine, by rule or regulation, the 
manner in which SEFs comply with the core principles.\634\
---------------------------------------------------------------------------

    \632\ The SEF definition is added in section 721 of the Dodd-
Frank Act, amending CEA section 1a. 7 U.S.C. 1a(50).
    \633\ See CEA section 5h, as enacted by section 733 of the Dodd-
Frank Act; 7 U.S.C. 7b-3.
    \634\ See id.; see also SEF core principle 1 at CEA section 
5h(f)(1)(B); 7 U.S.C. 7b-3(f)(1)(B).
---------------------------------------------------------------------------

iii. The Dodd-Frank Act Added the Regulation of Swaps, Added Core 
Principles for SEFs, Including SEF Core Principle 6, and Amended DCM 
Core Principle 5
    The Dodd-Frank Act added a core principle concerning position 
limitations or accountability for SEFs, SEF core principle 6, which 
parallels DCM core principle 5.\635\ SEF core principle 6 requires SEFs 
that are trading facilities to set, ``as is necessary and appropriate, 
position limitations or position accountability for speculators'' \636\ 
for each contract executed pursuant to their rules. Furthermore, for 
contracts subject to Federal position limits imposed by the Commission 
under CEA section 4a(a), CEA section 5h(f)(6)(B) \637\ requires SEFs 
that are trading facilities to set and enforce speculative position 
limits at a level no higher than those established by the Commission.
---------------------------------------------------------------------------

    \635\ Compare CEA section 5h(f)(6); 7 U.S.C. 7b-3(f)(6) with CEA 
section 5(d)(5); 7 U.S.C. 7(d)(5).
    \636\ CEA section 5h(f)(6)(A); 7 U.S.C. 7b-3(f)(6).
    \637\ 7 U.S.C. 7b-3(f)(6) as added by the Dodd-Frank Act.
---------------------------------------------------------------------------

    The Dodd-Frank Act similarly amended DCM core principle 5 by adding 
that for any contract that is subject to a position limit established 
by the Commission pursuant to CEA section 4a(a), the DCM shall set the 
position limit of the board of trade at a level not higher than the 
position limitation established by the Commission.\638\
---------------------------------------------------------------------------

    \638\ See CEA section 5(d)(1)(B); 7 U.S.C. 7(d)(1)(B). DCM core 
principle 5 under CEA section 5(d)(5) requires that DCMs adopt for 
each contract, as is necessary and appropriate, position limitations 
or position accountability.
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5. Dodd-Frank Rulemaking
    To implement section 735 of the Dodd-Frank Act, the Commission has 
proposed a number of new and revised rules, guidance, and acceptable 
practices to implement the new and revised DCM core principles. In 
doing so, the Commission has evaluated the preexisting regulatory 
framework for overseeing DCMs, which consisted largely of guidance and 
acceptable practices, in order to update those provisions and to 
determine which core principles would benefit from having new or 
revised derivative regulations. Based on that review, and in view of 
the Dodd-Frank Act's amendment to section 5(d)(1) of the CEA, which 
grants the Commission authority to determine, by rule or regulation, 
the manner in which boards of trade comply with the core principles, 
the Commission has proposed revised guidance and acceptable practices 
for some core

[[Page 75753]]

principles and, for other core principles, has proposed to codify rules 
in lieu of guidance and acceptable practices.
i. Amended Part 38
    In January 2011, the Commission published a notice of proposed 
rulemaking to replace existing part 150, in its entirety, with a new 
federal position limits rules regime in the form of new part 151.\639\ 
Just one month prior to this publication, the Commission published a 
notice of proposed rulemaking to amend part 38 to establish regulatory 
obligations that each DCM must meet in order to comply with section 5 
of the CEA, as amended by the Dodd-Frank Act. Accordingly, the 
Commission proposed Sec.  38.301 to require that each DCM must comply 
with the requirements of part 151 as a condition of its compliance with 
DCM core principle 5.\640\ The Commission later adopted a revised 
version of Sec.  38.301 with an additional clause that requires DCMs to 
continue to meet the requirements of part 150 of the Commission's 
regulations--the current position limit regulations--until such time 
that compliance would be required under part 151.\641\ The Commission 
explained that this clarification would ensure that DCMs are in 
compliance with the Commission's regulations under part 150 during the 
interim period until the compliance date for the new position limits 
regulations of part 151 would take effect.\642\ The Commission further 
explained that new Sec.  38.301 was based on the Dodd-Frank amendments 
to the DCM core principles regime, which collectively provide that DCM 
discretion in setting position limits or position accountability levels 
is limited by Commission regulations setting limits.\643\
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    \639\ Position Limits for Derivatives, Proposed Rule, 76 FR 
4752, Jan. 26, 2011. The final rulemaking for vacated part 151 
required DCMs to comply with part 150 until such time that the 
Commission replaces part 150 with the new part 151. See 76 FR at 
71632.
    \640\ 75 FR 80571, 80585, Dec. 22, 2010.
    \641\ 77 FR 36611, 36639, Jun. 19, 2012. The Commission mandated 
in final Sec.  38.301 that, in order to comply with DCM core 
principle 5, a DCM must ``meet the requirements of parts 150 and 151 
of this chapter, as applicable.'' See also 17 CFR 38.301.
    \642\ 77 FR at 36639.
    \643\ Id. See also CEA sections 5(d)(1) and 5(d)(5) (amended 
2010), and discussion supra of Dodd-Frank amendments to the DCM core 
principles.
---------------------------------------------------------------------------

    However, in an Order dated September 28, 2012, the United States 
District Court for the District of Columbia vacated part 151.\644\ The 
District Court's decision did not affect the applicability of part 
150.\645\ Therefore, part 150 continues to apply as if part 151 had not 
been finally adopted by the Commission, and Sec.  150.5 continues to 
apply as non-exclusive guidance and acceptable practices for compliance 
with DCM core principle 5. In light of the foregoing, the Commission 
could not, without notice, interpret Sec.  150.5 as a pre-requisite for 
compliance with core principle 5. Additionally, the Commission is 
proposing to amend Sec.  38.301 by deleting the reference to vacated 
part 151. Proposed Sec.  38.301 would maintain the requirement that 
DCMs meet the requirements of part 150, as applicable.
---------------------------------------------------------------------------

    \644\ See 887 F. Supp. 2d 259 (D.D.C. 2012).
    \645\ See id generally.
---------------------------------------------------------------------------

ii. Amended Part 37
    Similarly, in the Commission's proposal to adopt a regulatory 
scheme applicable to SEFs, under proposed Sec.  37.601,\646\ the 
Commission proposed to require that SEFs establish position limits in 
accordance with the requirements set forth in part 151 of the 
Commission's regulations.\647\ In the SEF final rulemaking, the 
Commission revised Sec.  37.601 to state that until such time that 
compliance is required under part 151, a SEF may refer to the guidance 
and/or acceptable practices in appendix B of part 37 to demonstrate to 
the Commission compliance with the requirements of core principle 6.
---------------------------------------------------------------------------

    \646\ Current Sec.  37.601 provides requirements for SEFs that 
are trading facilities to comply with SEF core principle 6 (Position 
Limits or Accountability).
    \647\ Core Principles and Other Requirements for Swap Execution 
Facilities, 76 FR 1214 (proposed Jan. 7, 2011).
---------------------------------------------------------------------------

    In light of the District Court vacatur of part 151, the Commission 
proposes to amend Sec.  37.601 to delete the reference to vacated part 
151. Instead, this rulemaking proposes to require that SEFs that are 
trading facilities meet the requirements of part 150, which are 
comparable to the DCM's requirement, since, as proposed, Sec.  150.5 
would apply to commodity derivative contracts, whether listed on a DCM 
or on a SEF that is a trading facility. In addition, the Commission 
proposes to amend appendix B to part 37, which provides guidance on 
complying with core principles, both initially and on an ongoing basis, 
to maintain SEF registration.\648\ Since this rulemaking proposes to 
require that SEFs that are trading facilities meet the requirements of 
part 150, the proposed amendments to the guidance regarding SEF core 
principle 6 would reiterate that requirement. For SEFs that are not 
trading facilities, to whom core principle 6 is not applicable under 
the statutory language, the proposal would provide that part 150 should 
be considered as guidance.
---------------------------------------------------------------------------

    \648\ Appendix B to Part 37--Guidance on, and Acceptable 
Practices in, Compliance with Core Principles.
---------------------------------------------------------------------------

iii. Vacated Part 151
    As discussed above, the United States District Court for the 
District of Columbia vacated part 151 of the Commission's 
regulations.\649\ Because the District Court's decision did not affect 
the applicability of part 150, current Sec.  150.5 remains as guidance 
and acceptable practices for compliance with DCM core principle 5 and 
SEF core principle 6. The Commission continues to rigorously enforce 
compliance with these core principles.
---------------------------------------------------------------------------

    \649\ See 887 F. Supp. 2d 259 (D.D.C. 2012).
---------------------------------------------------------------------------

    Vacated Sec.  151.11 would have required DCMs and SEFs to adopt 
position limits for Referenced Contracts, and would have established 
acceptable practices for establishing position limits and position 
accountability for certain non-referenced contracts and excluded 
commodities.\650\ Specifically, vacated Sec.  151.11(a) would have 
required DCMs and SEFs to set spot month limits, with exceptions for 
securities futures and some excluded commodities.\651\ Under vacated 
Sec.  151.11(a)(1), the Commission would have required DCMs and SEFs to 
establish spot-month limits for Referenced Contracts at levels no 
greater than the federal position limits (established pursuant to 
vacated Sec.  151.4).\652\ For contracts other than Referenced 
Contracts (including other physical commodity contracts), it would be 
acceptable practice under vacated Sec.  151.11(a)(2) for DCMs and SEFs 
to set position limits at levels no greater than 25 percent of 
estimated deliverable supply.\653\ Additionally, under vacated Sec.  
151.11(c), DCMs and SEFs would have had discretion to establish 
position accountability levels in lieu of position

[[Page 75754]]

limits for excluded commodities under certain circumstances.\654\
---------------------------------------------------------------------------

    \650\ See 76 FR at 71659-61.
    \651\ 76 FR at 71659.
    \652\ 76 FR at 71659-60. For Referenced Contracts, DCMs and SEFs 
would have been similarly required under vacated Sec.  151.11(b) to 
set single non-spot-month and all-months limits for Referenced 
Contracts at levels no higher than the federal position limits 
(established pursuant to vacated Sec.  151.4). Id. For non-
referenced contracts, it would be acceptable practice under vacated 
Sec.  151.11(b)(2) for DCMs and SEFs to impose limits based on ten 
percent of the average combined futures, swaps and delta-adjusted 
option month-end open interest for the most recent two calendar 
years up to 25,000 contracts, with a marginal increase of 2.5 
percent thereafter based on open interest in the contract and 
economically equivalent contracts traded on the same DCM or SEF. 76 
FR 71661.
    \653\ 76 FR at 71660. Furthermore, for non-referenced contracts, 
vacated Sec.  151.11(b)(3) would have allowed as an acceptable 
practice the provision of speculative limits for an individual 
single-month or in all-months-combined at no greater than 1,000 
contracts for non-energy physical commodities and at no greater than 
5,000 contracts for other commodities. Id.
    \654\ Id. Position accountability levels could be used in lieu 
of position limits only if the contract involves either a major 
currency or certain excluded commodities (such as measures of 
inflation, or other macroeconomic measures) or an excluded commodity 
that: (1) Has an average daily open interest of 50,000 or more 
contracts, (2) has an average daily trading volume of 100,000 or 
more contracts, and (3) has a highly liquid cash market. Id. Compare 
this vacated provision with current 17 CFR 150.5(e). As for physical 
commodities, under vacated Sec.  151.11(c), the Commission would 
have allowed a DCM or SEF to establish position accountability rules 
as an acceptable alternative to position limits outside of the spot 
month for physical commodity contracts when a contract has an 
average month-end open interest of 50,000 contracts and an average 
daily volume of 5,000 contracts and a liquid cash market. Id.
---------------------------------------------------------------------------

    Vacated Sec. Sec.  151.11(e) and 151.11(f) would have required DCMs 
and SEFs to follow the same account aggregation and bona fide exemption 
standards set forth by vacated Sec. Sec.  151.5 and 151.7 with respect 
to exempt and agricultural commodities.\655\ With respect to a DCM's or 
SEF's duty to administer hedge exemptions, the Commission intended that 
DCMs and SEFs administer their own position limits under Sec.  
151.11.\656\ Accordingly, the Commission had required under this 
vacated rulemaking that DCMs and SEFs create rules and procedures to 
allow traders to claim a bona fide hedge exemption, consistent with 
vacated Sec.  151.5 for physical commodity derivatives and Sec.  
1.3(z), as was amended in the vacated rulemaking, for excluded 
commodities.\657\
---------------------------------------------------------------------------

    \655\ Id. Furthermore, under vacated Sec.  151, the Commission 
would have removed the procedure to apply to the Commission for bona 
fide hedge exemptions for non-enumerated transactions or positions 
under Sec.  1.3(z)(3). Id. DCMs and SEFs would have been able to 
recognize non-enumerated hedge transactions subject to Commission 
review. Id. Additionally, DCMs and SEFs could continue to provide 
exemptions for ``risk-reducing'' and ``risk-management'' 
transactions or positions consistent with existing Commission 
guidelines. Id. (citing Clarification of Certain Aspects of Hedging 
Definition, 52 FR 27195, Jul. 20, 1987; and Risk Management 
Exemptions from Speculative Position Limits Approved under 
Commission Regulation 1.61, 52 FR 34633, Sep. 14, 1987). Vacated 
Sec.  151.11(f)(2) would have required traders seeking a hedge 
exemption to comply with the procedures of the DCM or SEF for 
granting exemptions from its speculative position limit rules. 76 FR 
71660-61.
    \656\ 76 FR at 71661.
    \657\ Id. Vacated Sec.  151.11 contemplated that DCMs and SEFs 
would administer their own bona fide hedge exemption regime in 
parallel to the Commission's regime.
---------------------------------------------------------------------------

C. Proposed Amendments to Sec.  150.5

    To implement section 735 of the Dodd-Frank Act regarding DCMs, the 
Commission continues to adopt new and revised rules, guidance, and 
acceptable practices to implement the DCM core principles added and 
revised by the Dodd-Frank Act. The Commission continues to evaluate its 
pre-Dodd-Frank Act regulations and approach to oversight of DCMs, which 
had consisted largely of published guidance and acceptable practices, 
with the aim of updating them to conform to the new Dodd-Frank Act 
regulatory framework. Based on that review, and pursuant to the 
authority given to the Commission in amended sections 5(d)(1) and 
5h(f)(1) of the CEA, which permit the Commission to determine, by rule 
or regulation, the manner in which boards of trade and SEFs, 
respectively, must comply with the core principles,\658\ the Commission 
is proposing several updates to Sec.  150.5 to promote compliance with 
DCM core principle 5 and SEF core principle 6.
---------------------------------------------------------------------------

    \658\ See CEA sections 5(d)(1)(B) and 5h(f)(1)(B); 7 U.S.C. 
7(d)(1)(B) and 7b-3(f)(1)(B).
---------------------------------------------------------------------------

    First, the Commission proposes amendments to the provisions of 
Sec.  150.5 to include SEFs and swaps. Second, the Commission proposes 
to codify rules and revise acceptable practices for compliance with DCM 
core principle 5 and SEF core principle 6 within amended Sec.  150.5(a) 
for contracts subject to the federal position limits set forth in Sec.  
150.2. Lastly, the Commission proposes to codify rules and revise 
guidance and acceptable practices for compliance with DCM core 
principle 5 and SEF core principle 6 within amended Sec.  150.5(b) for 
contracts not subject to the federal position limits set forth in Sec.  
150.2.
    As noted above, the CFMA core principles regime concerning position 
limitations or accountability for exchanges had the effect of 
undercutting the mandatory rules promulgated by the Commission in Sec.  
150.5. Since the CFMA amended the CEA in 2000, the Commission has 
retained Sec.  150.5, but only as guidance on, and acceptable practice 
for, compliance with DCM core principle 5.\659\ However, the Commission 
did not amend the text of Sec.  150.5 following passage of CFMA, 
leaving language in place that could suggest that the rules originally 
codified within Sec.  150.5 remain mandatory for exchanges. To correct 
this potential misimpression, the Commission now proposes several 
amendments to Sec.  150.5 to clarify that certain provisions of Sec.  
150.5 are non-exclusive guidance on, and acceptable practice for, 
compliance with DCM core principle 5.
---------------------------------------------------------------------------

    \659\ See id.
---------------------------------------------------------------------------

    Additionally, the Commission is proposing several conforming 
amendments to Sec.  150.5 in order to integrate that section more fully 
with the statutory framework created by the Dodd-Frank Act. The 
Commission, pursuant to the factors enumerated in section 4a(a)(3) of 
the Act, has endeavored to maximize the objectives of preventing 
excessive speculation, deterring and preventing market manipulation, 
ensuring that markets remain sufficiently liquid so as to afford end 
users and producers of commodities the ability to hedge commercial 
risks, and promoting efficient price discovery. These proposed 
clarifying revisions to Sec.  150.5 should also provide exchanges with 
sufficient flexibility to address the divergent and changing conditions 
in their respective markets.
    Within amended Sec.  150.5(a), the Commission proposes to codify a 
set of rules and revise acceptable practices for compliance with DCM 
core principle 5 and SEF core principle 6 for contracts that are 
subject to the federal position limits set forth in Sec.  150.2. Within 
amended Sec.  150.5(b), the Commission proposes to codify rules and 
revise guidance and acceptable practices for compliance with DCM core 
principle 5 and SEF core principle 6 for contracts that are not subject 
to the federal position limits set forth in Sec.  150.2.
    Unlike current Sec.  150.5, which contains only non-exclusive 
guidance on and acceptable practices for compliance with DCM core 
principle 5 (despite the presence of language that connotes mandatory 
rules), proposed Sec.  150.5 contains a mix of rules that would be 
mandatory for compliance with DCM core principle 5 and SEF core 
principle 6, coupled with guidance and acceptable practices for 
compliance with those core principles. Accordingly, the Commission 
urges the reader to pay special attention to the language in proposed 
Sec.  150.5 that distinguishes mandatory rules (indicated by terms such 
as ``must'' and ``shall'') from guidance and acceptable practices 
(indicated by terms such as ``should'' or ``may'').
    Additionally, the Commission proposes to amend Sec.  150.5 to 
implement uniform requirements for DCMs and SEFs relating to hedging 
exemptions across all types of contracts, including those that are 
subject to federal limits. The Commission also proposes to require DCMs 
and SEFs to have aggregation policies that mirror the federal 
aggregation provisions.\660\ Hedging exemptions and position 
aggregation exemptions, if not uniform with the Commission's 
requirements,

[[Page 75755]]

may serve to permit a person to obtain a larger position on a 
particular DCM or SEF than would be permitted under the federal limits. 
For example, if an exchange were to grant an aggregation position to a 
corporate person with aggregate positions above federal limits, that 
exchange may permit such person to be treated as two or more persons. 
The person would avoid violating exchange limits, but may be in 
violation of the federal limits. The Commission believes that a DCM or 
SEF, consistent with its responsibilities under applicable core 
principles, may serve an important role in ensuring compliance with 
federal positions limits and thereby protect the price discovery 
function of its market and guard against excessive speculation or 
manipulation. In the absence of uniform hedging and position 
aggregation exemptions, DCMs or SEFs may not serve that role. The 
Commission notes that hedging exemptions and aggregation policies that 
vary from exchange to exchange would increase the administrative burden 
on a trader active on multiple exchanges, as well as increase the 
administrative burden on the Commission in enforcing exchange-set 
position limits.
---------------------------------------------------------------------------

    \660\ Aggregation exemptions are, in effect, a way for a trader 
to acquire a larger speculative position. The Commission believes 
that it is important that the aggregation rules set out, to the 
extent feasible, ``bright line'' standards that are capable of easy 
application by a wide variety of market participants while not being 
susceptible to circumvention.
---------------------------------------------------------------------------

    The essential features of the proposed amendments to Sec.  150.5 
are summarized below.
1. Proposed Amendments to Sec.  150.5 To Add References to Swaps and 
Swap Execution Facilities
    As discussed above, the Dodd-Frank Act created a new type of 
regulated marketplace, SEFs, for which it established a comprehensive 
regulatory framework. A SEF must comply with fifteen enumerated core 
principles and any requirement that the Commission may impose by rule 
or regulation.\661\ The Dodd-Frank Act provides that the Commission 
may, in its discretion, determine by rule or regulation the manner in 
which SEFs comply with the core principles.\662\
---------------------------------------------------------------------------

    \661\ See supra discussion of SEF core principles.
    \662\ See CEA section 5h(f)(1)(B); 7 U.S.C. 7b-3(f)(1)(B).
---------------------------------------------------------------------------

    For contracts that are subject to federal position limits imposed 
under CEA section 4a(a), new CEA section 5h(f)(6)(A) \663\ requires 
that SEFs set ``as is necessary and appropriate, position limitations 
or position accountability for speculators'' for each contract executed 
pursuant to their rules.\664\ New CEA section 5h(f)(6)(B),\665\ 
requires SEFs that are trading facilities to set and enforce 
speculative position limits at a level no higher than those established 
by the Commission.\666\ The Commission recognizes that SEFs may need to 
contract with derivative clearing organizations in order to comply with 
SEF core principle 6. The Commission invites comments on the 
practicability and effectiveness of such arrangements. In addition, the 
Commission invites comment as to whether the Commission should use its 
exemptive authority under CEA section 4a(a)(7) to exempt SEFs from the 
requirements of CEA section 5h(f)(6)(B). If so, why and to what extent?
---------------------------------------------------------------------------

    \663\ As added by section 723 of the Dodd-Frank Act.
    \664\ A similar duty is imposed on DCMs under CEA section 
5(d)(5)(A); 7 U.S.C. 7(d)(5)(A).
    \665\ As added by section 723 of the Dodd-Frank Act.
    \666\ This requirement for SEFs parallels that for DCMs as 
listed in the CEA section 5(d)(5)(B); 7 U.S.C. 7(d)(5)(B).
---------------------------------------------------------------------------

    The Commission carefully considered both the novel nature of SEFs 
and its experience in overseeing DCMs' compliance with core principles 
when determining which SEF core principles to address with rules that 
would provide more certainty to the marketplace, and which core 
principles to address with guidance or acceptable practices that might 
provide more flexibility. The Commission has determined that the policy 
purposes effectuated by establishing uniform requirements for 
aggregation and bona fide hedging exemptions for DCM contracts are 
equally present in SEF markets.\667\ Accordingly, the Commission has 
determined to amend Sec.  150.5 to present essentially identical 
standards for establishing rules and acceptable practices relating to 
position limits (and accountability levels) for DCMs and SEFs.
---------------------------------------------------------------------------

    \667\ See core principle 6 for SEFs, CEA section 5h(f)(6)(A); 7 
U.S.C. 7b-3(f)(6)(A). The Commission notes that section 4a(a)(2) of 
the CEA requires the Commission to establish speculative position 
limits on physical commodity DCM contracts as appropriate, but did 
not extend this requirement to SEF contracts. See discussion above.
---------------------------------------------------------------------------

2. Proposed Sec.  150.5(a)--Requirements and Acceptable Practices for 
Commodity Derivative Contracts That Are Subject to Federal Position 
Limits
    Proposed Sec.  150.5(a) adds several requirements that a DCM or SEF 
must adhere to when setting position limits for contracts that are 
subject to the federal position limits listed in Sec.  150.2.\668\ 
Proposed Sec.  150.5(a)(1) specifies that a DCM or SEF that lists a 
contract on a commodity that is subject to federal position limits must 
adopt position limits for that contract at a level that is no higher 
than the federal position limit.\669\ Exchanges with cash-settled 
contracts price-linked to contracts subject to federal limits must also 
adopt those limit levels.
---------------------------------------------------------------------------

    \668\ As discussed above, 17 CFR 150.2 provides limits for 
specified agricultural contracts in the spot month, individual non-
spot months, and all-months-combined.
    \669\ Proposed Sec.  150.5(a)(1) is in keeping with the mandate 
in core principle 5 as amended by the Dodd-Frank Act. See CEA 
section 5(d)(1)(B); 7 U.S.C. 7(d)(1)(B). SEF core principle 6 
parallels DCM core principle 5. Compare CEA section 5h(f)(5); 7 
U.S.C. 7b-3(f)(5) with CEA section 5(d)(5); 7 U.S.C. 7(d)(5).
---------------------------------------------------------------------------

    Proposed Sec.  150.5(a)(2) prescribes the manner in which a DCM or 
SEF that lists a contract on a commodity that is subject to federal 
position limits must adopt hedge exemption rules. Proposed Sec.  
150.5(a)(2)(i) cross-references the definition of bona fide hedging, as 
proposed in amended Sec.  150.1, as the regulation governing bona fide 
hedging positions.\670\ Proposed Sec.  150.5(a)(2)(ii) clarifies the 
types of spread positions for which a DCM or SEF may grant exemptions 
from the federal limits by cross-referencing the definitions of 
intermarket and intramarket spread positions in proposed Sec.  
150.1.\671\ To be eligible for exemption under proposed Sec.  
150.5(a)(2)(ii), intermarket and intramarket spread positions must be 
outside of the spot month for physical delivery contracts, and 
intramarket spread positions must not exceed the federal all-months 
limit when combined with any other net positions in the single month. 
Proposed Sec.  150.5(a)(2)(iii) would require traders to apply to the 
DCM or SEF for any exemption from its speculative position limit 
rules.\672\ Proposed Sec.  150.5(a)(2)(iii) also preserves the 
exchange's ability to limit bona fide hedging positions which it 
determines are not in accord with sound commercial practices, or which 
exceed

[[Page 75756]]

an amount that may be established and liquidated in an orderly 
fashion.\673\
---------------------------------------------------------------------------

    \670\ Compare 17 CFR 150.5(d) which explicitly precludes 
exchanges from applying exchange-set speculative position limits 
rules to bona fide hedging positions as defined by the exchange in 
accordance with Sec.  1.3(z)(1).
    \671\ The Commission has proposed to maintain the current 
practice in 17 CFR 150.2 of setting single-month limits at the same 
levels as all-months limits, rendering the ``spread'' exemption in 
17 CFR 150.3 unnecessary. However, since DCM core principle 5 allows 
exchanges to set more restrictive limits than the federal limits, a 
DCM or SEF may set the single month limit at a level lower than that 
of the all-month limit, an exemption for intramarket spread position 
may be useful. See CEA section 5(d)(5); 7 U.S.C. 7(d)(5). An 
exemption for intramarket spread positions would be unnecessary if 
the DCM or SEF sets the single month limit at the same level as the 
all-months limit.
    Additionally, the duplicative term ``arbitrage'' would be 
removed because CEA section 4a(a)(1) explains that ``the word 
`arbitrage' in domestic markets shall be defined to mean the same as 
`spread' or `straddle.' '' 7 U.S.C. 6a(a)(1).
    \672\ Hence, proposed Sec.  150.5(a)(2)(C) would codify as a 
requirement for DCMs and SEFs the acceptable practice concerning 
application for exemption listed in 17 CFR 150.5(d)(2).
    \673\ Proposed Sec.  150.5(a)(2)(C) presents guidance that 
largely mirrors the guidance provided in the second half of 17 CFR 
150.5(d), with edits to specify DCMs and SEFs.
---------------------------------------------------------------------------

    Proposed Sec.  150.5(a)(3)(i) requires a DCM or SEF to exempt from 
speculative position limits established under Sec.  150.2 a swap 
position acquired in good faith prior to the effective date of such 
limits.\674\ However, proposed Sec.  150.5(a)(3)(i) would allow a 
person to net such a pre-existing swap with post-effective date 
commodity derivative contracts for the purpose of complying with any 
non-spot-month speculative position limit. Furthermore, proposed Sec.  
150.5(a)(3)(ii) requires a DCM or SEF to exempt from non-spot-month 
speculative position limits established under Sec.  150.2 any commodity 
derivative contract acquired in good faith prior to the effective date 
of such limit. However, such a pre-existing commodity derivative 
contract position must be attributed to the person if the person's 
position is increased after the effective date of such limit.\675\
---------------------------------------------------------------------------

    \674\ The Commission is exercising its authority under CEA 
section 4a(a)(7) to exempt pre-Dodd-Frank and transition period 
swaps from speculative position limits (unless the trader elects to 
include such a position to net with post-effective date commodity 
derivative contracts). Such a pre-existing swap position will be 
exempt from initial spot month speculative position limits.
    \675\ Notwithstanding any pre-existing exemption adopted by a 
DCM or SEF that applies to speculative position limits in non-spot 
months, a person holding pre-existing commodity derivative contracts 
(except for pre-existing swaps as described above) must comply with 
spot month speculative position limits. However, nothing in proposed 
Sec.  150.5(a)(3)(B) would override the exclusion of pre-Dodd-Frank 
and transition period swaps from speculative position limits.
---------------------------------------------------------------------------

    The Commission proposes to require DCMs and SEFs to have 
aggregation polices that mirror the federal aggregation 
provisions.\676\ Therefore, proposed Sec.  150.5(a)(4) requires DCMs 
and SEFs to have aggregation rules that conform to the uniform 
standards listed in Sec.  150.4.\677\
---------------------------------------------------------------------------

    \676\ See supra discussion concerning aggregation.
    \677\ Proposed Sec.  150.5(a)(4) references 17 CFR 150.4 as the 
regulation governing aggregation for contracts subject to federal 
position limits and would replace 17 CFR 150.5(g). See supra the 
Commission's explanation for implementing uniform aggregation 
standards across DCMs and SEFs.
---------------------------------------------------------------------------

    A DCM or SEF would continue to be free to enforce position limits 
that are more stringent that the federal limits. The Commission 
clarifies that federal spot month position limits do not to apply to 
physical-delivery contracts after delivery obligations are 
established.\678\ Exchanges generally prohibit transfer or offset of 
positions once long and short position holders have been assigned 
delivery obligations. Proposed Sec.  150.5(a)(6) would clarify 
acceptable practices for a DCM or SEF to enforce spot month limits 
against the combination of, for example, long positions that have not 
been stopped, stopped positions, and deliveries taken in the current 
spot month.\679\
---------------------------------------------------------------------------

    \678\ Therefore, federal spot month position limits do not apply 
to positions in physical-delivery contracts on which notices of 
intention to deliver have been issued, stopped long positions, 
delivery obligations established by the clearing organization, or 
deliveries taken.
    \679\ For example, an exchange may restrict a speculative long 
position holder that otherwise would obtain a large long position, 
take delivery, and seek to re-establish a large long position in an 
attempt to corner a significant portion of the deliverable supply or 
to squeeze shorts. Proposed Sec.  150.5(b)(9) would set forth the 
same acceptable practices for contracts not subject to federal 
limits.
---------------------------------------------------------------------------

3. Proposed Sec.  150.5(b)--Requirements and Acceptable Practices for 
Commodity Derivative Contracts That Are Not Subject to Federal Position 
Limits
    The Commission sets forth in proposed Sec.  150.5(b) requirements 
and acceptable practices applicable to DCM- and SEF-set speculative 
position limits for any contract that is not subject to federal 
position limits, including physical and excluded commodities.\680\
---------------------------------------------------------------------------

    \680\ For position limits purposes, proposed Sec.  150.1(k) 
would define ``physical commodity'' to mean any agricultural 
commodity, as defined in 17 CFR 1.3, or any exempt commodity, as 
defined in section 1a(20) of the Act. Excluded commodity is defined 
in section 1a(19) of the Act.
---------------------------------------------------------------------------

    As discussed above, the Commission proposes to revise Sec.  150.5 
to implement uniform requirements for DCMs and SEFs relating to hedging 
exemptions across all types of commodity derivative contracts, 
including those that are not subject to federal position limits. The 
Commission further proposes to require DCMs and SEFs to have uniform 
aggregation polices that mirror the federal aggregation provisions for 
all types of commodity derivative contracts, including for contracts 
that are not subject to federal position limits. As explained above, 
hedging exemptions and aggregation policies that vary from exchange to 
exchange would increase the administrative burden on a trader active on 
multiple exchanges, as well as increase the administrative burden on 
the Commission in monitoring and enforcing exchange-set position 
limits.
    Therefore, proposed Sec.  150.5(b)(5)(i) would require any hedge 
exemption rules adopted by a designated contract market or a swap 
execution facility that is a trading facility to conform to the 
definition of bona fide hedging position in proposed Sec.  150.1. In 
addition to this affirmative rule, proposed Sec.  150.5(b)(5) would set 
forth acceptable practices for DCMs and SEFs to grant exemptions from 
position limits for positions, other than bona fide hedging positions, 
in contracts not subject to federal limits. Such exemptions generally 
track the exemptions set forth in proposed Sec.  150.3, and are 
suggested as acceptable practices based on the same logic that 
underpins the proposed Sec.  150.3 exemptions.\681\ It would be 
acceptable practice for a DCM or SEF to grant exemptions under certain 
circumstances for financial distress, intramarket and intermarket 
spreads, and qualifying cash-settled contract positions in the spot 
month.\682\ Additionally, proposed Sec.  150.5(b)(5)(ii) would set 
forth an acceptable practice for a DCF or SEF to grant a limited risk 
management exemption for contracts on excluded commodities pursuant to 
rules submitted to the Commission, and consistent with the guidance in 
new appendix A to part 150.\683\
---------------------------------------------------------------------------

    \681\ See supra discussion of the Sec.  150.3 exemptions.
    \682\ See id.
    \683\ New appendix A to part 150 is intended to capture the 
essence of the Commission's 1987 interpretation of its definition of 
bona fide hedge transactions to permit exchanges to grant hedge 
exemptions for various risk management transactions. See Risk 
Management Exemptions From Speculative Position Limits Approved 
Under Commission Regulation 1.61, 52 FR 34633, Sep. 14, 1987. The 
Commission specified that such exemptions be granted on a case-by-
case basis, subject to a demonstrated need for the exemption. It 
also required that applicants for these exemptions be typically 
engaged in the buying, selling, or holding of cash market 
instruments. See id. Additionally, the Commission required the 
exchanges to monitor the exemptions they granted to ensure that any 
positions held under the exemption did not result in any large 
positions that could disrupt the market. See id. The term ``excluded 
commodity'' is defined in CEA section 1(a)(19).
---------------------------------------------------------------------------

    Proposed Sec.  150.5(b)(6) and (7) set forth acceptable practices 
relating to pre-enactment and transition period swap positions (as 
those terms are defined in proposed Sec.  150.1),\684\ and to commodity 
derivative contract positions acquired in good faith prior to the 
effective date of mandatory federal speculative position limits.
---------------------------------------------------------------------------

    \684\ See supra discussion of pre-enactment and transition 
period swap positions.
---------------------------------------------------------------------------

    Additionally, for any contract that is not subject to federal 
position limits, proposed Sec.  150.5(b)(8) requires the DCM or SEF to 
conform to the uniform federal aggregation provisions.\685\ This 
proposed requirement generally mirrors the requirement in proposed 
Sec.  150.5(a)(4) for contracts that are subject to federal position 
limits by requiring the DCM or SEF to have

[[Page 75757]]

aggregation rules that conform to Sec.  150.4.
---------------------------------------------------------------------------

    \685\ Proposed Sec.  150.5(b)(7) would replace 17 CFR 150.5(g) 
as it relates to contracts that are not subject to federal position 
limits.
---------------------------------------------------------------------------

    The Commission proposes in Sec.  150.5(b) to generally update and 
reorganize the set of acceptable practices listed in current Sec.  
150.5 as it relates to contracts that are not subject to the federal 
position limits. For existing and newly established DCMs and newly 
established SEFs, these acceptable practices generally concern how to: 
(1) Set spot-month position limits; (2) set individual non-spot month 
and all-months-combined position limits; (3) set position limits for 
cash-settled contracts that use a reference contract as a price source; 
(4) adjust position limit levels after a contract has been listed for 
trading; and (5) adopt position accountability in lieu of speculative 
position limits.
    For a derivative contract that is based on a commodity with a 
measurable deliverable supply, proposed Sec.  150.5(b)(1)(i)(A) updates 
the acceptable practice in current Sec.  150.5(b)(1) whereby spot month 
position limits should be set at a level no greater than one-quarter of 
the estimated deliverable supply of the underlying commodity.\686\ 
Proposed Sec.  150.5(b)(1)(i)(A) clarifies that this acceptable 
practice for setting spot month position limits would apply to any 
commodity derivative contract, whether physical-delivery or cash-
settled, that has a measurable deliverable supply.\687\
---------------------------------------------------------------------------

    \686\ Proposed Sec.  150.5(b)(1)(i)(A) is consistent with the 
Commission's longstanding policy regarding the appropriate level of 
spot-month limits for physical delivery contracts. These position 
limits would be set at a level no greater than 25 percent of 
estimated deliverable supply. The spot-month limits would be 
reviewed at least every 24 months thereafter. The proposed 
deliverable supply formula narrowly targets the trading that may be 
most susceptible to, or likely to facilitate, price disruptions. The 
formula seeks to minimize the potential for corners and squeezes by 
facilitating the orderly liquidation of positions as the market 
approaches the end of trading and by restricting swap positions that 
may be used to influence the price of referenced contracts that are 
executed centrally.
    \687\ In general, the term ``deliverable supply'' means the 
quantity of the commodity meeting a derivative contract's delivery 
specifications that can reasonably be expected to be readily 
available to short traders and saleable to long traders at its 
market value in normal cash marketing channels at the derivative 
contract's delivery points during the specified delivery period, 
barring abnormal movement in interstate commerce. Proposed Sec.  
150.1 would define commodity derivative contract to mean any 
futures, option, or swap contract in a commodity (other than a 
security futures product as defined in CEA section 1a(45)).
---------------------------------------------------------------------------

    For a derivative contract that is based on a commodity without a 
measurable deliverable supply, proposed Sec.  150.5(b)(1)(i)(B) would 
codify as guidance that the spot month limit level should be no greater 
than necessary and appropriate to reduce the potential threat of market 
manipulation or price distortion of the contract's or the underlying 
commodity's price.\688\
    Proposed Sec.  150.5(b)(1)(ii)(A) preserves the existing acceptable 
practice in current Sec.  150.5(b)(2) whereby individual non-spot or 
all-months-combined levels for agricultural commodity derivative 
contracts that are not subject to the federal limits should be no 
greater than 1,000 contracts at initial listing. The proposed rule 
would also codify as guidance that the 1,000 contract limit should be 
taken into account when the notional quantity per contract is no larger 
than a typical cash market transaction in the underlying commodity, or 
reduced if the notional quantity per contract is larger than a typical 
cash market transaction.\689\ Additionally, proposed Sec.  
150.5(b)(1)(ii)(A) would codify that if the commodity derivative 
contract is substantially the same as a pre-existing DCM or SEF 
commodity derivative contract, then it would be an acceptable practice 
for the DCM or SEF to adopt the same limit as applies to that pre-
existing commodity derivative contract.\690\
---------------------------------------------------------------------------

    \688\ This descriptive standard is largely based on the language 
of DCM core principle 5 and SEF core principle 6. The Commission 
does not suggest that an excluded commodity derivative contract that 
is based on a commodity without a measurable supply should adhere to 
a numeric formula in setting spot month position limits.
    \689\ The Commission explained what it considers to be a 
``typical cash market transaction'' in the preamble for final part 
151 (subsequently vacated): ``[f]or example, if a DCM or SEF offers 
a new physical commodity contract and sets the notional quantity per 
contract at 100,000 units while most transactions in the cash market 
for that commodity are for a quantity of between 1,000 and 10,000 
units and exactly zero percent of cash market transactions are for 
100,000 units or greater, then the notional quantity of the 
derivatives contract offered by the DCM or SEF would be atypical. 
This clarification is intended to deter DCMs and SEFs from setting 
non-spot-month position limits for new contracts at levels where 
they would constitute non-binding constraints on speculation through 
the use of an excessively large notional quantity per contract. This 
clarification is not expected to result in additional marginal cost 
because, among other things, it reflects current Commission custom 
in reviewing new contracts and is an acceptable practice for core 
principle compliance and not a requirement per se for DCMs or 
SEFs.'' See 76 FR 71660.
    \690\ In this context, ``substantially the same'' means a close 
economic substitute. For example, a position in Eurodollar futures 
can be a close economic substitute for a fixed-for-floating interest 
rate swap.
---------------------------------------------------------------------------

    Proposed Sec.  150.5(b)(1)(ii)(B) preserves the existing acceptable 
practice, set forth in current Sec.  150.5(b)(3), for DCMs to set 
individual non-spot or all-months-combined limits at levels no greater 
than 5,000 contracts at initial listing, but would apply this 
acceptable practice on a wider scale to both exempt and excluded 
commodity derivative contracts.\691\ Proposed Sec.  150.5(b)(1)(ii)(B) 
would codify as guidance for exempt and excluded commodity derivative 
contracts that the 5,000 contract limit should be applicable when the 
notional quantity per contract is no larger than a typical cash market 
transaction in the underlying commodity, or should be reduced if the 
notional quantity per contract is larger than a typical cash market 
transaction. Additionally, proposed Sec.  150.5(b)(1)(B)(ii) would 
codify a new acceptable practice for a DCM or SEF to adopt the same 
limit as applies to the pre-existing contract if the new commodity 
contract is substantially the same as an existing contract.
---------------------------------------------------------------------------

    \691\ In contrast, 17 CFR 150.5(b)(3) lists this as an 
acceptable practice for contracts for energy products and non-
tangible commodities. Excluded commodity is defined in CEA section 
1a(19), and exempt commodity is defined CEA section 1a(20).
---------------------------------------------------------------------------

    Proposed Sec.  150.5(b)(1)(iii) sets forth that if a commodity 
derivative contract is cash-settled by referencing a daily settlement 
price of an existing contract listed on a DCM or SEF, then it would be 
an acceptable practice for a DCM or SEF to adopt the same position 
limits as the original referenced contract, assuming the contract sizes 
are the same. Based on its enforcement experience, the Commission 
believes that limiting a trader's position in cash-settled contracts in 
this way diminishes the incentive to exert market power to manipulate 
the cash-settlement price or index to advantage a trader's position in 
the cash-settled contract.\692\
---------------------------------------------------------------------------

    \692\ With respect to cash-settled contracts where the 
underlying product is a physical commodity with limited supplies, 
enabling a trader to exert market power (including agricultural and 
exempt commodities), the Commission has viewed the specification of 
speculative position limits to be an essential term and condition of 
such contracts in order to ensure that they are not readily 
susceptible to manipulation, which is the DCM core principle 3 
requirement.
---------------------------------------------------------------------------

    Proposed Sec.  150.5(b)(2)(i) updates the acceptable practices in 
current Sec.  150.5(c) for adjusting limit levels for the spot month. 
For a derivative contract that is based on a commodity with a 
measurable deliverable supply, proposed Sec.  150.5(b)(2)(i) maintains 
the acceptable practice in current Sec.  150.5(c) to adjust spot month 
position limits to a level no greater than one-quarter of the estimated 
deliverable supply of the underlying commodity, but would apply this 
acceptable practice to any commodity derivative contract, whether 
physical-delivery or cash-settled, that has a measurable deliverable 
supply. For a derivative contract that is based on a commodity without 
a measurable deliverable supply, proposed Sec.  150.5(b)(1)(i)(B) would 
codify as

[[Page 75758]]

guidance that the spot month limit level should not be adjusted to 
levels greater than necessary and appropriate to reduce the potential 
threat of market manipulation or price distortion of the contract's or 
the underlying commodity's price. Proposed Sec.  150.5(b)(2)(i) would 
codify as a new acceptable practice that spot month limit levels be 
reviewed no less than once every two years.
    Proposed Sec.  150.5(b)(2)(ii) maintains as an acceptable practice 
the basic formula set forth in current Sec.  150.5(c)(2) for adjusting 
non-spot-month limits at levels of no more 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% of the remaining open interest thereafter. Proposed 
Sec.  150.5(b)(2)(ii) would also maintain as an alternative acceptable 
practice the adjustment of non-spot-month limits to levels based on 
position sizes customarily held by speculative traders in the contract. 
Proposed Sec.  150.5(b)(3) generally updates and reorganizes the 
existing acceptable practices in current Sec.  150.5(e) for a DCM or 
SEF to adopt position accountability rules in lieu of position limits, 
under certain circumstances, for contracts that are not subject to 
federal position limits. This proposed section reiterates the DCM's 
authority, with conforming changes for SEFs, to require traders to 
provide information regarding their position when requested by the 
exchange.\693\ Proposed Sec.  150.5(b)(3) would codify a new acceptable 
practice for a DCM or SEF to require traders to consent to halt from 
increasing their position in a contract if so ordered. Proposed Sec.  
150.5(b)(3) would also codify a new acceptable practice for a DCM or 
SEF to require traders to reduce their position in an orderly manner.
---------------------------------------------------------------------------

    \693\ Compare 17 CFR 150.5(e)(2)-(3).
---------------------------------------------------------------------------

    Proposed Sec.  150.5(b)(3)(i) would maintain the acceptable 
practice for a DCM or SEF to adopt position accountability rules 
outside the spot month, in lieu of position limits, for an agricultural 
or exempt commodity derivative contract that: (1) has an average month-
end open interest of 50,000 contracts and an average daily volume of 
5,000 or more contracts during the most recent calendar year; (2) has a 
liquid cash market; and (3) is not subject to federal limits in Sec.  
150.2--provided, however, that such DCM or SEF should adopt a spot 
month speculative position limit with a level no greater than one-
quarter of the estimated spot month deliverable supply.\694\
---------------------------------------------------------------------------

    \694\ 17 CFR 150.5(e)(3) applies this acceptable practice to a 
``tangible commodity, including, but not limited to metals, energy 
products, or international soft agricultural products.'' Also, 
compare the ``minimum open interest and volume test'' in proposed 
Sec.  150.5(b)(3)(i) with that in current Sec.  150.5(e)(3).
---------------------------------------------------------------------------

    For an excluded commodity derivative contract that has a highly 
liquid cash market and no legal impediment to delivery, proposed Sec.  
150.5(b)(3)(ii)(A) would maintain the acceptable practice for a DCM or 
SEF to adopt position accountability rules in the spot month in lieu of 
position limits. For an excluded commodity derivative contract without 
a measurable deliverable supply, proposed Sec.  150.5(b)(3)(ii)(A) 
would codify an acceptable practice for a DCM or SEF to adopt position 
accountability rules in the spot month in lieu of position limits 
because there is not a deliverable supply that is subject to 
manipulation. However, for an excluded commodity derivative contract 
that has a measurable deliverable supply, but that may not be highly 
liquid and/or is subject to some legal impediment to delivery, proposed 
Sec.  150.5(b)(3)(ii)(A) sets forth an acceptable practice for a DCM or 
SEF to adopt a spot-month position limit equal to no more than one-
quarter of the estimated deliverable supply for that commodity, because 
the estimated deliverable supply may be susceptible to manipulation. 
Furthermore, proposed Sec.  150.5(b)(3)(ii) would remove the ``minimum 
open interest and volume'' test for excluded commodity derivative 
contracts generally.\695\ Proposed Sec.  150.5(b)(3)(ii)(B) would 
codify an acceptable practice for a DCM or SEF to adopt position 
accountability levels for an excluded commodity derivative contract in 
lieu of position limits in the individual non-spot month or all-months-
combined.
---------------------------------------------------------------------------

    \695\ The ``minimum open interest and volume'' test, as 
presented in 17 CFR 150.5(e)(1)-(2), need not be used to determine 
whether an excluded commodity derivative contract should be eligible 
for position accountability rules in lieu of position limits in the 
spot month.
---------------------------------------------------------------------------

    Proposed Sec.  150.5(b)(3)(iii) adds a new acceptable practice for 
an exchange to list a new contract with position accountability levels 
in lieu of position limits if that new contract is substantially the 
same as an existing contract that is currently listed for trading on an 
exchange that has already adopted position accountability levels in 
lieu of position limits.\696\
---------------------------------------------------------------------------

    \696\ See supra discussion of what is meant by ``substantially 
the same'' in this context.
---------------------------------------------------------------------------

    Proposed Sec.  150.5(b)(4) maintains the acceptable practice that 
for contracts not subject to federal position limits, DCMs and SEFs 
should calculate trading volume and open interest as established in 
current Sec.  150.5(e)(4).\697\ Proposed Sec.  150.5(b)(4) would build 
upon these standards by accounting for swaps in reference contracts on 
a futures-equivalent basis.\698\
---------------------------------------------------------------------------

    \697\ For SEFs, trading volume and open interest for swaptions 
should be calculated on a delta-adjusted basis.
    \698\ ``Futures-equivalent'' is a defined term in proposed Sec.  
150.1 that accounts for swaps in referenced contracts.
---------------------------------------------------------------------------

III. Related Matters

A. Considerations of Costs and Benefits

1. Background
    Generally, speculative position limits cap the size of positions 
that a person may hold or control in commodity derivative contracts for 
speculative purposes.\699\ First authorized in 1936,\700\ position 
limits are not a new regulatory tool for containing speculative market 
activity. The Commission and its predecessors have directly set limits 
for futures and options contracts on certain agricultural commodities 
since 1938. Additionally, for approximately 20 years from 1981 until 
the Commodity Futures Modernization Act (``CFMA'') \701\ amended the 
CEA to substitute a core-principles-based, self-regulatory model for 
futures exchanges, Commission rules required exchanges to set position 
limits (or, in certain

[[Page 75759]]

specified cases, position accountability levels) for futures and 
options contracts not subject to Commission-imposed limits.\702\ 
Through amendments to the CEA over more than 75 years and a number of 
legislative reauthorizations, the Commission's basic authority to 
establish speculative position limits, now codified in CEA section 
4a(a), has remained constant.\703\
---------------------------------------------------------------------------

    \699\ Derivative contracts--i.e., futures, options and swaps--
may not transfer any ownership interest in the underlying commodity, 
but their prices are substantially derived from the value of the 
underlying commodity. Those who purchase or sell derivatives do so 
either to hedge or speculate. Generally, hedging is the use of 
derivatives markets by commodity producers, merchants or end-users 
to manage their exposure to fluctuation in the price of a commodity 
that a producer or user intends to use or produce; speculation, in 
contrast, is the use of derivative markets to profit from price 
appreciation or depreciation in the underlying commodity. Because 
the limits only restrict positions obtained for speculative 
purposes, this discussion refers interchangeably to ``position 
limits,'' ``speculative position limits,'' or ``speculative 
limits.''
    \700\ Congress first granted the CEC, a Commodity Futures 
Trading Commission predecessor, authority to set speculative 
position limits as part of the New Deal reforms enacted in the 
Commodity Exchange Act of 1936. Public Law 74-765, 49 Stat. 1491, 
1492 (codified at 7 U.S.C. 6a(1) (1940)). Specifically, Congress 
authorized the CEC to ``fix such limits on the amount of trading . . 
. which may be done by any person as the [CEC] finds is necessary to 
diminish, eliminate, or prevent such burden.'' Congress exempted 
positions attributable to bona fide hedging. Unless otherwise 
indicated, references in this discussion to the ``Commission'' mean 
the Commodity Futures Trading Commission as well as its predecessor 
agencies, including the CEC.
    \701\ Commodity Futures Modernization Act of 2000, Public Law 
106-554, 114 Stat. 2763 (Dec. 21, 2000).
    \702\ See, e.g., 46 FR 50938, 50940, Oct. 16, 1981. As discussed 
above, following enactment of the CFMA, which among other things 
afforded DCMs discretion to set appropriate position limits under 
DCM core principle 5, these rules, then contained in Sec.  150.5, 
became ineffective as requirements; they were retained, however, as 
guidance and acceptable practices for DCMs to use in meeting their 
core principle 5 compliance obligations. 74 FR 12178, 12183, Mar. 
23, 2009.
    \703\ One of these amendments, the Commodity Futures Trading Act 
of 1974, created the CFTC and granted it expanded jurisdiction 
beyond the certain enumerated agricultural products of its 
predecessor to all ``services, rights, and interests'' in which 
futures contracts are traded. Public Law 93-463, 88 Stat. 1389 
(1974).
---------------------------------------------------------------------------

    The backdrop for this basic authority is a public record replete 
with Congressional and other official governmental investigations and 
reports--issued over more than 80 years--critical of the harm 
attributed to ``excess speculation'' in derivative markets. From the 
1920s through 2009, a litany of official government investigations, 
hearings and reports document disruptive speculative behavior; \704\ 
several of the earliest link the behavior to artificial price effects 
and impaired commodity distribution efficiency, and recommend mandatory 
position limits as a tool to curb speculative abuses and their ill-
effects. The statute reflects and responds to the centerpiece concern 
of these hearings and reports. Indeed, CEA section 4a(a)(1) states 
Congress's express determination that excessive commodity speculation 
causing sudden or unreasonable price fluctuations or unwarranted 
changes in commodity prices is an undue and unnecessary burden on 
interstate commerce, and mandates that the Commission set position 
limits, including prophylactic limits, to diminish, eliminate, or 
prevent this burden.\705\
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    \704\ See, e.g., Federal Trade Commission, ``Report of the 
Federal Trade Commission on the Grain Trade,'' vol. VI, at 60-62 
(1924)(documenting a number of ``violent fluctuations of price'' 
over the preceding 30 years evidencing ``the close connection 
between extreme fluctuations in annual average prices of cash grain 
and unusual speculative activity in the futures market''); id. vol. 
VII, at 293-294 (1926)(recommending limitation on individual open 
interest because the ``very large trader . . . [w]hether he is more 
often right than wrong . . . and whether influenced by a desire to 
manipulate or not . . . can cause disturbances in the market which 
impair its proper functioning and are harmful to producers and 
consumers''); Grain Futures Administration, ``Fluctuations in Wheat 
Futures,'' S. Doc. No. 69-135, at 1,6 (1926) (investigation of 
``wide and erratic [1925 wheat futures] price fluctuations . . . 
were largely artificial[,] were caused primarily . . . by heavy 
trading on the part of a limited number of professional speculators 
[that] completely disrupted the market and resulted in abnormal 
fluctuations . . . felt in every other large grain market in the 
world;'' concludes that limitations on the extent of daily trading 
by speculators are ``inevitable . . . if there is to be eliminated 
from the market those hazards which are so unmistakably reflected as 
existing whenever excessively large lines are held by 
individuals''); 1932 Annual Report of the Chief of the Grain Futures 
Admin., at 4, 8 (describing the 16 percent drop in May wheat prices 
during a 21-day period as illustrative of the price impact of 
``short selling by a few large traders;'' again stresses the need 
for legislation authorizing limitations to eliminate ``the economic 
evils incident to market domination by a few powerful operators 
trading for speculative account''); 1950 Annual Report of the 
Administrator of the Commodity Exchange Authority, at 14-15 
(speculative operations by a small number of traders holding a large 
proportion of long contracts ``distorted egg future prices in 
October 1949 and disrupted orderly marketing of the commodity 
causing financial losses;'' notes that enforcement of speculative 
limits is a ``strong deterrent to excessive speculation by large 
traders''); Commodity Futures Trading Commission, Report To The 
Congress In Response To Section 21 Of The Commodity Exchange Act, 
May 29, 1981, Part Two, A Study of the Silver Market (addressing 
silver market corner discussed above); ``The Role of Market 
Speculation in Rising Oil and Gas Prices: A Need to Put the Cop Back 
on the Beat,'' Staff Report, Permanent Subcommittee on 
Investigations of the Senate Committee on Homeland Security and 
Governmental Affairs, U.S. Senate, S. Rpt. No. 109-65 at 1 (June 27, 
2006) (addressing speculation and price increases in oil and gas 
markets) [hereinafter ``Oil & Gas Report'']; ``Excessive Speculation 
in the Natural Gas Market, Staff Report,'' Permanent Subcommittee on 
Investigations of the Senate Committee on Homeland Security and 
Governmental Affairs, U.S. Senate, at 1 (June 25, 2007) (addressing 
speculation, price increases and market distortion in natural gas 
markets discussed above) [hereinafter ``Gas Report'']; ``Excessive 
Speculation in the Wheat Market;'' Staff Report, Permanent 
Subcommittee on Investigations of the Senate Committee on Homeland 
Security and Governmental Affairs, U.S. Senate, at 2 (June 24, 2009) 
(addressing excessive speculation in wheat futures contracts by 
commodity index traders) [hereinafter ``Wheat Report'']; see also 
Jerry W. Markham, ``The History of Commodity Futures Trading and its 
Regulation,'' at 3-47 (1987) (summarizes numerous incidents of large 
speculative trader abuse in an array of commodities from the 
emergence of futures exchanges in the mid-1800s through the 1970s).
    \705\ The roots of this statutory determination date back to 
1922, when Congress found ``sudden or unreasonable fluctuations in 
the prices'' of certain commodity futures transactions ``frequently 
occur as a result of [ ] speculation, manipulation or control'' and 
that ``such fluctuations in prices are an obstruction to and a 
burden upon'' interstate commerce. Grain Futures Act of 1922, ch. 
369 at section 3, 342 Stat. 998, 999 (1922), codified at 7 U.S.C. 5 
(1925-26).
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    The longstanding statutory approach to position limit regulation 
reflects two important concepts with direct bearing on the benefits and 
costs involved in this rulemaking. First is the distinction between 
speculative trading, for which limits are statutorily authorized, and, 
as to derivatives for physical commodities, mandated, and bona fide 
hedging, for which they are not.\706\ This distinction is important 
because a chief purpose of position limits is to preserve the integrity 
of derivative markets for the benefit of producers that use them to 
hedge risk and consumers that consume the underlying commodities.
---------------------------------------------------------------------------

    \706\ See CEA section 4a(c)(1); 7 U.S.C. 6a(c)(1).
---------------------------------------------------------------------------

    Second is the distinction between speculation generally and 
excessive speculation as addressed in CEA section 4a(a)(1). While, as 
noted above, numerous government inquires have linked speculation at 
excessive levels to abuses and burdens on commerce, below excessive 
levels, speculation provides needed liquidity to derivative 
markets.\707\
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    \707\ Hedgers do not always trade simultaneously in the same 
quantities in opposing directions. That is, long and short hedgers 
may trade at different times and with different quantities, often 
making transactions between only hedgers unfeasible. Speculative 
traders thus provide a trading partner for hedgers for whom there is 
no feasible hedger counterparty. In so doing, speculators provide 
valuable liquidity to the market.
---------------------------------------------------------------------------

    In 2010 the Dodd-Frank Act \708\ amended CEA section 4a(a). These 
amendments responded to the 2008 financial crisis and came in the wake 
of three Congressional reports within a three-year span finding 
increased and/or ``excessive'' derivative market speculation linked to 
increased and distorted prices. These reports recommended increased 
statutory authority to, in the parlance of two of the reports, put the 
Commission ``back on the beat.'' \709\ Among other things, the Dodd-
Frank Act \710\ expanded the Commission's speculative position limit 
authority under CEA section 4a to

[[Page 75760]]

mandate that the Commission: (i) establish limits on the amount of 
positions, as appropriate, that may be held by any person in 
agricultural and exempt commodity \711\ futures and options contracts 
traded on a DCM (CEA section 4a(a)(2));* * * \712\ (ii) establish at an 
appropriate level position limits for swaps that are economically 
equivalent to those futures and options that are subject to mandatory 
position limits pursuant to CEA section 4a(a)(2), and do so at the same 
time as the CEA section 4a(a)(2) limits are established (CEA section 
4a(a)(5)); and (iii) apply position limits on an aggregate basis to 
contracts based on the same underlying commodity across enumerated 
trading venues \713\ (CEA section 4a(a)(6)).
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    \708\ Public Law 111-203, 124 Stat. 1376 (2010).
    \709\ See, e.g., Wheat Report, at 15-16 (excessive speculation 
in wheat futures contracts by commodity index traders contributed to 
``unreasonable fluctuations or unwarranted changes'' in wheat 
futures prices, resulting in an abnormally large and persistent gap 
between wheat futures and cash prices (the basis);'' commerce was 
unduly burdened; stiffened position limit regulation for index 
traders recommended); Gas Report, at 3-7 (``[t]he current regulatory 
system was unable to prevent [the hedge fund] Amaranth's excessive 
speculation in the 2006 natural gas market;'' the experience 
demonstrated ``how excessive speculation can distort prices'' and 
have ``serious consequences for other market participants;'' and the 
Commission should be put ``back on the beat''); Oil & Gas Report, at 
6-7 (heavy speculation in commodity energy markets contributed to 
rising U.S. energy prices, distorting the historical relationship 
between price and inventory; recommends putting the CFTC ``back on 
the beat'' to police these markets by eliminating the ``Enron'' 
loophole that limited it from doing so). In the interval between the 
two reports addressed to energy market speculation and the Dodd-
Frank Act amendments, Congress also expanded the Commission's 
authority to set position limits for significant price discovery 
contracts on exempt commercial markets. See Food, Conservation and 
Energy Act of 2008, Public Law 110-246, 122 Stat. 1624 (2008).
    \710\ Dodd-Frank Act section 737(a).
    \711\ As defined in CEA section 1a(20), ``exempt commodity'' 
means a commodity that is neither an agricultural commodity nor an 
``excluded commodity.'' Excluded commodities, in turn, are defined 
in CEA section 1a(19) to encompass specified groups of financial and 
occurrence-based commodities. Accordingly, exempt commodities 
include energy products and metals. The Dodd-Frank mandate in CEA 
section 4a(a)(2) to impose limits applies to all agricultural and 
exempt commodities (collectively, physical commodities). This 
mandate does not apply to excluded commodities, which are primarily 
intangible commodities, like financial products.
    \712\ The Commission's statutory interpretation of its mandate 
under CEA section 4a(a)(2) is discussed in detail above. A separate 
provision added by the Dodd-Frank Act directs the Commission with 
respect to factors to consider in establishing the levels of 
speculative position limits that are mandated by CEA section 
4a(a)(2). See CEA section 4a(a)(3); 7 U.S.C. 6a(a)(3).
    \713\ Specifically, as enumerated these are: (1) contracts 
listed by DCMs; (2) with respect to FBOTs, contracts that are price-
linked to a contract listed for trading on a registered entity and 
made available from within the United States via direct access; and 
(3) SPDF Swaps.
---------------------------------------------------------------------------

    Additionally, the Dodd-Frank Act requires DCMs and SEFs to set 
position limits for any contract subject to a Commission-imposed limit 
at a level not higher than the Commission's limit.\714\ Finally, the 
Dodd-Frank Act, through new CEA section 4a(c)(2), requires that the 
Commission define bona fide hedging positions pursuant to an express 
framework for purposes of exclusion from position limits. The 
Commission's approach, historically, to exercising its statutory 
position limits authority has been to set or order limits 
prophylactically to deter all forms of manipulation and to diminish, 
eliminate, or prevent excessive speculation.\715\ It has done so 
through regulations comprised of three primary components: (1) The 
level of the limits, which set a threshold that restricts the number of 
speculative positions that a person may hold in the spot-month, in any 
individual month, and in all months combined; (2) the standards for 
what constitute bona fide hedging versus speculative transactions, as 
well as other exemptions; and (3) the accounts and positions a person 
must aggregate for the purpose of determining compliance with the 
position limit levels. These rules now reside in part 150 of the 
Commission's regulations.\716\ The rules proposed herein would amend 
part 150 and make certain conforming amendments to related reporting 
requirements in parts 15, 17 and 19. They would do so in a manner that 
represents an extension of the Commission's historical approach towards 
the first two components: limit levels and exemptions. The third 
component, aggregation, is addressed in a separate Commission 
rulemaking.\717\
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    \714\ See Dodd-Frank Act sections 735(b) (amending CEA section 
5(d)(5)) and 733 (adding CEA section 5h, subsection (f)(6) of which 
specifies SEF's core principle obligation with respect to position 
limitations or accountability).
    \715\ See, e.g., 46 FR 50938, 50940, Oct. 16, 1981. In this 
release adopting Sec.  1.61, the Commission articulated its 
interpretation that the CEA authorized prophylactic speculative 
position limits. One year later, Congress enacted the Futures 
Trading Act of 1982, Public Law 97-444, 96 Stat. 2294, 2299-
2300(1982), which, inter alia, amended the CEA to ``clarify and 
strengthen the Commission's'' position limits authority. S. Rep. 97-
384, at 44 (1982). Congress enacted this strengthening amendment 
with awareness of the Commission's prophylactic interpretation and 
approach, and after rejecting amendments that would have 
circumscribed the Commission's authority. See, e.g., Futures Trading 
Act of 1982: Hearings on S. 2109 before the S. Subcomm. on 
Agricultural Research, 97th Cong. 28, 29, 44-45, 337, 340-45 (1982) 
(oral and written statements of Commission Chair Phillip McBride 
Johnson and Commodity Exchange Executive Vice Chair Lee Berendt 
concerning, inter alia, the Commission's omnibus approach to 
position limits); S. Rep. 97-384, at 44-45, 79 (discussing rejected 
amendments).
    \716\ As discussed above, the District Court for the District of 
Columbia vacated part 151 of the Commission's regulations, which 
would have replaced part 150. As a result, part 150 remains in 
effect.
    \717\ See Aggregation NPRM.
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i. Statutory Mandate To Consider Costs and Benefits
    CEA section 15(a) \718\ requires the Commission to consider the 
costs and benefits of its actions before promulgating a regulation 
under the CEA or issuing certain orders. CEA section 15(a) further 
specifies that the costs and benefits 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; (4) sound 
risk management practices; and (5) other public interest 
considerations.\719\
---------------------------------------------------------------------------

    \718\ 7 U.S.C. 19(a).
    \719\ In ICI v. CFTC, 2013 WL 3185090, at *8 (D.C. Cir. 2013), 
the United States Court of Appeals for the D.C. Circuit held that 
CEA section 15(a) imposes no duty on the Commission to conduct a 
quantitative economic analysis: ``Where Congress has required 
```rigorous, quantitative economic analysis,''' it has made that 
requirement clear in the agency's statute, but it imposed no such 
requirement here [in the CEA].'' Id. (citation omitted).
---------------------------------------------------------------------------

    The Commission considers the costs and benefits resulting from its 
discretionary determinations with respect to the CEA section 15(a) 
factors.
    Accordingly, the discussion that follows identifies, and considers 
against the five CEA section 15(a) factors, benefits and costs to 
market participants and the public that the Commission expects to flow 
from these proposed rules relative to the statutory requirements of the 
CEA and the Commission's regulations now in effect. The Commission has 
attempted to quantify the costs and benefits of these regulations where 
feasible. Where quantification is not feasible the Commission 
identifies and considers costs and benefits qualitatively.
    Beyond specific questions interspersed throughout its discussion, 
the Commission generally requests comment on all aspects of its 
consideration of costs and benefits, including: identification and 
assessment of any costs and benefits not discussed therein; data and 
any other information to assist or otherwise inform the Commission's 
ability to quantify or qualify the benefits and costs of the proposed 
rules; and, substantiating data, statistics, and any other information 
to support positions posited by commenters with respect to the 
Commission's consideration of costs and benefits.
    The following consideration of benefits and costs is generally 
organized according to the following rules proposed in this release: 
definitions (Sec.  150.1),\720\ federal position limits (Sec.  150.2), 
exemptions to limits (Sec.  150.3), position limits set by DCMs and 
SEFs (Sec.  150.5), anticipatory hedging requirements (Sec.  150.7), 
and reporting requirements (Sec.  19.00). For each rule, the Commission 
summarizes the proposed rule and considers the benefits and costs 
expected to result from it.\721\ The Commission then considers the 
benefits and costs of the proposed rules collectively in light of the 
five public

[[Page 75761]]

interest considerations of CEA section 15(a).
---------------------------------------------------------------------------

    \720\ Many of the revised or new definitions do not 
substantively affect the Commission's considerations of costs and 
benefits on their own merit, but are considered in conjunction with 
the sections of the rule that implement them.
    \721\ The proposed rules also include amendments to 17 CFR parts 
15 and 17, as discussed supra. The Commission preliminarily believes 
these amendments are not substantive in nature and do not have cost 
or benefit implications. The Commission welcomes comment on any 
potential costs or benefits of the changes to parts 15 and 17.
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2. Section 150.1--Definitions
    Currently, Sec.  150.1 defines terms for operation within the 
various rules that comprise part 150. As described above, the 
Commission proposes formatting, organizational, and other non-
substantive amendments to these definitional provisions that, subject 
to consideration of any relevant comments, it does not view as having 
benefit or cost implications.\722\ But, with respect to a number of 
definitions, the Commission proposes substantive amendments and 
additions. With the exception of the term ``bona fide hedging 
position,'' for which the benefits and costs of the proposed Sec.  
150.1 definition are considered in the subsection directly below, any 
benefits and costs attributable to substantive definitional changes and 
additions proposed in Sec.  150.1 are considered in the discussion of 
the rule in which such new or amended terms would be operational.
---------------------------------------------------------------------------

    \722\ See supra discussion of proposed amendments to Sec.  
150.1.
---------------------------------------------------------------------------

i. Bona Fide Hedging
    Proposed Sec.  150.1 would include a definition of the term ``bona 
fide hedging positions''--which operates to distinguish hedging 
positions from those that are speculative and thus subject to position 
limits, both federal and exchange-set, unless otherwise exempted by the 
Commission. Hedgers present a lesser risk of burdening interstate 
commerce as described in CEA section 4a because their positions are 
offset in the physical market. CEA section 4a(c) has long directed that 
no Commission rule, regulation or order establishing position limits 
under CEA section 4a(a) apply to bona fide hedging as defined by the 
Commission.\723\ The proposed definition would replace the definition 
now contained in Sec.  1.3(z) to implement that statutory 
directive.\724\
---------------------------------------------------------------------------

    \723\ CEA section 4a(c)(1); 7 U.S.C. 6a(c)(1).
    \724\ Currently, 17 CFR 1.3(z), defines the term ``bona fide 
hedging transactions and positions.'' Originally adopted by the 
newly formed Commission in 1975, a revised version of Sec.  1.3(z) 
took effect two years later. This 1977 revision largely forms the 
basis of the current definition of bona fide hedging. A history of 
the definition of bona fide hedging is presented above. With the 
adoption of the proposed definition of ``bona fide hedging 
positions'' in Sec.  150.1, Sec.  1.3(z) would be deleted.
---------------------------------------------------------------------------

    Generally, the current definition of bona fide hedging in Sec.  
1.3(z) advises that a position should ``normally represent a substitute 
for . . . positions to be taken at a later time in a physical marketing 
channel'' and requires such position to be ``economically appropriate 
to the reduction of risks in the conduct of a commercial enterprise'' 
where the risks arise from the potential change in value of assets, 
liabilities, or services.\725\ Such bona fide hedges must have a 
purpose ``to offset price risks incidental to commercial cash or spot 
operations'' and must be ``established and liquidated in an orderly 
manner in accordance with sound commercial practices.''
---------------------------------------------------------------------------

    \725\ 17 CFR 1.3(z)(1). The Commission cautions that the e-CFR 
2012 version of this provision reflects changes made by the now-
vacated Part 151 rule.
---------------------------------------------------------------------------

    This general definition thus provides general components of the 
type of position that constitute a bona fide hedge position. The 
criterion that such a position should ``normally represent a substitute 
for . . . positions to be taken at a later time in a physical marketing 
channel'' has been deemed the ``temporary substitute'' criterion. The 
requirement that such position be ``economically appropriate to the 
reduction of risks in the conduct of a commercial enterprise'' is 
referred to as the ``economically appropriate'' test. The criterion 
that hedged risks arise from the potential change in value of assets, 
liabilities, or services is commonly known as the ``change in value'' 
requirement or test. The phrase ``price risks incidental to commercial 
cash or spot operations'' has been termed the ``incidental test.'' The 
criterion that hedges must be ``established and liquidated in an 
orderly manner'' is known as the ``orderly trading requirement.'' \726\
---------------------------------------------------------------------------

    \726\ See supra for additional explanation of these terms.
---------------------------------------------------------------------------

    The current definition also describes a non-exclusive list of 
transactions that satisfy the definitional criteria and therefore 
qualify as bona fide hedges; these ``enumerated hedging transactions'' 
are located in Sec.  1.3(z)(2). For those transactions that may fit the 
definition but are not listed in Sec.  1.3(z)(2), current Sec.  
1.3(z)(3) provides a means of requesting relief from the Commission.
    The Dodd-Frank Act amended the CEA in ways that require the 
Commission to adjust its current bona fide hedging definition. 
Specifically, the Dodd-Frank Act added section 4a(c)(2) of the Act, 
which the Commission interprets as directing the Commission to narrow 
the bona fide hedging position definition for physical commodities from 
the definition found in current Sec.  1.3(z)(1).\727\
    Dodd-Frank also provided direction regarding the bona fide hedging 
criteria for swaps contracts newly under the Commission's jurisdiction. 
Specifically, new CEA sections 4a(a)(5) and (6) require the Commission 
to impose limits on an aggregate basis across all economically 
equivalent contracts, excepting in both cases bona fide hedging 
positions. CEA section 4a(c)(2)(B) describes which swap offset 
positions may qualify as bona fide hedges. Finally, new CEA section 
4a(a)(7) provides the Commission with authority to grant exemptive 
relief from position limits. The Commission proposes to amend its 
definition of bona fide hedging under the authority and direction of 
amended CEA section 4a(c) and the other provisions added by the Dodd-
Frank Act. To the extent a change in the definition represents a 
statutory requirement, it is not discretionary and thus not subject to 
CEA section 15(a).
ii. Rule Summary
    Like current Sec.  1.3(z), the proposed Sec.  150.1 bona fide 
hedging definition employs a basic organizational model of stating 
general, broadly applicable requirements for a hedge to qualify as bona 
fide,\728\ and then specifying certain particular (``enumerated'') 
hedges that are deemed to meet the general requirements.\729\ 
Generally, the proposed definition is built around the same criteria as 
are currently found in Sec.  1.3(z), including the temporary substitute 
and economically appropriate criteria. Thus, the proposed definition is 
substantially similar to the current definition, with limited changes 
to accommodate altered statutory requirements regarding bona fide 
hedging as well as accomplish discretionary improvements. The proposed 
definition also reflects organizational changes to better accommodate 
the extension of speculative position limits to all economically 
equivalent contracts across all trading venues. To the extent the 
proposed definition carries over requirements currently resident in the 
Sec.  1.3(z) definition, it does not represent a change from current 
practice and therefore should not pose incremental benefits or costs.
---------------------------------------------------------------------------

    \728\ Compare 17 CFR 1.3(z)(1) (``General Definition'') with the 
proposed Sec.  150.1 definition of bona fide hedging opening 
sentence and paragraphs (1) and (2) (respectively, ``Hedges of an 
excluded commodity'' and ``Hedges of a physical commodity'').
    \729\ Compare 17 CFR 1.3(z)(2)(``Enumerated Hedging 
Transactions'') with the proposed Sec.  150.1 definition of bona 
fide hedging paragraphs (3) and (4) (respectively, ``Enumerated 
hedging positions'' and ``Other enumerated hedging positions'').
---------------------------------------------------------------------------

    The proposed definition has been relocated from Sec.  1.3(z) to 
Sec.  150.1 in order to facilitate reference between sections of part 
150. The proposed

[[Page 75762]]

definition of bona fide hedging position is also re-organized into six 
sections, starting with an opening paragraph describing the general 
requirements for all hedges followed by five numbered paragraphs. 
Paragraph (1) of the proposed definition describes requirements for 
hedges of an excluded commodity,\730\ including guidance on risk 
management exemptions that may be adopted by an exchange. Paragraph (2) 
describes requirements for hedges of a physical commodity. Paragraphs 
(3) and (4) describe enumerated exemptions. Paragraph (5) describes 
cross-commodity hedges.
---------------------------------------------------------------------------

    \730\ An ``excluded commodity'' is defined in CEA section 
1a(19). The definition includes financial products such as interest 
rates, exchange rates, currencies, securities, credit risks, and 
debt instruments as well as financial events or occurrences.
---------------------------------------------------------------------------

    The following discussion is meant to highlight the essential 
components of each section of the proposed definition. A full 
discussion of the history and policy rationale of each section may be 
found supra.\731\
---------------------------------------------------------------------------

    \731\ See discussion above.
---------------------------------------------------------------------------

a. Opening Paragraph
    The opening paragraph of the proposed definition incorporates the 
incidental test and the orderly trading requirement, both found in the 
current Sec.  1.3(z)(1). The Commission intends the proposed incidental 
test to be a requirement that the risks offset by a commodity 
derivative contract hedging position must arise from commercial cash 
market activities. The Commission believes this requirement is 
consistent with the statutory guidance to define bona fide hedging 
positions to permit the hedging of ``legitimate anticipated business 
needs.'' \732\ The incidental test allows the Commission to distinguish 
between hedging and speculate activities by defining the former as 
requiring a legitimate business need.
---------------------------------------------------------------------------

    \732\ 7 U.S.C. 6a(c)(1).
---------------------------------------------------------------------------

    The proposed orderly trading requirement is intended to impose on 
bona fide hedgers the duty to enter and exit the market carefully in 
the ordinary course of business. The requirement is also intended to 
avoid to the extent possible the potential for significant market 
impact in establishing or liquidating a position in excess of position 
limits. This requirement is particularly important because, as 
discussed below, the Commission proposes to set the initial levels of 
position limits at the outer bound of the range of levels of limits 
that may serve to balance the statutory policy objectives in CEA 
section 4a(a)(3) for limit levels. As such, bona fide hedgers likely 
would only need an exemption for very large positions. The orderly 
trading requirement is intended to prevent disorderly trading, 
practices, or conduct from bona fide hedgers by encouraging market 
participants to assess market conditions and consider how the trading 
practices and conduct affect the orderly execution of transactions when 
establishing or liquidating a position greater than the applicable 
position limit.\733\
---------------------------------------------------------------------------

    \733\ As discussed supra, the Commission believes that negligent 
trading, practices, or conduct should be a sufficient basis for the 
Commission to deny or revoke a bona fide hedging exemption.
---------------------------------------------------------------------------

b. Paragraph (1) Hedges of an Excluded Commodity
    The first paragraph in the proposed definition addresses hedging of 
an excluded commodity; it emanates from the Commission's discretionary 
authority to impose limits on intangible commodities. In general, in 
addition to the requirements in the opening paragraph, proposed 
paragraph (1) requires the position meet the economically appropriate 
test and is either enumerated in paragraphs (3), (4), or (5) of the 
proposed definition or is recognized by a DCM or SEF as a bona fide 
hedge pursuant to exchange rules. The temporary substitute and change 
in value criteria are not included in the proposed paragraph (1), as 
these requirements are inappropriate in the context of certain excluded 
commodities that lack a physical marketing channel.\734\
---------------------------------------------------------------------------

    \734\ The Commission notes that DCMs currently incorporate the 
temporary substitute and change in value criteria when the 
contract's underlying market has physical delivery obligations. The 
proposal would not limit their ability to continue to do so when 
appropriate.
---------------------------------------------------------------------------

    Exclusively addressed to excluded commodity hedging, paragraph (1) 
is relevant only for the purposes of exchange-set limits under Sec.  
150.5 as proposed for amendment. As the Commission has determined to 
focus the application of federal speculative position limits on 28 
physical commodities and their related physical-delivery and cash-
settled referenced contracts, this paragraph does not affect the 
imposition of federal speculative position limits and exemptions 
thereto.
c. Paragraph (2) Hedges of a Physical Commodity
    Proposed paragraph (2) of the definition enumerates what 
constitutes a hedge for physical commodities, including physical 
agricultural and exempt commodities both subject and not subject to 
federal speculative position limits. In addition to the requirements in 
the opening paragraph, proposed paragraph (2) requires that the 
position satisfy the temporary substitute test, the economically 
appropriate test, and the change-in-value test. These tests have been 
incorporated into the revised statutory definition in CEA section 
4a(c)(2) and essentially mirror the current definition in Sec.  
1.3(z).\735\ The proposed paragraph (2) also requires the position 
either be enumerated in proposed paragraphs (3), (4), or (5) or be a 
pass-through swap offset or pass-through swap position as defined in 
paragraph (2)(ii).
---------------------------------------------------------------------------

    \735\ With respect to the temporary substitute test, the word 
``normally'' has been removed in the proposed definition in order to 
conform with the stricter statutory standard in new CEA section 
4a(c)(2). See discussion above.
---------------------------------------------------------------------------

    Proposed paragraph (2) of the definition applies generally to 
derivative positions that hedge a physical commodity and as such 
includes swaps. Thus, the paragraph responds to the statutory 
requirement in CEA section 4a(a)(5) that the Commission establish 
limits on economically equivalent contracts, including swaps, excluding 
bona fide hedging positions. The definition of a pass-through swap 
offset position incorporates the definition in new CEA section 
4a(c)(2)(B)(i), with the inclusion of the requirement that such 
position not be maintained during the lesser of the last five days of 
trading or the time period for the spot month for the physical-delivery 
contract.
d. Paragraphs (3) and (4) Enumerated Hedging Positions
    Proposed paragraph (3) lists specific positions that would fit 
under the definition of a bona fide hedging position, including hedges 
of inventory, cash commodity purchase and sales contracts, unfilled 
anticipated requirements, and hedges by agents.\736\ Each of these 
positions was described in Sec.  1.3(z), with the exception of 
paragraph (iii)(B), which was added in response to the petition 
submitted to the Commission by the Working Group of Commercial Energy 
Firms.\737\
---------------------------------------------------------------------------

    \736\ A detailed description of each enumerated position can be 
found supra.
    \737\ See discussion above.
---------------------------------------------------------------------------

    Proposed paragraph (4) provides other enumerated hedging 
exemptions, including hedges of unanticipated production, offsetting 
unfixed price cash commodity sales and purchases, anticipated 
royalties, and services, all of which are subject to the ``five-day 
rule.'' The ``five-day rule'' is a provision in many of the enumerated 
hedging positions that prohibits a trader from maintaining the 
positions in any physical-delivery commodity derivative

[[Page 75763]]

contract during the lesser of the last five days of trading or the time 
period for the spot month in such physical-delivery contract.\738\ 
Because each exemption shares this provision, the Commission is 
proposing to reorganize such exemptions into proposed paragraph (4) for 
administrative efficiency.
---------------------------------------------------------------------------

    \738\ As discussed above, the purpose of the five-day rule is to 
protect the integrity of the delivery and settlement processes in 
physical-delivery contracts. Without this rule, high concentrations 
of exempted positions can distort the markets, impairing price 
discovery while potentially having an adverse impact on efforts to 
deter all forms of market manipulation and diminish excessive 
speculation.
---------------------------------------------------------------------------

    Of the enumerated hedges in proposed paragraphs (4)(i) and (ii) are 
currently in Sec.  1.3(z) and paragraph (4)(iv) codifies a hedge that 
has historically been recognized by the Commission. Paragraph (4)(iii) 
proposes a royalties exemption not now specified in Sec.  1.3(z).
e. Paragraph (5) cross-commodity hedges
    Proposed paragraph (5) describes positions that would qualify as 
cross-commodity bona fide hedges. The Commission has long recognized 
cross-commodity hedging, stating in 1977 that such positions would be 
covered under the general provisions of Sec.  1.3(z)(2).
    The definition in proposed paragraph (5) would condition cross-
commodity hedging on: (i) whether the fluctuations in value of the 
position in the commodity derivative contract are ``substantially 
related'' to the fluctuations in value of the actual or anticipated 
cash position or pass-through swap; and (ii) the five-day rule being 
applied to positions in any physical-delivery commodity derivative 
contract. The second condition, i.e. the application of the five-day 
rule, would help to protect the integrity of the delivery process in 
the physical-delivery contract but would not apply to cash-settled 
contract positions.\739\
---------------------------------------------------------------------------

    \739\ See discussion above.
---------------------------------------------------------------------------

iii. Benefits and Costs
    Elements of the proposed definition that represent discretionary, 
substantive modifications to the required manner in which bona fide 
hedging have been defined under Sec.  1.3(z) include the following: 
\740\ (i) Proposing requirements for hedges in an excluded commodity in 
proposed paragraph (1); (ii) adding the five-day rule into the 
statutory definition of pass-through swap as described in paragraph 
(2)(ii)(A); (iii) applying the definition in proposed paragraph (2) to 
positions in economically equivalent contracts in a physical commodity; 
\741\ (iv) expanding paragraph (3)(III)(b) to incorporate hedges 
encouraged by a public utility commission; (v) expanding paragraph 
(4)(ii) to include offsetting unfixed-price cash commodity sales and 
purchases that are basis different contracts in the same commodity, 
regardless of whether the contracts are in the same calendar month; 
(vi) adding paragraph (iii) to proposed paragraph (4) to enumerate 
anticipated royalty hedges; and (vii) enumerating cross-commodity 
hedges as a standalone provision in paragraph (5).
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    \740\ The Commission notes that the relocation of the definition 
from Sec.  1.3(z) to part 150 is also discretionary. As noted above, 
the placement is intended to facilitate compliance with the other 
sections of part 150; the Commission does not believe, however, that 
this action has substantive cost or benefit implications. Also, the 
proposed definition incorporates and references elements of non-
binding guidance not encompassed by CEA section 15(a).
    \741\ As discussed supra, CEA section 4a(a)(5) requires that the 
Commission set speculative limits on the amount of positions, 
``other than bona fide hedging positions . . . held by any person 
with respects to swaps that are economically equivalent'' to futures 
and options. 7 U.S.C. 6a(a)(5). Subject to CEA section 4a(a)(2), the 
Commission is exercising its discretion in defining bona fide 
hedging in economically equivalent contracts in the same manner as 
for futures and options in physical commodities. 7 U.S.C. 6a(a)(2).
---------------------------------------------------------------------------

a. Benefits
    The Commission proposes the definition for excluded commodities in 
paragraph (1) in order to provide a consistent definition of bona fide 
hedging--i.e., a definition that incorporates the economically 
appropriate test--for all commodities under the Commission's 
jurisdiction. The addition of paragraph (1) would provide exchanges 
with a definition for bona fide hedging designed to provide a level of 
assurance that the Commission's policy objectives regarding bona fide 
hedging are met at the exchange level as well as at the federal level, 
and for excluded commodities as well as agricultural and exempt 
commodities.
    The Commission believes that the additions to the definition of 
bona fide hedging proposed in this release provide additional necessary 
relief to bona fide hedgers. This relief, in turn, will help to ensure 
that market participants with positions hedging legitimate business 
needs are properly recognized as hedgers under the Commission's 
speculative position limits regime. Thus, the Commission anticipates 
that the addition of the enumerated position for anticipated royalties 
and the expansion of the enumerated unfilled anticipated requirements 
position provide additional means for obtaining a hedge exemption by 
recognizing the legitimate business need in each position. The safe 
harbor proposed in paragraph (5) is expected to provide clarity and 
promote regulatory certainty for entities that use cross-commodity 
hedging strategies. Further, the addition of the five-day rule to the 
hedging definition for pass-through swaps helps the Commission to 
ensure the integrity of the delivery process in the physical-delivery 
contract and as a result to accomplish to the maximum extent 
practicable the factors in CEA section 4a(a)(3). Finally, the 
Commission believes using the same bona fide hedging exemptions in 
economically equivalent contracts may facilitate administrative 
efficiency by avoiding the need for market participants to manage and 
apply different definitional criteria across multiple products and 
trading venues.\742\ The Commission requests comment on its 
consideration of the benefits of the proposed definition of bona fide 
hedging. Has the Commission misidentified any of the benefits of the 
proposed rule? Are there additional benefits the Commission ought to 
consider regarding the proposed definition of bona fide hedging? Why or 
why not?
---------------------------------------------------------------------------

    \742\ Further, using the same exemptions in economically 
equivalent contracts is consistent with the approach of the Dodd-
Frank Act section 737(a) amendment requiring that the Commission 
establish limits for economically equivalent swap positions and 
across trading venues, including direct-access linked FBOT 
contracts. See 7 U.S.C. 6a(a)(5)-(6).
---------------------------------------------------------------------------

b. Costs
    The Commission anticipates that there will be some small additional 
costs associated with the proposed definition.
    Entities may incur costs to the extent the proposed definition of a 
bona fide hedging position in an excluded commodity requires an 
exchange to adjust its policies for bona fide hedging exemptions or a 
market participant to adjust its trading strategies for what is and is 
not a bona fide hedge in an excluded commodity. The Commission expects 
such costs to be negligible, as the definition is substantially the 
same as the current definition under Sec.  1.3(z). Costs for exchanges 
are also considered in the section of this release that discusses the 
proposed amendments to Sec.  150.5.
    In general, under other aspects of the Commission's proposed 
definition, market participants may incur costs to determine whether 
their positions fall under one of the new or expanded enumerated 
positions. In the event a position does not fit under any of the 
enumerated positions, market

[[Page 75764]]

participants may incur costs associated with filing for exemptive 
relief as described in the section discussing the costs of proposed 
Sec.  150.3 or in altering speculative trading strategies as discussed 
above. As trading strategies are proprietary, and the determinations 
made by individual entities present a burden that is highly 
idiosyncratic, it is not reasonably feasible for the Commission to 
estimate the value of the burden imposed.
c. Request for Comment
    The Commission requests comment on its consideration of the costs 
of the proposed definition of bona fide hedging position. Are there 
additional costs related to the Commission's discretionary actions that 
the Commission should consider? Has the Commission misidentified any 
costs? Commenters are encouraged to submit any data that the Commission 
should consider in evaluating the costs of the proposed definition.
d. Consideration of Alternatives
    The Commission recognizes that alternatives exist to discretionary 
elements of the definition of bona fide hedging positions proposed 
herein. The Commission requests comments on whether an alternative to 
what is proposed would result in a superior benefit-cost profile, with 
support for any such position provided.
3. Section 150.2--Limits
i. Rule Summary
    As previously discussed, the Commission interprets CEA section 
4a(a)(2) to mandate that it establish speculative position limits for 
all agricultural and exempt physical commodity derivative 
contracts.\743\ The Commission currently sets and enforces speculative 
position limits for futures and futures-equivalent options contracts on 
nine agricultural products. Specifically, current Sec.  150.2 provides 
``[n]o 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'' enumerated spot, single-month, and all-
month levels for nine specified contracts.\744\ These proposed 
amendments to Sec.  150.2 would expand the scope of federal position 
limits regulation in three chief ways: (1) specify limits on 19 
contracts in addition to the nine existing legacy contracts (i.e., a 
total of 28); (2) extend the application of these limits beyond futures 
and futures-equivalent options to all commodity derivative interests, 
including swaps; and (3) extend the application of these limits across 
trading venues to all economically equivalent contracts that are based 
on the same underlying commodity. In addition, the proposed rule would 
provide a methodology and procedures for implementing and applying the 
expanded limits.
---------------------------------------------------------------------------

    \743\ See supra discussion of the Commission's interpretation of 
this mandate.
    \744\ These contracts are Chicago Board of Trade corn and mini-
corn, oats, soybeans and mini-soybeans, wheat and mini-wheat, 
soybean oil, and soybean meal; Minneapolis Grain Exchange hard red 
spring wheat; ICE Futures U.S. cotton No. 2; and Kansas City Board 
of Trade hard winter wheat.
---------------------------------------------------------------------------

    The Commission proposes to amend Sec.  150.2 to impose speculative 
position limits as mandated by Congress in accordance with the 
statutory bounds that define its discretion in doing so. First, 
pursuant to CEA section 4a(a)(5) the Commission must concurrently 
impose position limits on swaps that are economically equivalent to the 
agricultural and exempt commodity derivatives for which position limits 
are mandated in section 4a(a)(2). Second, CEA section 4a(a)(3) requires 
that the Commission appropriately set limit levels mandated under 
section 4a(a)(2) that ``to the maximum extent practicable, in its 
discretion,'' accomplish four specific objectives.\745\ Third, CEA 
section 4a(a)(2)(C) requires that in setting limits mandated under 
section 4a(a)(2)(A), the ``Commission shall strive to ensure that 
trading on foreign boards of trade in the same commodity will be 
subject to comparable limits and that any limits . . . imposed . . . 
will not cause price discovery in the commodity to shift to trading on 
the foreign boards of trade.'' Key elements of the proposed rule are 
summarized below.\746\
---------------------------------------------------------------------------

    \745\ These objectives are to: (1) ``diminish, eliminate, or 
prevent excessive speculation;'' (2) ``deter and prevent market 
manipulation, squeezes, and corners;'' (3) ``ensure sufficient 
market liquidity for bona fide hedgers;'' and (4) ``ensure that the 
price discovery function of the underlying market is not 
disrupted.'' 7 U.S.C. 6a(a)(3).
    \746\ For a more detailed description, see discussion above.
---------------------------------------------------------------------------

    Generally, proposed Sec.  150.2 would limit the size of speculative 
positions,\747\ i.e., prohibit any person from holding or controlling 
net long/short positions above certain specified spot month, single 
month, and all-months-combined position limits. These position limits 
would reach: (1) 28 ``core referenced futures contracts,'' \748\ 
representing an expansion of 19 contracts beyond the 9 legacy 
agricultural contracts identified currently in Sec.  150.2; \749\ (2) a 
newly defined category of ``referenced contracts'' (as defined in 
proposed Sec.  150.1); \750\ and (3) across all trading venues to all 
economically equivalent contracts that are based on the same underlying 
commodity.
---------------------------------------------------------------------------

    \747\ Proposed Sec.  150.1 would include a consistent definition 
of the term ``speculative position limits.''
    \748\ Proposed Sec.  150.1 also would define the term ``core 
referenced futures contract'' by reference to ``a futures contract 
that is listed in Sec.  150.2(d).''
    \749\ Specifically, in addition to the existing 9 legacy 
agricultural contracts now within Sec.  150.2--i.e., Chicago Board 
of Trade corn, oats, soybeans, soybean oil, soybean meal, and wheat; 
Minneapolis Grain Exchange hard red spring wheat; ICE Futures U.S. 
cotton No. 2; and Kansas City Board of Trade hard winterwheat--
proposed Sec.  150.2 would expand the list of core referenced 
futures contracts to capture the following additional agricultural, 
energy, and metal contracts: Chicago Board of Trade Rough Rice; ICE 
Futures U.S. Cocoa, Coffee C, FCOJ-A, Sugar No. 11 and Sugar No. 16; 
Chicago Mercantile Exchange Feeder Cattle, Lean Hog, Live Cattle and 
Class III Milk; Commodity Exchange, Inc., Gold, Silver and Copper; 
and New York Mercantile Exchange Palladium, Platinum, Light Sweet 
Crude Oil, NY Harbor ULSD, RBOB Gasoline and Henry Hub Natural Gas.
    \750\ This would result in the application of prescribed 
position limits to a number of contract types with prices that are 
or should be closely correlated to the prices of the 28 core 
referenced futures contracts--i.e., economically equivalent 
contracts--including: (1) ``look-alike'' contracts (i.e., those that 
settle off of the core referenced futures contract and contracts 
that are based on the same commodity for the same delivery location 
as the core referenced futures contract); (2) contracts based on an 
index comprised of one or more prices for the same delivery location 
and in the same or substantially the same commodity underlying a 
core referenced futures contract; and (3) inter-commodity spreads 
with two components, one or both of which are referenced contracts. 
The proposed ``reference contract'' definition would exclude, 
however, a guarantee of a swap.
---------------------------------------------------------------------------

a. Sec.  150.2(a) Spot-Month Speculative Position Limits
    In order to implement the statutory directive in CEA section 
4a(a)(3)(A), proposed Sec.  150.2(a) would prohibit any person from 
holding or controlling positions in referenced contracts in the spot 
month in excess of the level specified by the Commission for referenced 
contracts.\751\ Proposed Sec.  150.2(a) would require, in the 
Commission's discretion, that a trader's positions, net long or net 
short, in the physical-delivery referenced contract and cash-settled 
referenced contract be

[[Page 75765]]

calculated separately under the spot month position limits fixed by the 
Commission for each. As a result, a trader could hold positions up to 
the applicable spot month limit in the physical-delivery contracts, as 
well as positions up to the applicable spot month limit in cash-settled 
contracts (i.e., cash-settled futures and swaps), but would not be able 
to net across physical-delivery and cash-settled contracts in the spot 
month.
---------------------------------------------------------------------------

    \751\ As discussed supra, the Commission proposes to adopt a 
streamlined, amended definition of ``spot month'' in proposed Sec.  
150.1. The term would be defined as the trading period immediately 
preceding the delivery period for a physical-delivery futures 
contract and cash-settled swaps and futures contracts that are 
linked to the physical-delivery contract. The definition proposes 
similar but slightly different language for cash-settled contracts, 
providing for the spot month to be the earlier of the period in 
which the underlying cash-settlement price is calculated or the 
close of trading on the trading day preceding the third-to-last 
trading day, until the contract cash-settlement price is determined. 
For more details, see discussion above.
---------------------------------------------------------------------------

b. Sec.  150.2(b) Single-Month and All-Months-Combined Speculative 
Position Limits
    Proposed Sec.  150.2(b) would provide that no person may hold or 
control positions, net long or net short, in referenced contracts in a 
single-month or in all-months-combined in excess of the levels 
specified by the Commission. Proposed Sec.  150.2(b) would require 
netting all positions in referenced contracts (regardless of whether 
such referenced contracts are physical-delivery or cash-settled) when 
calculating a trader's positions for purposes of the proposed single-
month or all-months-combined position limits (collectively ``non-spot-
month'' limits).\752\
---------------------------------------------------------------------------

    \752\ The Commission proposes to use the same level for single-
month and all-months-combined limits, and refers to those limits as 
the ``non-spot-month limits.'' The spot month and any single month 
refer to those periods of the core referenced futures contract.
---------------------------------------------------------------------------

c. Sec.  150.2(d) Core Referenced Futures Contracts
    To be clear, the statutory mandate in Dodd-Frank section 4a(a)(2) 
applies on its face to all physical commodity contracts. The Commission 
is nevertheless proposing, initially, to apply speculative position 
limits to referenced contracts that are based on 28 core referenced 
futures contract listed in proposed Sec.  150.2(d). As defined in 
proposed Sec.  150.1, referenced contracts are futures, options, or 
swaps contracts that are directly or indirectly linked to a core 
referenced futures contract or the commodity underlying a core 
referenced futures contract.\753\
---------------------------------------------------------------------------

    \753\ As discussed above, the definition of referenced contract 
excludes any guarantee of a swap, basis contracts, and commodity 
index contracts.
---------------------------------------------------------------------------

    Proposed Sec.  150.2(d) lists the 28 core referenced futures 
contracts on which the Commission is initially proposing to establish 
federal speculative position limits. The list represents a significant 
expansion of federal speculative position limits from the current list 
of nine agricultural contracts under current part 150.\754\ The 
Commission has selected these important food, energy, and metals 
contracts on the basis that such contracts (i) have high levels of open 
interest and significant notional value and/or (ii) serve as a 
reference price for a significant number of cash market transactions. 
Thus, the Commission is proposing limits to commence the expansion of 
its federal position limit regime with those commodity derivative 
contracts that it believes are likely to have the greatest impact on 
interstate commerce. Because the mandate applies to all physical 
commodity contracts, the Commission intends through supplemental 
rulemaking to establish limits for all other physical commodity 
contracts. Given limited Commission resources, it cannot do so in this 
initial rulemaking.
---------------------------------------------------------------------------

    \754\ 17 CFR 150.2.
---------------------------------------------------------------------------

    As discussed above,\755\ the Commission calculated the notional 
value of open interest (delta-adjusted) and open interest (delta-
adjusted) for all futures, futures options, and significant price 
discovery contracts as of December 31, 2012 in all agricultural and 
exempt commodities in order to select the list of 28 core referenced 
futures contracts in proposed Sec.  150.2(d). The Commission selected 
commodities in which the derivative contracts had largest notional 
value of open interest and open interest for three categories: 
agricultural, energy, and metals. The Commission then designated the 
benchmark futures contracts for each commodity as the core referenced 
futures contracts for which position limits would be established. 
Proposed Sec.  150.2(d) lists 19 core referenced futures contracts for 
agricultural commodities, four core referenced futures contracts for 
energy commodities, and five core referenced futures contracts for 
metals commodities.
---------------------------------------------------------------------------

    \755\ See discussion above.
---------------------------------------------------------------------------

d. Sec.  150.2(e) Levels of Speculative Position Limits
    The Commission proposes setting initial spot month position limit 
levels for referenced contracts at the existing DCM-set levels for the 
core referenced futures contracts. Thereafter, proposed Sec.  
150.2(e)(3) would task the Commission with recalibrating spot month 
position limit levels no less frequently than every two calendar years. 
The Commission's proposed recalibration would result in limits no 
greater than one-quarter (25 percent) of the estimated spot-month 
deliverable supply \756\ in the relevant core referenced futures 
contract. This formula is consistent with the acceptable practices in 
current Sec.  150.5, as well as the Commission's longstanding practice 
of using this measure of deliverable supply to evaluate whether DCM-set 
spot-month limits are in compliance with DCM core principles 3 and 5. 
The proposed rules separately restrict the size of positions in cash-
settled referenced contracts that would potentially benefit from a 
trader's potential distortion of the price of the underlying core 
referenced futures contract.
---------------------------------------------------------------------------

    \756\ The guidance for meeting DCM core principle 3 (as listed 
in 17 CFR part 38 app. C) specifies that, ``[t]he specified terms 
and conditions [of a futures contract], considered as a whole, 
should result in a `deliverable supply' that is sufficient to ensure 
that the contract is not susceptible to price manipulation or 
distortion. In general, the term `deliverable supply' means the 
quantity of the commodity meeting the contract's delivery 
specifications that reasonably can be expected to be readily 
available to short traders and salable by long traders at its market 
value in normal cash marketing channels . . .'' See 77 FR 36612, 
36722, Jun. 19, 2012.
---------------------------------------------------------------------------

    As proposed, each DCM would be required to supply the Commission 
with an estimated spot-month deliverable supply figure that the 
Commission would use to recalibrate spot-month position limits unless 
it decides to rely on its own estimate of deliverable supply 
instead.\757\
---------------------------------------------------------------------------

    \757\ Proposed Sec.  150.2(e)(3)(ii) would require DCMs to 
submit estimates of deliverable supply. DCM estimates of deliverable 
supplies (and the supporting data and analysis) would continue to be 
subject to Commission review.
---------------------------------------------------------------------------

    In contrast to spot-month limits, which would be set as a function 
of deliverable supply, the proposed formula for the non-spot-month 
position limits is based on total open interest for all referenced 
contracts that are aggregated with a particular core referenced 
contract. Proposed Sec.  150.2(e)(4) explains that the Commission would 
calculate non-spot-month position limit levels based on the following 
formula: 10 percent of the largest annual average open interest for the 
first 25,000 contracts and 2.5 percent of the open interest 
thereafter.\758\ As is the case with spot month limits, the Commission 
proposes to adjust single month and all-months-combined limits no less 
frequently than every two calendar years.
---------------------------------------------------------------------------

    \758\ Since 1999, the same 10 percent/2.5 percent methodology, 
now incorporated in current Sec.  150.5(c)(2), has been used to 
determine futures all-months position limits for referenced 
contracts.
---------------------------------------------------------------------------

    The Commission's proposed average open interest calculation would 
be computed for each of the past two calendar years, using either 
month-end open contracts or open contracts for each business day in the 
time period, as practical and in the Commission's discretion. 
Initially, the Commission proposes to set the levels of initial non-
spot-month limits using open interest

[[Page 75766]]

for calendar years 2011 and 2012 in futures contracts, options thereon, 
and in swaps that are significant price discovery contracts and are 
traded on exempt commercial markets. Using the 2011/2012 combined 
levels of open interest for futures contracts and for swaps that are 
significant price discovery contracts and are traded on exempt 
commercial markets will result in non-spot month position limit levels 
that are not overly restrictive at the outset; this is intended to 
facilitate the transition to the new position limits regime without 
disrupting liquidity. For example, the Commission is proposing a non-
spot-month limit for CBOT Wheat that represents the harvest from around 
2 million acres (3,125 square miles) of wheat, or 81 million bushels. 
The proposed non-spot-month limit for NYMEX WTI Light Sweet Crude Oil 
represents 109.2 million barrels of oil. The Commission believes these 
levels to be sufficiently high as to restrict excessive speculation 
without restricting the benefits of speculative activity, including 
liquidity provision for bona fide hedgers.
    After the initial non-spot-month limits are set, the Commission 
proposes subsequently to use the data reported by DCMs and SEFs 
pursuant to parts 16, 20, and/or 45 to estimate average open interest 
in referenced contracts.\759\
---------------------------------------------------------------------------

    \759\ Options listed on DCMs would be adjusted using an option 
delta reported to the Commission pursuant to 17 CFR part 16; swaps 
would be counted on a futures equivalent basis, equal to the 
economically equivalent amount of core referenced futures contracts 
reported pursuant to 17 CFR part 20 or as calculated by the 
Commission using swap data collected pursuant to 17 CFR part 45.
---------------------------------------------------------------------------

e. Sec.  150.2(f)-(g) Pre-Existing Positions and Positions on Foreign 
Boards of Trade
    The Commission proposes in new Sec.  150.2(f)(2) to exempt from 
federal non-spot-month speculative position limits any referenced 
contract position acquired by a person in good faith prior to the 
effective date of such limit, provided that the pre-existing position 
is attributed to the person if such person's position is increased 
after the effective date of such limit.\760\
---------------------------------------------------------------------------

    \760\ See also the definition of the term ``Pre-existing 
position'' incorporated in proposed Sec.  150.1 herein. Such pre-
existing positions that are in excess of the proposed position 
limits would not cause the trader to be in violation based solely on 
those positions. To the extent a trader's pre-existing positions 
would cause the trader to exceed the non-spot-month limit, the 
trader could not increase the directional position that caused the 
positions to exceed the limit until the trader reduces the positions 
to below the position limit. As such, persons who established a net 
position below the speculative limit prior to the enactment of a 
regulation would be permitted to acquire new positions, but the 
total size of the pre-existing and new positions may not exceed the 
applicable limit.
---------------------------------------------------------------------------

    Finally, proposed Sec.  150.2(g) would apply position limits to 
positions on foreign boards of trade (``FBOT''s) provided that 
positions are held in referenced contracts that settle to a referenced 
contract and that the FBOT allows direct access to its trading system 
for participants located in the United States.
ii. Benefits
    The criteria set out in CEA section 4a(a)(3)(B)--namely, that 
position limit levels (1) ``diminish, eliminate, or prevent excessive 
speculation;'' (2) ``deter and prevent market manipulation, squeezes, 
and corners;'' (3) ``ensure sufficient market liquidity for bona fide 
hedgers;'' and (4) ``ensure that the price discovery function of the 
underlying market is not disrupted''--clearly articulate objectives 
that Congress intended the Commission to accomplish, to the maximum 
extent practicable, in setting limit levels in accordance with the 
mandate to impose limits. The Commission is proposing to expand its 
speculative position limits regime to include all commodity derivative 
interests, including swaps; to impose federal limits on 19 additional 
contract markets; and to apply limits across trading venues to all 
economically equivalent contracts that are based on the same underlying 
commodity.
    In so doing, the proposed rules generally would expand the 
prophylactic protections of federal position limits to additional 
contract markets. Proposed Sec.  150.2(f) and (g) implement statutory 
directives in CEA section 4a(b)(2) and CEA section 4a(a)(6)(B), 
respectively, and are not acts of the Commission's discretion. Thus, 
the Commission is not required to consider costs and benefits of these 
provisions under CEA section 15(a). Specific discussion of the benefits 
of the other components of proposed Sec.  150.2 is below.
a. Sec.  150.2(a) Spot-Month Speculative Position Limits
    As discussed above, CEA section 4a(a)(3)(A) now directs the 
Commission to set limits on speculative positions during the spot-
month.\761\ It is during the spot-month period that concerns regarding 
certain manipulative behaviors, such as corners and squeezes, become 
most urgent.\762\ Spot-month position limits cap speculative traders' 
positions, and therefore restrict their ability to amass market power. 
In so doing, spot-month limits restrict the ability of speculators to 
engage in corners and squeezes and other forms of manipulation. They 
also prevent the potential adverse impacts of unduly large positions 
even in the absence of manipulation, thereby promoting a more orderly 
liquidation process for each contract.
---------------------------------------------------------------------------

    \761\ 7 U.S.C. 6a(a)(3)(A).
    \762\ See discussion above.
---------------------------------------------------------------------------

    The Commission has used its discretion in the manner in which it 
implements the statutorily-required spot-month position limits so as to 
achieve Congress's objectives in CEA section 4a(a)(3)(B)(ii) to prevent 
or deter market manipulation, including corners and squeezes. For 
example, the Commission has used its discretion under CEA section 
4a(a)(1) to set separate but equal limits in the spot-month for 
physical-delivery and cash-settled referenced contracts. By setting 
separate limits for physical-delivery and cash-settled referenced 
contracts, the proposed rule restricts the size of the position a 
trader may hold or control in cash-settled reference contracts, thus 
reducing the incentive of a trader to manipulate the settlement of the 
physical-delivery contract in order to benefit positions in the cash-
settled reference contract. Thus, the separate limits further enhance 
the prevention of market manipulation provided by spot-month position 
limits by reducing the potential for adverse incentives to manifest in 
manipulative action.
b. Sec.  150.2(b) Single-Month and All-Months-Combined Speculative 
Position Limits
    CEA section 4a(a)(3)(A) further directs the Commission to set 
limits on speculative positions for months other than the spot-
month.\763\ While market disruptions arising from the concentration of 
positions remain a possibility outside the spot month, the above-
mentioned concerns about corners and squeezes and other forms of 
manipulation are reduced because the potential for the same is reduced 
outside the spot-month. Accordingly, the Commission has proposed to use 
its discretion to require netting of physical-delivery and cash-settled 
referenced contracts for purposes of determining compliance with non-
spot-month limits. The Commission deems it is appropriate to provide 
traders with additional flexibility in complying with the non-spot-
months limits given their decreased risk of corners and squeezes. 
Because this additional flexibility means market participants are able 
to retain offsetting positions outside of the spot-month, liquidity 
should not be

[[Page 75767]]

impaired and price discovery should not be disrupted.
---------------------------------------------------------------------------

    \763\ 7 U.S.C. 6a(a)(3)(A).
---------------------------------------------------------------------------

c. Sec.  150.2(e) Levels of Speculative Position Limits
    The proposed methodology for determining the levels at which the 
limits are set is consistent with the Commission's longstanding 
acceptable practices for DCM-set speculative position limits. Further, 
the Commission's proposal to set initial spot-month limits at the 
current federal or DCM-set levels for each core referenced futures 
contract means that any trading activity that is compliant with the 
current position limits regime generally will continue to be compliant 
under the first two years of the proposed rule.\764\
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    \764\ The Commission notes that the CME Group submitted an 
estimate of deliverable supply that, if used by the Commission as a 
base for setting initial levels of spot month limits, would result 
in higher spot month limits than those currently proposed in 
appendix D. See discussion above for more information.
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    The proposed rule is designed to result in speculative position 
limit levels that prevent excessive speculation and deter market 
manipulation without diminishing market liquidity. Specifically, levels 
that are too low may be binding and overly restrictive, but levels that 
are too high may not adequately protect against manipulation and 
excessive speculation. The Commission believes that both standards--
i.e., spot month limits of not greater than 25 percent of deliverable 
supply and the 10 and 2.5 percent formula for non-spot-month limits--
produce levels for speculative position limits that help to ensure that 
both policy objectives--to deter market manipulation and excessively 
large speculative positions and to maintain adequate market liquidity--
are achieved to the maximum extent practicable.
    The Commission's review of the number of potentially affected 
traders indicates that the proposed rule will not significantly affect 
market liquidity. Over the last two full years (2011-2012), an average 
of fewer than 40 traders in any one of the 28 proposed markets exceeded 
just 60 percent of the level of the proposed spot-month position limit. 
An average of fewer than 10 of those traders exceeded 100 percent of 
the proposed level of the spot-month limit.\765\ In several months over 
the period, no trader exceeded the proposed level of the spot-month 
limits and some months saw a much larger number of traders with 
positions in excess of the proposed level of the spot-month limits. 
Smaller numbers were revealed when observing traders' positions in 
relation to proposed levels for non-spot-month position limits--an 
average of fewer than 10 traders exceeded 60 percent of the proposed 
all-months-combined limit. The analysis reviewed by the Commission does 
not account for hedging and other exemptions, which leads the 
Commission to believe that the number of speculative traders in excess 
of the proposed limit is even smaller. The relatively low number of 
traders that may exceed proposed limits in non-spot-months is 
indicative of the flexibility of the limit formula to account for 
changes in market participation.
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    \765\ To put this figure in context, over the same period the 
number of unique owners over at least one of the proposed limit 
levels in the 28 proposed markets was 384, while 932 unique owners 
were over 60 percent of at least one of the proposed limit levels. 
In contrast, under the large trader reporting provisions of part 17, 
there are thousands of traders with reportable positions as defined 
in Sec.  15.00(p).
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d. Request for Comment
    The Commission welcomes comment on its considerations of the 
benefits of proposed Sec.  150.2. What other benefits of the provisions 
in Sec.  150.2 should the Commission consider? Has the Commission 
accurately identified the potential benefits of the proposed rules?
iii. Costs
    The expansion of Sec.  150.2 will necessarily create some 
additional compliance costs for market participants. The Commission has 
attempted, where feasible, to reduce such burdens without compromising 
its policy objectives.
a. Sec.  150.2(a)-(b) Spot-Month, Single-Months, and All-Months-
Combined Speculative Position Limits; Other Considerations
    Notwithstanding the above analysis of potentially affected traders, 
the Commission anticipates that some market participants still may find 
it necessary to reassess and modify existing trading strategies in 
order to comply with spot- and non-spot-month position limits for the 
28 commodities with applicable federal limits, though the Commission 
believes much of these costs to be the direct result of the statutory 
mandate to impose limits. The Commission anticipates any such costs 
would be largely incurred by swaps-only entities, as futures and 
options market participants have experience with position limits, 
particularly in the spot-month, such that the costs of any strategic or 
trading changes that needed to be made may have already been incurred. 
These costs are not reasonably quantifiable by the Commission, due to 
their highly variable and entity-specific nature, and because trading 
strategies are proprietary, but to the extent an expanded position 
limits regime alters the ways a trader conducts speculative trading 
activity, such costs may be incurred.
    Broadly speaking, imposing position limits raises the concerns that 
liquidity and price discovery may be diminished, because certain market 
segments, i.e., speculative traders, are restricted. The Commission has 
endeavored to mitigate concerns about liquidity and price discovery, as 
well as costs to market participants, by expanding limits to additional 
markets incrementally in order to facilitate the transition to the 
expanded position limits regime. For example, the Commission has 
proposed to adopt current spot-month limit levels as the initial levels 
in order to ensure traders know well in advance of the effective date 
of the rule what limits will be on that date. The Commission also 
expects a large number of swaps traders to avail themselves of the pre-
existing position exemption as defined in proposed Sec.  150.3. As 
preexisting positions are replaced with new positions, traders will be 
able to incorporate an understanding of the new regime into existing 
and new trading strategies, which allows the burden of altering 
strategies to happen incrementally over time. The preexisting position 
exemption applies to non-spot-month positions entered into in good 
faith prior to (i) the enactment of the Dodd-Frank Act or (ii) the 
effective date of this proposed rule.
    Implementing the statutory requirement of CEA section 4a(a)(6), the 
aggregate limits proposed in Sec.  150.2 would impact, as described 
above, market participants who are active across trading venues in 
economically equivalent contracts. Under current practice, speculative 
traders may hold positions up to the limit in each derivative product 
for which a limit exists. In contrast, aggregate limits cap all of a 
speculative market participant's positions in derivatives contracts for 
a particular commodity. In some circumstances, the aggregate limit will 
prevent traders from entering into positions that would have otherwise 
been permitted without aggregate limits.\766\ The proposed rule 
incorporates features that provide

[[Page 75768]]

counterbalancing opportunities for speculative trading.
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    \766\ For example, a market participant has a position close to 
the spot-month limit in the NYMEX cash-settled crude oil contract is 
currently able to take the same size position in the ICE cash-
settled crude oil contract. The proposed rule would, in accordance 
with the statutory requirement of CEA section 4a(a)(6), require that 
the positions on NYMEX and ICE be aggregated for the purposes of 
complying with the limit--effectively halving the limit.
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    First, the limits apply separately to physical-delivery and cash-
settled contracts in the spot-month. Physical-delivery core referenced 
futures contracts have one limit; cash-settled reference contracts 
traded on the same exchange, a different exchange, or over-the-counter 
have a separate, but equal, limit. Therefore, a speculative trader may 
hold positions up to the spot month limit in both the physical-delivery 
core referenced futures contract, and a cash-settled contract (i.e., 
cash-settled future and/or swap).
    The second feature is the proposed conditional spot-month limit 
exemption. As discussed in a subsequent section of this release, the 
conditional spot-month limit exemption allows a speculative trader to 
hold a position in a cash-settled contract that is up to five times the 
spot-month limit of the core referenced futures contract, provided that 
trader does not hold any position in the physical-delivery core 
referenced futures contract.
    Finally, federal non-spot-month limits are calculated as a fixed 
ratio of total open interest in a particular commodity across all 
markets for referenced contracts. Because of this feature of the 
Commission's formula for calculating non-spot-month limit levels and of 
the proposed rule's application of non-spot-month limits on an 
aggregate basis across all markets, the imposition of the required 
aggregate limits should not unduly impact positions outside of the 
spot-month, as evidenced by the relatively few number of traders that 
would have been impacted historically, noted in table 11, supra.
b. Sec.  150.2(e) Levels of Speculative Position Limits
    Market participants would incur costs to monitor positions to 
prevent a violation of the limit level. The Commission expects that 
large traders in the futures and options markets for the 28 core 
referenced futures contracts have already developed some system to 
control the size of their positions on an intraday basis, in compliance 
with the longstanding position limits regimes utilized by both the 
Commission on a federal level and DCMs on an exchange level and in 
light of industry practices to measure, monitor, and control the risk 
of positions. For these traders, the Commission anticipates a small 
incremental burden to accommodate any physical commodity swap positions 
that such traders may hold that would become subject to the position 
limits regime. The Commission, subject to evidence establishing the 
contrary, believes the burden will be minimal because futures and 
options market participants are currently monitoring trading to track, 
among other things, their positions vis-[agrave]-vis current limit 
levels. For those participating in the futures and options markets, the 
Commission estimates two to three labor weeks to adjust monitoring 
systems to track position limits for referenced contracts, including 
swaps and other economically equivalent contracts traded on other 
trading venues. Assuming an hourly wage of $120,\767\ multiplied by 120 
hours, this implementation cost would amount to approximately $14,000 
per entity.
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    \767\ The Commission's estimates concerning the wage rates are 
based on 2011 salary information for the securities industry 
compiled by the Securities Industry and Financial Markets 
Association (``SIFMA''). The Commission is using $120 per hour, 
which is derived from a weighted average of salaries across 
different professions from the SIFMA Report on Management & 
Professional Earnings in the Securities Industry 2011, modified to 
account for an 1800-hour work-year, adjusted to account for the 
average rate of inflation in 2012, and multiplied by 1.33 to account 
for benefits and 1.5 to account for overhead and administrative 
expenses. The Commission anticipates that compliance with the 
provisions would require the work of an information technology 
professional; a compliance manager; an accounting professional; and 
an associate general counsel. Thus, the wage rate is a weighted 
national average of salary for professionals with the following 
titles (and their relative weight); ``programmer (senior)'' and 
``programmer (non-senior)'' (15% weight), ``senior accountant'' 
(15%) ``compliance manager'' (30%), and ``assistant/associate 
general counsel'' (40%). All monetary estimates have been rounded to 
the nearest hundred dollars.
---------------------------------------------------------------------------

    The incremental costs of compliance with the proposed rule would be 
higher for speculative traders who have until now traded only or 
primarily in swap contracts.\768\ Specifically, swaps-only traders may 
potentially incur larger start-up costs to develop a compliance system 
to monitor their positions in referenced contracts and to comply with 
an applicable position limit. Though swaps-only market participants 
have not historically been subject to position limits, swap dealers and 
major swap participants (as defined by the Commission pursuant to the 
Dodd-Frank Act) are required in Sec.  23.601 to implement systems to 
monitor position limits.\769\ In addition, many of these entities have 
already developed systems or business processes to monitor or control 
the size of swap positions for a variety of business reasons, including 
(i) managing counterparty credit risk exposure; and (ii) limiting and 
monitoring the risk exposure to such swap positions. Such existing 
systems would likely make compliance with position limits significantly 
less burdensome, as they may be able to leverage current monitoring 
procedures to comply with this rule. The Commission anticipates that a 
firm could select from a wide range of compliance systems to implement 
a monitoring regime. This flexibility allows the firm to tailor the 
system to suit its specific needs in a cost-effective manner.
---------------------------------------------------------------------------

    \768\ The Commission notes that costs associated with the 
inclusion of swaps contracts in the federal position limits regime 
are the direct result of changes made by the Dodd-Frank Act to 
section 4a of the Act. The Commission presents a discussion of these 
costs in order to be transparent regarding the effects of the 
proposed rules.
    \769\ See 17 CFR 23.601.
---------------------------------------------------------------------------

    In the release adopting now-vacated part 151, the Commission 
recognized the potentially firm-specific and highly variable nature of 
implementing monitoring systems. In particular, the Commission 
presented estimates of, on average, labor costs per entity ranging from 
40 to 1,000 hours, $5,000 to $100,000 in five-year annualized capital/
start-up costs, and $1,000 to $20,000 in annual operating and 
maintenance costs.\770\ The Commission explained that costs would 
likely be lower for firms with positions far below the speculative 
limits, but higher for firms with large or complex positions as those 
firms may need comprehensive, real-time analysis.\771\ The Commission 
further explained that due to the variation in both number of positions 
held and degree of sophistication in existing risk management systems, 
it was not feasible for the Commission to provide a greater degree of 
specificity as to the particularized costs for swaps firms.\772\
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    \770\ See 76 FR at 71667. The presentation of costs on a five-
year annualized basis is consistent with requirements under the 
Paperwork Reduction Act (``PRA''). See OMB Form 83-I requiring the 
Commission's Paperwork Reduction Act analysis be submitted with 
``annualized'' costs in all categories. Instructions for the form do 
not provide instructions for annualizing costs; the Commission chose 
to annualize over a five year period.
    \771\ Id. (n. 401).
    \772\ Id.
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    At this time, the Commission remains in the early stages of 
implementing the suite of Dodd-Frank Act regulations addressing swap 
markets now under its jurisdiction. The Commission is registering swap 
dealers and major swaps participants for the first time. Much of the 
infrastructure, including execution facilities, of the new markets has 
only recently become operational, and the collection of comprehensive 
regulatory data on physical commodity swaps is in its infancy. Because 
of this, the Commission is unable to estimate with precision the likely 
number of impacted swaps-only traders who would be subject to position 
limits for the first time. However, the Commission

[[Page 75769]]

preliminarily believes that a relatively small number of swaps-only 
traders will be affected. The Commission anticipates that most of the 
traders in swaps markets that accumulate physical commodity swap 
positions of a sufficiently high volume to engender concern for 
crossing position limit thresholds either: Are required to register as 
swap dealers or major swaps participants and as such already have 
systems in place to monitor limits in accordance with Sec.  23.601; or, 
are also active in futures markets and as such have the ability to 
leverage existing strategies for monitoring limits.
    Accordingly, for purposes of proposing these amendments to Sec.  
150.2, the Commission again estimates that swaps entities will incur, 
on average, labor costs per entity ranging from 40 to 1,000 hours; 
between $25,000 and $500,000 in total (non-annualized) capital/start-up 
costs and $1,000 to $20,000 in annual operating and maintenance costs. 
These estimates provide a preliminary range of costs for monitoring 
positions that reflects, on average, costs that market participants may 
incur based on their specific, individualized needs.
    Finally, proposed Sec.  150.2(e)(3)(ii) requires DCMs that list a 
core referenced futures contract to supply to the Commission estimates 
of deliverable supply. The Commission proposes to require staggered 
submission of the deliverable supply estimates in order to spread out 
the administrative burden of the proposed rules. Further, for contracts 
with DCM-set limits, an exchange would have already estimated 
deliverable supply in order to set spot-month position limit or 
demonstrate continued compliance with core principles 3 and 5. Thus, 
the Commission does not anticipate a large burden to result from the 
proposed Sec.  150.2(e)(3)(ii). The Commission preliminarily believes 
that, as estimated in accordance with the Paperwork Reduction Act 
(``PRA''), the submission would require a labor burden of approximately 
20 hours per estimate. Thus, a DCM that submits one estimate may incur 
a burden of 20 hours for a cost, using the estimated hourly wage of 
$120,\773\ of approximately $2,400. DCMs that submit more than one 
estimate may multiply this per-estimate burden by the number of 
estimates submitted to obtain an approximate total burden for all 
submissions, subject to any efficiencies and economies of scale that 
may result from submitting multiple estimates.
c. Request for Comment
    Do the estimates presented accurately reflect the expected costs of 
monitoring position limits under the proposed rule? Would the proposed 
rule engender material costs for monitoring positions addition to those 
the Commission has identified? Are the assumptions reflected in the 
Commission's consideration of the proposed rule's costs to monitor 
limits valid? If not, why and to what degree?
    Is the Commission's view that aggregate limits as proposed will not 
create overly restrictive limit levels valid? Would the aggregated, 
cross-exchange nature of the limits as proposed in Sec.  150.2 engender 
material costs that the Commission has not identified?
    Are there other cost factors related to operational changes that 
the Commission should consider? What other factors should the 
Commission consider?
    The Commission requests that commenters submit data or other 
information to assist it in quantifying anticipated costs of proposed 
Sec.  150.2 and to support their own assertions concerning costs 
associated with proposed Sec.  150.2.
iv. Consideration of Alternatives
    The Commission recognizes there exist alternatives to its 
discretionary proposals herein. These include the alternative of 
setting initial levels for spot month speculative position limit based 
on estimates of deliverable supply, as provided by the CME Group, 
rather than at the levels proposed in appendix D. The Commission 
requests comment on whether an alternative to what is proposed, 
including setting initial limits based on a current estimate of 
deliverable supply, would result in a superior benefit-cost profile, 
with support for any such position provided.
4. Section 150.3--Exemptions
    CEA section 4a(a)(7), added by the Dodd-Frank Act, authorizes the 
Commission to exempt, conditionally or unconditionally, any person, 
swap, futures contract, or option--as well as any class of the same--
from the position limit requirements that the Commission establishes. 
Current Sec.  150.3 specifies three types of positions for exemption 
from calculation against the federal limits prescribed by the 
Commission under Sec.  150.2: (1) Bona fide hedges, (2) spreads or 
arbitrage between single months of a futures contract (and/or, on a 
futures-equivalent basis, options), and (3) those of an ``eligible 
entity'' as that term is defined in Sec.  150.1(d) \774\ carried in a 
separate account by an independent account controller (``IAC'') \775\ 
when specific conditions are met. The Commission proposes to make 
organizational and conforming changes to Sec.  150.3 as well as several 
substantive changes. By exempting positions that pose less risk of 
unduly burdening interstate commerce from position limit regulation, 
these substantive revisions would further the Commission's mission 
specified in CEA section 4a(a)(3).
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    \774\ For example, an operator of a commodity pool or certain 
other trading vehicle, a commodity trading advisor, or another 
specified financial entity such as a bank, trust company, savings 
association, or insurance company.
    \775\ IACs are defined currently in 17 CFR 150.1(e). Amendments 
to that definition are being proposed in a separate release. See 
Aggregation NPRM.
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    The proposed organizational/conforming changes consist of updating 
cross references; \776\ relocating the IAC exemption to consolidate it 
with the Commission's separate proposal to amend the aggregation 
requirements of Sec.  150.4; \777\ and deleting the calendar month 
spread provision that, due to changes proposed under Sec.  150.2, would 
be rendered unnecessary.\778\ These amendments will facilitate reader 
ease-of-use and clarity. However, the Commission foresees little 
additional impact from these non-substantive proposed amendments.
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    \776\ Specifically, as described above: a) proposed Sec.  
150.3(a)(1)(i) would update the cross-references to the bona fide 
hedging definition to reflect its proposed replacement in amended 
Sec.  150.1 from its current location in Sec.  1.3(z); b) proposed 
Sec.  150.3(a)(3) would add a new cross-reference to the reporting 
requirements proposed to be amended in part 19; and c) proposed 
Sec.  150.3(i) would add a cross-reference to the updated 
aggregation rules in proposed Sec.  150.4.
    \777\ See Aggregation NPRM. The exemption for accounts carried 
by an IAC is set out in proposed Sec.  150.4(b)(5); adoption of that 
proposal would render current Sec.  150.3(a)(4) duplicative.
    \778\ More specifically, as discussed supra, the Commission 
proposes to amend Sec.  150.2 to increase the level of single month 
position limits to the same level as all months limits. As a result, 
the spread exemption set forth in current Sec.  150.3(a)(3) that 
permits a spread trader to exceed single month limits only to the 
extent of the all months limit would no longer provide useful 
relief.
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    The proposed substantive changes to Sec.  150.3 would revise an 
existing exemption, add three additional exemptions, and revise 
recordkeeping requirements. As summarized in the section below, 
proposed Sec.  150.3 would: (i) Codify in Commission regulation the 
statutory requirement of CEA section 4a(c)(1) that federal position 
limits not apply to bona fide hedging as defined by the Commission; 
(ii) add exemptions for financial distress situations, certain spot-
month positions in cash-settled reference contracts, and pre-Dodd-Frank 
and transition period swaps; (iii) provide guidance for non-enumerated 
exemptions, including the deletion of Sec.  1.47; and (iv) revise 
recordkeeping

[[Page 75770]]

requirements for traders claiming any exemption from the federal 
speculative position limits.
i. Rule Summary
a. Section 150.3(a) Bona Fide Hedging Exemption
    As does current Sec.  150.3(a)(1), proposed Sec.  150.3(a)(1)(i) 
will codify the statutory requirement that bona fide hedging positions 
be exempt from federal position limits. To the extent that benefits and 
costs would derive from the Commission's proposed amendment in Sec.  
150.1 to the definition of ``bona fide hedging position'' that is 
discussed above. This proposed amendment would also require that the 
anticipatory hedging requirements proposed in Sec.  150.7, the 
recordkeeping requirements proposed in Sec.  150.3(g), and the 
reporting requirements in proposed part 19 are met in order to claim 
the exemption. Any benefits and costs attributable to these features of 
the rule are considered below in the respective discussions of proposed 
Sec.  150.7, Sec.  150.3(g) and Part 19.
b. Section 150.3(b) Financial Distress Exemption
    Proposed Sec.  150.3(b) provides the means for market participants 
to request relief from applicable speculative position limits during 
times of market stress. The proposed rule allows for exemption under 
certain financial distress circumstances, including the default of a 
customer, affiliate, or acquisition target of the requesting entity, 
that may require an entity to assume in short order the positions of 
another entity.
c. Section 150.3(c) Conditional Spot-Month Limit Exemption
    Proposed Sec.  150.3(c) would provide a conditional spot-month 
limit exemption that permits traders to acquire positions up to five 
times the spot month limit if such positions are exclusively in cash-
settled contracts. The conditional exemption would not be available to 
traders who hold or control positions in the spot-month physical-
delivery referenced contract in order to reduce the risk that traders 
with large positions in cash-settled contracts would attempt to distort 
the physical-delivery price to benefit such positions.
    The proposed conditional exemption is consistent with current 
exchange-set position limits on certain cash-settled natural gas 
futures and swaps.\779\ Both NYMEX and ICE have established conditional 
spot month limits in their cash-settled natural gas contracts at a 
level five times the level of the spot month limit in the physical-
delivery futures contract. Since spot-month limit levels for referenced 
contracts will be set at no greater than 25 percent of the estimated 
deliverable supply in the relevant core referenced futures contract, 
the proposed exemption would allow a speculative trader to hold or 
control positions in cash-settled referenced contracts equal to no 
greater than 125 percent of the spot month limit.
---------------------------------------------------------------------------

    \779\ See discussion above.
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    Historically, the Commission has been particularly concerned about 
protecting the spot month in physical-delivery futures contracts 
because they are most at risk for corners and squeezes. This acute risk 
is the reason that speculative limits in physical-delivery markets are 
generally set more restrictively during the spot month. The conditional 
exemption, as proposed, would constrain the potential for manipulative 
or disruptive activity in the physical-delivery contracts during the 
spot month by capping speculative trading in such contracts; however, 
in parallel cash-settled contracts, where the potential for 
manipulative or disruptive activity is much lower, the conditional 
exemption would broaden speculative trading opportunity, potentially 
providing additional liquidity for bona fide hedgers in cash-settled 
contracts.
    In proposing the conditional limit, the Commission has examined 
market data on the effectiveness of conditional spot-month limits in 
natural gas markets, including the data submitted as part of the 
rulemaking for now-vacated part 151.\780\ The Commission has also 
examined market data in other contracts, and has observed that open 
interest levels naturally decline in the physical-delivery contract 
leading up to and during the spot month, as the contract approaches 
expiration.\781\ Both hedgers and speculators exit the physical-
delivery contract in order to, for example, roll their positions to the 
next contract month or avoid delivery obligations. Market participants 
in cash-settled contracts, however, tend to hold their positions 
through to expiration. This market behavior suggests that the 
conditional spot-month limit exemption should not affect liquidity in 
the spot month of the physical-delivery contract, as open interest is 
rapidly declining.\782\ The exemption, would, however, provide the 
opportunity for speculative trading to increase in the cash-settled 
contract. The Commission preliminarily believes that while this 
proposed exemption would remove certain constraints from speculative 
trading in cash-settled contracts, it would not damage liquidity in the 
aggregate, i.e., across physical-delivery and cash-settled contracts in 
the same commodity. On this basis, the Commission preliminarily 
believes a conditional limit in additional commodities is consistent 
with the statutory direction to deter manipulation while ensuring 
sufficient liquidity for bona fide hedgers without disrupting the price 
discovery process.
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    \780\ See 76 FR at 71635 (n. 100-01).
    \781\ See discussion above.
    \782\ Traders participating in the physical-delivery contract in 
the spot month are understood to have a commercial reason or need to 
stay in the spot month; the Commission preliminarily believes at 
this time that it is unlikely that the factors keeping traders in 
the spot month physical-delivery contract will change due solely to 
the introduction of a higher cash-settled contract limit.
---------------------------------------------------------------------------

    The Commission's current proposal would not restrict a trader's 
cash commodity position. Instead, the Commission proposes to require 
enhanced reporting of cash market positions of traders availing 
themselves of the conditional spot-month limit. As discussed in the 
proposed changes to part 19, the Commission proposes to initially 
require this enhanced reporting only for the natural gas contract until 
it gains more experience administering the conditional spot month limit 
in the other referenced contracts. The Commission preliminarily 
believes that the proposed reporting regime in natural gas will provide 
useful information that can be deployed by surveillance staff to detect 
and potentially deter manipulative schemes involving the cash market.
d. Section 150.3(d) Pre-Enactment and Transition Period Swaps Exemption
    To implement the statutory requirement of CEA section 
4a(b)(2),\783\ proposed Sec.  150.3(d) would provide an exemption from 
federal position limits for swaps entered into prior to July 21, 2010 
(the date of the enactment of the Dodd-Frank Act), the terms of which 
have not expired as of that date, and for swaps entered into during the 
period commencing July 22, 2010, the terms of which have not expired as 
of that date, and ending 60 days after the publication of final rule 
Sec.  150.3 in the Federal Register, i.e., its effective date. The 
Commission would allow both pre-enactment and transition swaps to be 
netted with commodity derivative contracts acquired more than 60 days 
after publication of final rule Sec.  150.3 in the Federal Register for 
the purpose of

[[Page 75771]]

complying with any non-spot-month position limit.\784\ This exemption 
facilitates the transition to full position limits compliance for 
previously unregulated swaps markets. Allowing netting with pre-
enactment and transition swaps provides flexibility where possible in 
order to lessen the impact of the regime on entities that trade swaps.
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    \783\ CEA section 4a(b)(2) states in part that ``any position 
limit fixed by the Commission . . . good faith prior to the 
effective date of such rule, regulation or order.'' 7 U.S.C. 
6a(b)(2).
    \784\ Because of concerns regarding manipulation during the 
delivery period of a referenced contract, the proposed rule would 
not allow pre- and post- enactment and transition swaps to be netted 
for the purpose of complying with any spot-month position limit.
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e. Section 150.3(e) and (f) Other Exemptions and Previously Granted 
Exemptions
    Proposed Sec.  150.3(e) and (f) provide information on other 
exemptive relief not specified by other sections of Sec.  150.3. The 
Commission previously permitted a person to file an application seeking 
approval for a non-enumerated position to be recognized as a bona fide 
hedging position under Sec.  1.47. Though the Commission is proposing 
to delete Sec.  1.47, the Commission believes it is appropriate to 
provide persons the opportunity to seek exemptive relief.
    Proposed Sec.  150.3(e) provides guidance to persons seeking 
exemptive relief. A person engaged in risk-reducing practices that are 
not enumerated in the revised definition of bona fide hedging in 
proposed Sec.  150.1 may use two different avenues to apply to the 
Commission for relief from federal position limits. The person may 
request an interpretative letter from Commission staff pursuant to 
Sec.  140.99 \785\ concerning the applicability of the bona fide 
hedging position exemption, or may seek exemptive relief from the 
Commission under section 4a(a)(7) of the Act.\786\
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    \785\ 17 CFR 140.99 defines three types of staff letters--
exemptive letters, no-action letters, and interpretative letters--
that differ in terms of scope and effect. An interpretative letter 
is written advice or guidance by the staff of a division of the 
Commission or its Office of the General Counsel. It binds only the 
staff of the division that issued it (or the Office of the General 
Counsel, as the case may be), and third-parties may rely upon it as 
the interpretation of that staff.
    \786\ See supra discussion of CEA section 4a(a)(7).
---------------------------------------------------------------------------

f. Section 150.3(g) and (h) Recordkeeping
    Proposed Sec.  150.3(g)(1) specifies recordkeeping requirements for 
persons who claim any exemption set forth in proposed Sec.  150.3. 
Persons claiming exemptions under Sec.  150.3 would need to maintain 
complete books and records concerning all details of their related 
cash, forward, futures, options and swap positions and transactions. 
Proposed Sec.  150.3(g)(1) is largely duplicative of other 
recordkeeping obligations imposed on market participants, including 
provisions in Sec.  1.35 and Sec.  18.05 as amended by the Commission 
to conform with the Dodd-Frank Act.\787\ Proposed Sec.  150.3(g)(2) 
require persons seeking to rely upon the pass-through swap offset 
exemption to obtain a representation from its counterparty that the 
swap qualifies as a bona fide hedging position and to retain this 
representation on file. Similarly, proposed Sec.  150.3(g)(3) requires 
a person who makes such a representation to maintain records supporting 
the representation. Under proposed Sec.  150.3(h), all persons would 
need to make such books and records available to the Commission upon 
request, which would preserve the ``call for information'' rule set 
forth in current Sec.  150.3(b).
---------------------------------------------------------------------------

    \787\ 77 FR 66288, Nov. 2, 2012.
---------------------------------------------------------------------------

ii. Benefits
    In articulating exemptions from position limit requirements, Sec.  
150.3 works in concert with Sec.  150.2 as it pertains to Commission-
specified federal limits and with certain requirements of Sec.  150.5 
pertaining to exchange-set position limits. Functioning as an 
integrated component within the broader position-limits regulatory 
regime, the Commission believes the proposed changes to Sec.  150.3 
accomplish, to the maximum extent practicable, the four objectives 
outlined in CEA section 4a(a)(3). As such, the Commission perceives 
these proposed amendments to offer significant benefits. These are 
explained more specifically below.
a. Section 150.3(b) Financial Distress Exemption
    In codifying the Commission's historical practice of temporarily 
lifting position limit restrictions, the proposed rule further 
strengthens the benefits of accommodating transfers of positions from 
financially distressed firms to financially secure firms or 
facilitating other necessary remediation measures during times of 
market stress. More specifically, due to the improved facility and 
transparency with respect to the availability of this exemption, it 
becomes less likely that positions will be prematurely or unnecessarily 
liquidated. The disorderly liquidation of a position poses the threat 
of price impacts that may harm the efficiency as well as the price 
discovery function of markets. In addition, the availability of a 
financial distress exemption provides market participants with a degree 
of confidence that the Commission has the appropriate tools to 
facilitate the transfer of positions expeditiously in times of market 
uncertainty.
b. Section 150.3(c) Conditional Spot-month Limit Exemption
    The conditional spot-month limit exemption provides speculators 
with an opportunity to maintain relatively large positions in cash-
settled contracts up to but no greater than 125 percent of the spot-
month limit. By prohibiting speculators using the exemption in the 
cash-settled contract from trading in the spot-month of the physical-
delivery contract, the proposed rules should further protect the 
delivery and settlement process. In addition, the condition of the 
exemption--i.e., a trader availing himself of the exemption may not 
have any position in the physical-delivery contract--reduces the 
ability for a trader with a large cash-settled contract position to 
attempt to manipulate the physical-delivery contract price in order to 
benefit his position. As such, the conditional spot-month limit 
exemption would further three of the goals under CEA section 4a(a)(3)--
deterring market manipulation, and ensuring sufficient market liquidity 
for bona fide hedgers, without disrupting the price discovery process.
    The proposed rules are specifically intended to provide an 
alternate structure to the one that is currently in place that also 
meets the objectives to deter and prevent manipulation and to ensure 
sufficient market liquidity. In this way, the conditional limit 
exemption provides flexibility for market participants and the 
Commission to meet the objectives outlined in CEA section 4a(a)(3). The 
Commission expects that market participants will respond to the 
flexibility afforded by the proposed exemption in order to fulfill 
their needs in a manner that is consistent with their business 
interests, although it cannot reasonably predict how markets, DCMs and 
market participants will adapt. Accordingly, the Commission requests 
comment on this exemption, its potential impacts on trading strategies, 
competition, and any other direct or indirect costs to markets or 
market participants and exchanges that could arise as a result of the 
conditional spot-month limit exemption.
c. Section 150.3(d) Pre-Enactment and Transition Period Swaps Exemption
    The pre-existing swaps exemption in proposed Sec.  150.3(d) is 
consistent with CEA section 4a(b)(2). This exemption facilitates the 
transition to full position

[[Page 75772]]

limits compliance for previously unregulated swaps markets. Allowing 
netting with post-enactment swaps outside of the spot-month provides 
flexibility where possible in order to lessen the impact of the regime 
on entities that trade swaps.
d. Section 150.3(e)-(f) Other Exemptions and Previously Granted 
Exemptions
    The proposed amendments to Sec.  150.3(e) and the replacement of 
existing Sec.  1.47 with new proposed Sec.  150.3(f) are essentially 
clarifying and organizational in nature. As such they will confer 
limited substantive benefits beyond providing market participants with 
clarity regarding the process for obtaining non-enumerated exemptive 
relief and promoting regulatory certainty for those granted exemptions 
pursuant to Sec.  1.47.
e. Section 150.3(g) Recordkeeping
    By requiring that market participants who avail themselves of the 
exemptions offered under Sec.  150.3 maintain certain records to 
document their exemption eligibility and make such records available to 
the Commission on request, the rule reinforces proposed Sec.  150.2 and 
Sec.  150.3 and helps to accomplish, to the maximum extent practicable, 
the goals set out in CEA section 4a(a)(3)(B). Supporting books and 
records are critical to the Commission's ability to effectively monitor 
compliance with exemption eligibility standards each and every time an 
exemption is employed. Absent this ability, exemptions are more 
susceptible to abuse. This susceptibility increases the potential that 
position limits function in a diminished capacity than intended to 
prevent excessive speculation and/or market manipulation.
f. Request for Comment
    The Commission requests comments on its considerations of the 
benefits associated with the proposed amendments to Sec.  150.3, 
including data or other information to assist the Commission in 
identifying the number and type of market participants that will 
realize, respectively, the benefits identified and/or to monetize such 
benefits. Has the Commission correctly identified market behavior and 
incentives that affect or would likely be affected by the conditional 
spot-month limit exemption? What other potential benefits could the 
conditional spot-month limit exemption have for markets and/or market 
participants? Will the exemptions proposed likely result in any 
benefits, direct or indirect, for markets and/or market participants in 
addition to those that the Commission has identified? If so, what, and 
why and how will they result? Has the Commission misidentified or 
overestimated any benefits likely to result from the proposed 
exemptions? If so, which and/or to what extent?
iii. Costs
    In general, the exemptions proposed in Sec.  150.3 do not increase 
the costs of complying with position limits, and in fact may decrease 
these costs by providing for relief from speculative limits in certain 
situations. The exemptions are elective, so no entity is required to 
assert an exemption if it determines the costs of doing so do not 
justify the potential benefit resulting from the exemption. Thus, the 
Commission does not anticipate the costs of obtaining any of the 
exemptions to be overly burdensome. Nor does the Commission anticipate 
the costs would be so great as to discourage entities from utilizing 
available exemptions, as applicable.
    Potential costs attendant to the proposed amendments to Sec.  150.3 
are discussed specifically below.
a. Section 150.3(b) Financial Distress Exemption
    The Commission anticipates the costs associated with the 
codification of the financial distress exemption to be minimal. Market 
participants who voluntarily employ these exemptions will incur costs 
stemming from the requisite filing and recordkeeping obligations that 
attend the exemptions.\788\ Along with performing its due diligence to 
acquire a distressed firm, or positions held or controlled by a 
distressed firm, an entity would have to update and submit to the 
Commission a request for the financial distress exemption. The 
Commission is unable at this time to accurately estimate how often this 
exemption may be invoked, as emergency or distressed market situations 
by nature are unpredictable and dependent on a variety of firm- and 
market-specific idiosyncratic factors as well as general macroeconomic 
indicators. Given the unusual and unpredictable nature of emergency or 
distressed market situations, the Commission anticipates that this 
exemption would be invoked infrequently, but is unable to provide a 
more precise estimate. The Commission also assumes that codifying the 
proposed rule and thus lending a level of transparency to the process 
will result in an administrative burden that is less onerous than the 
current regime. In addition, the Commission believes that in the case 
that one firm is assuming the positions of a financially distressed 
firm, the costs of claiming the exemption would be incidental to the 
costs of assuming the position.
---------------------------------------------------------------------------

    \788\ See supra considerations of costs and benefits of the 
proposed amendments to part 19 and the Paperwork Reduction Act.
---------------------------------------------------------------------------

b. Section 150.3(c) Conditional Spot-month Limit Exemption
    A market participant that elects to exercise this exemption, one 
that is not available under current rules, will incur certain direct 
costs to do so. A person seeking to utilize this exemption for the 
natural gas market must file Form 504 in accordance with requirements 
listed in proposed Sec.  19.01.\789\ If that person currently has any 
position in the physical-delivery contract, such person may incur costs 
associated with liquidating that position in order to meet the 
conditions of the conditional spot-month limit exemption. As previously 
discussed, the conditional spot month limit is designed to deter market 
manipulation without disrupting the price discovery process. The 
Commission does not have reason to believe that liquidity, in the 
aggregate (across the core referenced and referenced contracts), will 
be adversely impacted. However, the proposed rules are specifically 
intended to provide an alternative to the position limit regime that is 
currently in place for the purpose of deterring and preventing 
manipulation and ensuring sufficient market liquidity; the Commission 
expects that market participants will respond to the flexibility 
afforded by the proposed exemption in order to fulfill their needs in a 
manner that is consistent with their business interests, although it 
cannot reasonably predict how markets, DCMs and market participants 
will adapt. Accordingly, the Commission requests comment on this 
exemption, its potential impacts on trading strategies, competition, 
and any other direct or indirect costs to markets or market 
participants and exchanges that could arise as a result of the 
conditional spot-month limit exemption.
---------------------------------------------------------------------------

    \789\ Specific costs associated with filing Form 504 are 
considered above in the sections that implement that form, namely 
the discussion of the costs and benefits of proposed amendments to 
part 19 and the Paperwork Reduction Act .
---------------------------------------------------------------------------

c. Section 150.3(d) Pre-Enactment and Transition Period Swaps Exemption
    The exemption offered in proposed Sec.  150.3(d) is self-executing 
and would not require a market participant to file for relief. However, 
a firm may incur costs to identify positions eligible for

[[Page 75773]]

the exemption and to determine if that position is to be netted with 
post-enactment swaps for purposes of complying with a non-spot-month 
position limit. Such costs would be assumed voluntarily by a market 
participant in order to avail itself of the exemption, and the 
Commission does not anticipate these costs to be overly burdensome.
d. Section 150.3(e)-(f) Other Exemptions and Previously Granted 
Exemptions
    Under the proposed Sec.  150.3(e), market participants electing to 
seek an exemption other than those specifically enumerated, will incur 
certain direct costs to do so. First, they will incur costs related to 
petitioning the Commission under Sec.  140.99 of the Commission's 
regulations or under CEA section 4a(a)(7). To the extent these costs 
may be marginally greater than a market participant would experience to 
seek an exemption under the process afforded under current Sec.  1.47--
something the Commission cannot rule out at this time--the cost 
difference between the two is attributable to this rulemaking.\790\ 
Further, market participants who had previously relied upon the 
exemptions granted under Sec.  1.47 would be able to continue to rely 
on such exemptions for existing positions. Going forward, market 
participants would need to enter into a new position that fits within 
applicable limits or are eligible for an alternate exemption, in which 
case the participants may incur costs associated with applying for such 
exemptions. The Commission is unable to ascertain at this time the 
number of participants affected by these proposed regulations. The 
Commission notes, however, that a decision to incur the costs inherent 
in seeking relief is voluntary.
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    \790\ Alternatively, to the extent petitioning the Commission 
under Sec.  140.99 or under CEA section 4a(a)(7) results in lower 
costs relative to those necessary to utilize the current Sec.  1.47 
process, the cost difference is a benefit attributable to this 
rulemaking. The Commission requests comment concerning whether, and 
to what degree, requiring petitions for exemption under Sec.  140.99 
or under CEA section 4a(a)(7) in place of current Sec.  1.47 is 
likely to result in any material cost difference.
---------------------------------------------------------------------------

    e. Section 150.3(g) Recordkeeping
    Finally, any person that elects to exercise an exemption provided 
in proposed Sec.  150.3 would incur costs attributable to additional 
recordkeeping obligations under proposed Sec.  150.3(e)-(g). The 
Commission preliminarily believes that these costs will be minimal, as 
participants already maintain books and records under a variety of 
other Commission regulations and as the information required in these 
sections is likely already being maintained as part of prudent 
accounting and risk management policies and procedures. The Commission 
preliminarily believes that, as estimated in accordance with the PRA, a 
total of 400 entities will incur an annual labor burden of 
approximately 50 hours each, or 20,000 total hours for all affected 
entities, to comply with the additional recordkeeping obligations. 
Using an estimated hourly wage of $120 per hour,\791\ the Commission 
anticipates an annual burden of approximately $6,000 per entity and a 
total of $2,400,000 for all affected entities.
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    \791\ The Commission's estimates concerning the wage rates are 
based on 2011 salary information for the securities industry 
compiled by the Securities Industry and Financial Markets 
Association (``SIFMA''). The Commission is using $120 per hour, 
which is derived from a weighted average of salaries across 
different professions from the SIFMA Report on Management & 
Professional Earnings in the Securities Industry 2011, modified to 
account for an 1800-hour work-year, adjusted to account for the 
average rate of inflation in 2012, and multiplied by 1.33 to account 
for benefits and 1.5 to account for overhead and administrative 
expenses. The Commission anticipates that compliance with the 
provisions would require the work of an information technology 
professional; a compliance manager; an accounting professional; and 
an associate general counsel. Thus, the wage rate is a weighted 
national average of salary for professionals with the following 
titles (and their relative weight); ``programmer (senior)'' and 
``programmer (non-senior)'' (15% weight), ``senior accountant'' 
(15%) ``compliance manager'' (30%), and ``assistant/associate 
general counsel'' (40%). All monetary estimates have been rounded to 
the nearest hundred dollars.
---------------------------------------------------------------------------

f. Request for Comment
    The Commission requests comment on its considerations of the costs 
associated with the proposed changes to Sec.  150.3. Are there other 
costs associated with new exemptions that the Commission should 
consider? With respect to the proposed conditional spot-month limit 
exemption, specifically, the Commission welcomes comments regarding the 
potential cost impact on trading strategies, any other direct or 
indirect costs to markets or market participants that could arise as a 
result of it, and the estimated number of impacted entities.
iv. Consideration of Alternatives
    The Commission recognizes that alternatives may exist to 
discretionary elements of Sec.  150.3 proposed herein. The Commission 
requests comment on whether an alternative to what is proposed would 
result in a superior benefit-cost profile, with support for any such 
position provided.
5. Section 150.5--Exchange-Set Speculative Position Limits
    Current Sec.  150.5 addresses the requirements and acceptable 
practices for exchanges in setting speculative position limits or 
position accountability levels for futures and options contracts traded 
on each exchange. As further described above,\792\ the CFMA's 
amendments to the CEA in 2000 gave DCMs discretion to set those limits 
or levels within the statutory requirements of core principle 5.\793\ 
With this grant of statutory discretion, Sec.  150.5 became non-binding 
guidance and accepted practice to assist the exchanges in meeting their 
statutory responsibilities under the core principles.\794\ 
Subsequently, the Dodd-Frank Act scaled back the discretion afforded 
DCMs for establishing position limits under the earlier CFMA 
amendments. Specifically, among other things, the 2010 law: (1) amended 
core principle 1 to expressly subordinate DCMs' discretion in complying 
with statutory core principles to Commission rules and regulations; and 
(2) amended core principle 5 to additionally require that, with respect 
to contracts subject to a position limit set by the Commission under 
CEA section 4a, a DCM must set limits no higher than those prescribed 
by the Commission.\795\ The Dodd-Frank Act also added parallel core 
principle obligations on newly-authorized SEFs, including SEF core 
principle 6 regarding the establishment of position limits.\796\
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    \792\ See discussion above.
    \793\ CEA section 5(d)(5) (specifying DCM core principle 5 
titled ``Position Limits or Accountability'').
    \794\ Specifically, in 2001, the Commission adopted in part 38 
app. B (Guidance on, and acceptable Practices in, Compliance with 
Core Principles), 66 FR 42256, 42280, Aug. 10, 2001, an acceptable 
practice for compliance with DCM core principle 5 that stated 
``[p]rovisions concerning speculative position limits are set forth 
in part 150.'' Current Sec.  150.5 states that each DCM shall 
``limit the maximum number of contracts a person may hold or 
control, separately or in combination, net long or net sort, for the 
purchase or sale of a commodity for future delivery or, on a 
futures-equivalent basis, options thereon,'' with certain 
exemptions. Exemptions from federal limits include major foreign 
currencies and ``spread, straddles or arbitrage'' exemptions. 
Current Sec.  150.5 expressly excludes bona fide hedging positions 
from limits, but acknowledges that exchanges may limit positions 
``not in accord with sound commercial practices or exceed an amount 
which may be established and liquidated in an orderly fashion.''
    \795\ Dodd-Frank Act section 735(b). CEA section 4a(e), 
effective prior to, and not amended by, the Dodd-Frank Act, likewise 
provides that position limits fixed by a board of trade not exceed 
federal limits. 7 U.S.C. 6a(e).
    \796\ Dodd-Frank Act section 733 (adding CEA section 5h; 7 
U.S.C. 7b-3).

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[[Page 75774]]

i. Rule Summary
    In light of these Dodd-Frank Act statutory amendments, the 
Commission proposes to amend Sec.  150.5 to specify certain binding 
requirements with which DCMs and SEFs must comply in establishing 
exchange-set limits. \797\ Specifically, proposed Sec.  150.5(a)(1) 
would require that DCMs and SEFs set limits for contracts listed in 
Sec.  150.2(d) at a level not higher than the levels specified in Sec.  
150.2. Proposed Sec.  150.5(a)(5) and (b)(8) would require that 
exchanges adopt aggregation rules that conform to proposed Sec.  150.4 
for all contracts, including those contracts subject to federal 
speculative limits. Proposed Sec.  150.5(a)(2)(i) and (b)(5)(i) would 
require that exchanges conform their bona fide hedging exemption rules 
to the proposed Sec.  150.1 definition of bona fide hedging for all 
contracts, including those contracts subject to federal speculative 
limits. Proposed Sec.  150.5(a)(2)(iii) and (b)(5)(iii) would require 
that exchanges condition any exemptive relief from federal or exchange-
set position limits on an application from the trader.\798\ To the 
extent an exchange offers exemptive relief for intra- and inter-market 
spread positions for contracts subject to federal limits under proposed 
Sec.  150.2, proposed Sec.  150.5(a)(2)(i) and (ii) would require that 
the exchange provide such relief only outside of the spot month for 
physical-delivery contracts and, with respect to intra-market spread 
positions, on the condition that such positions do not exceed the all-
months limit. Finally, proposed Sec.  150.5(a)(4) would further 
implement the statutory provision in CEA section 4a(b)(2) that exempts 
pre-existing positions, while Sec.  150.5(a)(3) would require exchanges 
to mirror the Commission's exemption in proposed Sec.  150.3 for pre-
enactment and transition period swaps from exchange-set limits on 
contracts subject to limits under proposed Sec.  150.2. Proposed Sec.  
150.5(a)(3) would also require exchanges to allow the netting of pre-
enactment and transition swaps with post-effective date commodity 
derivative contracts for the purpose of complying with any non-spot-
month position limit.
---------------------------------------------------------------------------

    \797\ As discussed above, proposed Sec.  150.5 also would 
continue to incorporate non-exclusive guidance and acceptable 
practices for DCMs and SEFs with respect to setting limits with and 
without a measurable deliverable supply, adopting position 
accountability in lieu of a position limits scheme, and adjusting 
limit levels, among other things. As non-binding guidance and 
acceptable practices, these components of the rulemaking are not 
binding Commission regulations or orders subject to the requirement 
of CEA section 15(a).
    \798\ The Commission notes that for contracts subject to federal 
limits, exchange-granted exemptions would need to conform with the 
standards in proposed Sec.  150.5(a)(2)(i) for hedge exemptions and 
proposed Sec.  150.5(a)(2)(ii) for other exemptions.
---------------------------------------------------------------------------

    Two of these proposed requirements--i.e., that for contracts 
subject to limits specified in Sec.  150.2, DCMs and SEFs set limits no 
higher than those specified in Sec.  150.2, and that pre-existing 
positions must be exempted from exchange-set limits on contracts 
subject to Sec.  150.2--exclusively codify statutory requirements, and 
therefore reflect no exercise of Commission discretion subject to CEA 
section 15(a). The other-listed requirements, however, do involve 
Commission discretion, the costs and benefits of which are considered 
below.
ii. Benefits
    Functioning as an integrated component within the broader position-
limits regulatory regime, the Commission expects the proposed changes 
to Sec.  150.5 would further the four objectives outlined in CEA 
section 4a(a)(3).\799\ As explained more fully below, the Commission 
believes these proposed amendments offer significant benefits.
---------------------------------------------------------------------------

    \799\ CEA section 4a(a)(3)(B) applies for purposes of setting 
federal limit levels. 7 U.S.C. 6a(a)(3)(B). The Commission considers 
the four factors set out in the section relevant for purposes of 
considering the benefits and costs of these proposed amendments 
addressed to exchange-set position limits as well.
---------------------------------------------------------------------------

a. Section 150.5(a)(5) and (b)(8) Aggregation
    CEA section 4a(a)(1) states that the Commission, ``[in] determining 
whether any person has exceeded such limits,'' must include ``the 
positions held and trading done by any persons directly or indirectly 
controlled'' by such person. Pursuant to this statutory direction, the 
Commission has proposed in a separate release amendments to its 
aggregation policy, located in Sec.  150.4.\800\ The regulations 
proposed in this release require that exchange-set limits employ 
aggregation policies that conform to the Commission's aggregation 
policy both for contracts that are subject to federal limits under 
Sec.  150.2 and those that are not, thus harmonizing aggregation rules 
for all federal and exchange-set speculative position limits.
---------------------------------------------------------------------------

    \800\ See Aggregation NPRM.
---------------------------------------------------------------------------

    For contracts subject to federal speculative position limits under 
proposed Sec.  150.2, the Commission anticipates that a harmonized 
approach to aggregation will prevent confusion that otherwise might 
result from allowing divergent standards between federal and exchange-
set limits on the same contracts. Further, the proposed approach would 
prevent the kind of regulatory arbitrage that may impede the benefits 
of the federal speculative position limits regime. The harmonized 
approach to aggregation policies for limits on all levels eliminates 
the potential for exchanges to use permissiveness in aggregation 
policies as a competitive advantage and therefore prevents a ``race to 
the bottom,'' which would impair the effectiveness of the Commission's 
aggregation policy. In addition, DCMs and SEFs are required to set 
position limits at a level not higher than that set by the Commission. 
Differing aggregation standards may have the practical effect of 
lowering a DCM- or SEF-set limit to a level that is lower than that set 
by the Commission. Accordingly, harmonizing aggregation standards 
reinforces the efficacy and intended purpose of Sec. Sec.  
150.5(a)(2)(iii) and (b)(5)(iii) by foreclosing an avenue to circumvent 
applicable limits.
    Moreover, by extending this harmonized approach to contracts not 
included in proposed Sec.  150.2, the Commission is proposing a common 
standard for all federal and exchange-set limits. The proposed rule 
provides uniformity, consistency, and certainty for traders who are 
active on multiple trading venues, and thus should reduce the 
administrative burden on traders as well as the burden on the 
Commission in monitoring the markets under its jurisdiction.
b. Section 150.5(a)(2)(i) and (b)(5)(i) Hedge Exemptions
    The proposed rules also promote a common standard for bona fide 
hedging exemptions by requiring such exemptions granted by an exchange 
to conform with the proposed definition of bona fide hedging in Sec.  
150.1. For contracts subject to federal limits under proposed Sec.  
150.2, the proposed rules under Sec.  150.5(a)(2)(i) prescribe a 
harmonized approach intended to prevent the confusion that may arise 
should the same contract have differing standards of bona fide hedging 
between the Commission's federal standard and the standard on any given 
exchange. As discussed above, the definition of bona fide hedging 
proposed by the Commission in this release allows only positions that 
represent legitimate commercial risk to be exempt from position limits. 
Deviation from this definition could impede the effectiveness of the 
Commission's position limit regime by potentially allowing positions to 
be improperly exempted from speculative limits.
    Proposed Sec.  150.5(b)(5)(i) would extend this common standard of 
bona fide hedging to contracts not subject to

[[Page 75775]]

federal speculative limits, thereby creating a single standard across 
all trading venues that would reduce the administrative burden on 
market participants trading on multiple trading venues and the burden 
on the Commission of monitoring the markets under its jurisdiction.
c. Section 150.5(a)(2)(iii) and (b)(5)(iii) Application for Exemption
    Proposed Sec.  150.5 requires traders to apply to the exchange for 
any exemption from position limits. Requiring traders to apply to the 
exchange affirms the position of the DCM or SEF as the front-line 
regulator for position limits while providing the exchanges with 
information that can be used to ensure the legitimacy of a trader's 
position with regards to its eligibility for exemptive relief. By 
gathering information from traders' applications for exemption, 
exchanges will have a complete record of all exemptions requested, 
granted, and denied, as well as information about the commercial 
operations of traders who apply for exemptions. Because the Commission 
has not specified a format for such exemption applications, exchanges 
have flexibility to determine which information will best inform the 
exchange's self-regulatory operations and obligations.
    The Commission understands that many DCMs are already requiring 
applications for exemptive relief from speculative position 
limits,\801\ and that SEFs are likely to adopt this practice as a 
``best practice'' for complying with core principles. As such, the 
proposed rules codify an industry ``best practice'' regarding position 
limits and promote the continuation of the benefits of that best 
practice across all trading venues and all commodity derivative 
contracts.
---------------------------------------------------------------------------

    \801\ See, e.g., CME Rule 559; NYMEX Rule 559; CBOT Rule 559; 
KCBT Rule 559; ICE Futures Rules 6.26, 6.27, and 6.29; and MGEX Rule 
1504.00.
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d. Section 150.5(a)(2)(ii) Other Exemptions
    As discussed above, the Commission is proposing to set single-month 
limits at the same levels as all-months limits, rendering the 
``spread'' exemption in current Sec.  150.3 unnecessary. However, since 
DCM core principle 5 allows exchanges to set more restrictive levels 
than those set by the Commission, a DCM or SEF may set the single month 
limit at a lower level than that of the all-month limit. Further, 
because federal limits apply across trading venues, exchanges may grant 
spread exemptions for inter-market spreads across exchanges. As such, 
the Commission is proposing Sec.  150.5(a)(2)(ii) to clarify the types 
of spread positions for which a DCM or SEF may grant exemptions by 
cross-referencing the definitions proposed in Sec.  150.1 \802\ and to 
require that any such exemption be outside of the spot month for 
physical-delivery contracts.
---------------------------------------------------------------------------

    \802\ The terms ``inter-market spread'' and ``intra-market 
spread'' are defined in proposed Sec.  150.1.
---------------------------------------------------------------------------

    This exemption would provide exchanges with certainty regarding the 
application of spread exemptions for contracts subject to federal 
limits under proposed Sec.  150.2. Should an exchange decide to provide 
exemptive relief for spread positions, the exemption described in Sec.  
150.5(a)(2)(ii) promotes the intended goals of federal speculative 
limits, including protection of the spot period in the physical-
delivery contract and exemption of positions as appropriate.
e. Section 150.5(a)(3) Pre-Enactment and Transition Period Swaps 
Positions
    Proposed Sec.  150.5(a)(3) requires DCMs and SEFs to exempt pre-
enactment and transition period swaps as defined in proposed Sec.  
150.1 from exchange-set limits on contracts subject to federal limits 
under proposed Sec.  150.2. This provision mirrors the exemption 
proposed in Sec.  150.3 and requires that exchanges provide the same 
relief as the Commission for pre-existing swaps positions.
    Further, requiring that DCMs and SEFs allow netting of pre-and-post 
enactment swaps outside of the spot month provides additional 
flexibility on an exchange level for market participants in 
transitioning to a position limits regime that includes swaps.
f. Request for Comment
    The Commission requests comment on its consideration of the 
benefits of proposed Sec.  150.5. Are there additional benefits that 
the Commission should consider? Has the Commission misidentified any 
benefits?
iii. Costs
    DCMs presently have considerable experience in setting and 
administering speculative position limits and hedge exemption programs 
in line with existing Commission guidance and acceptable practices that 
run parallel in most respects to the requirements that are incorporated 
in the proposed rule. Accordingly, as a general matter, the Commission 
anticipates minimal cost impact on DCMs from these proposed 
requirements; relative to DCMs, the cost impact for SEFs as newly-
instituted entities may be somewhat greater.
    The Commission notes that recently adopted Sec.  37.204 of the 
Commission's regulations allows SEFs the flexibility to contract with a 
third-party regulatory service provider \803\ to fulfill certain 
regulatory obligations.\804\ The administration of position limits is 
within the range of obligations eligible for outsourcing to a third-
party regulatory service provider. Presumably, a SEF will avail itself 
of this flexibility if doing so results in lower costs for the entity. 
In order to better inform itself with respect to the cost implications 
of this proposed rule for SEFs, the Commission requests comment on the 
likelihood of SEFs utilizing a third-party regulatory service provider 
to comply with its position limits obligations and the expected dollar 
costs of doing so. The Commission also requests comment on the expected 
dollar costs of meeting the proposed rule's requirement if a SEF 
undertakes to perform the proposed rule's obligations in-house rather 
than outsourcing them.
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    \803\ Under Sec.  37.204, possible third-party regulatory 
service providers include registered futures associations (such as 
the National Futures Association (NFA)), registered entities (such 
as DCMs or SEFs), and the Financial Industry Regulatory Authority 
(FINRA).
    \804\ See 78 FR 33476, 33516, Jun. 4, 2013.
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    The following discusses potential costs with respect to the 
specific discretionary aspects of the rule to which they are 
attributable.
a. Section 150.5(a)(5) and (b)(8) Aggregation and Sec.  150.5(a)(2)(i) 
and (b)(5)(i) Hedge Exemptions
    DCMs may incur costs to amend their current aggregation and bona 
fide hedging policies to conform with proposed Sec.  150.4 and proposed 
Sec.  150.1 respectively. Such costs may include burdens associated 
with reviewing and evaluating current standards to assess differences 
that must be addressed, employing legal counsel to aid in ensuring 
conformity, and transitioning from an old standard to the new one. 
Because the burden associated with this rule is proportional to the 
divergence of a DCM's current standard from the Commission's proposed 
standard, costs are specific and proprietary to each affected entity; 
as such, the Commission is unable to estimate costs at this time within 
a range of reasonable accuracy. It requests comment to assist it in 
doing so.
    SEFs, as newly-instituted entities, will be required to incur costs 
to develop aggregation and bona fide hedging policies that conform to 
the appropriate provisions as required

[[Page 75776]]

under proposed Sec.  150.5. Such costs are likely to include legal 
counsel, as well as drafting and implementation of the new policy. 
Because these entities are new and have not previously been subject to 
the Commission's oversight in this capacity, the Commission requests 
comment regarding the costs associated with implementing the 
appropriate policies.
b. Section 150.5(a)(2)(iii) and (b)(5)(iii) Application for Exemption
    The Commission anticipates that DCMs will incur minimal costs to 
administer the application process for exemption relief in accordance 
with standards set forth in the proposed rule. As described above, the 
Commission understands that requiring traders to apply for exemptive 
relief comports with existing DCM practice. Accordingly, by 
incorporating an application requirement that the Commission has reason 
to understand most if not all active DCMs already follow, the rule 
should have little cost impact for DCMs.
    For SEFs, the rules necessitate a compliant application regime, 
which will require an initial investment similar to that which DCMs 
have likely already made and need not duplicate. As noted above, the 
Commission considers it highly likely that, in accordance with industry 
best practices to comply with core principles and due to the utility of 
application information in demonstrating compliance with core 
principles, SEFs may incur such costs with or without the proposed 
rules. Again, due to the new existence of these entities, the 
Commission is unable to estimate what costs may be associated with the 
requirement to impose an application regime for exemptive relief on the 
exchange level. The Commission requests comment regarding the burden on 
a SEF to impose a compliant application regime.
c. Section 150.5(a)(2)(ii) Other Exemptions
    Proposed Sec.  150.5(a)(2)(ii) provides clarity on the imposition 
of exemptions for spread positions on contracts subject to federal 
limits under proposed Sec.  150.2 in accordance with new definitions 
proposed in Sec.  150.1. The Commission notes again that the rules 
would apply if the single-month limit is at a lower level than the all-
month limit, which would occur if a DCM or SEF determines to set more 
restrictive levels for a single-month limit that what has been set by 
the Commission, or if the exchange grants inter-market spread 
exemptions. Thus, the Commission anticipates that a DCM or SEF that has 
determined to set a more restrictive limit will have done so having 
taken into account any burden imposed by the proposed rule. Further, 
some trading venues already grant inter-market spread exemptions on 
certain commodities; such entities may be able to leverage current 
practices to extend such spread exemptions to other commodities as 
appropriate.
    The Commission expects small costs to be associated with 
communicating and monitoring the appropriate conditions for exemption 
as described in proposed Sec.  150.5(a)(2)(ii), namely that such 
position must be solely outside of the spot-month of the physical-
delivery contract.
d. Request for Comment
    The Commission requests comment on its considerations of the costs 
of proposed Sec.  150.5. Are there additional costs that the Commission 
should consider? Has the Commission misidentified any costs? What other 
relevant cost information or data, including alternative cost 
estimates, should the Commission consider and why?
iv. Consideration of Alternatives
    The Commission recognizes that alternatives may exist to 
discretionary elements of Sec.  150.5 proposed herein. The Commission 
requests comment on whether an alternative to what is proposed would 
result in a superior benefit-cost profile, with support for any such 
position provided.
6. Section 150.7--Reporting Requirements for Anticipatory Hedging 
Positions
    The revised definition of bona fide hedging in proposed Sec.  150.1 
incorporates hedges of five specific types of anticipated transactions: 
unfilled anticipated requirements, unsold anticipated production, 
anticipated royalties, anticipated services contract payments or 
receipts, and anticipatory cross-hedges.\805\ The Commission proposes 
reporting requirements in new Sec.  150.7 for traders seeking an 
exemption from position limits for any of these five enumerated 
anticipated hedging transactions. Proposed Sec.  150.7 would build on, 
and replace, the special reporting requirements for hedging of unsold 
anticipated production and unfilled anticipated requirements in current 
Sec.  1.48.\806\
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    \805\ See, paragraphs (3)(iii), (4)(i), (iii), and (iv), and 
(5), respectively, of the Commission's amended definition of bona 
fide hedging transactions in proposed Sec.  150.1.
    \806\ See 17 CFR 1.48. See also definition of bona fide hedging 
transactions in current 17 CFR 1.3(z)(2)(i)(B) and (ii)(C), 
respectively.
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    Current Sec.  1.48 provides a procedure for persons to file for 
bona fide hedging exemptions for anticipated production or unfilled 
requirements when that person has not covered the anticipatory need 
with fixed-price commitments to sell a commodity, or inventory or 
fixed-price commitments to purchase a commodity. It reflects a long-
standing Commission concern for the difficulty of distinguishing 
between reduction of risk arising from anticipatory needs and that 
arising from speculation if anticipatory transactions are not well 
defined.\807\ These same concerns apply to any position undertaken to 
reduce the risk of anticipated transactions. To address them, the 
Commission proposes to extend the special reporting requirements in 
proposed Sec.  150.7 for all types of enumerated anticipatory hedges 
that appear in the definition of bona fide hedging positions in 
proposed Sec.  150.1.\808\
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    \807\ See Hedging Anticipated Requirements for Processing or 
Manufacturing under Section 4a(3) of the Commodity Exchange Act, 21 
FR 6913, Sep. 12, 1956.
    \808\ For purposes of simplicity, the proposed special reporting 
requirements for anticipatory hedges would be placed within the 
Commission's position limits regime in part 150, and alongside the 
Commission's updated definition of bona fide hedging positions in 
proposed Sec.  150.1; rendered duplicative by these changes, current 
Sec.  1.48 would be deleted. In another non-substantive change, 
proposed Sec.  150.7(i) would replace current Sec.  140.97 which 
delegates to the Director of the Division of Market Oversight or his 
designee authority regarding requests for classification of 
positions as bona fide hedging under current Sec. Sec.  1.47 and 
1.48. For purposes of simplicity, this delegation of authority would 
be placed within the Commission's position limits regime in part 
150.
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    The Commission proposes to add a new series '04 reporting form, 
Form 704, to effectuate these additional and updated reporting 
requirements for anticipatory hedges. Persons wishing to avail 
themselves of an exemption for any of the anticipatory hedging 
transactions enumerated in the updated definition of bona fide hedging 
in proposed Sec.  150.1 would be required to file an initial statement 
on Form 704 with the Commission at least ten days in advance of the 
date that such positions would be in excess of limits established in 
proposed Sec.  150.2.
    Proposed Sec.  150.7(f) would add a requirement for any person who 
files an initial statement on Form 704 to provide annual updates that 
detail the person's actual cash market activities related to the 
anticipated exemption. Proposed Sec.  150.7(g) would similarly enable 
the Commission to review and compare the

[[Page 75777]]

actual cash activities and the remaining unused anticipated hedge 
transactions by requiring monthly reporting on Form 204.
    As is the case under current Sec.  1.48, proposed Sec.  150.7(h) 
requires that a trader's maximum sales and purchases must not exceed 
the lesser of the approved exemption amount or the trader's current 
actual anticipated transaction.
i. Benefits and Costs
    As noted above, the Commission remains concerned that 
distinguishing whether an over-the-limit position is entered into in 
order to reduce risk arising from anticipatory needs, or whether it is 
speculative, may be exceedingly difficult if anticipatory transactions 
are not well defined. The Commission proposes to add, in its 
discretion, proposed Sec.  150.7 to collect vital information to aid in 
this distinction. Advance notice of a trader's intended maximum 
position in commodity derivative contracts to offset anticipatory risks 
would identify--in advance--a position as a bona fide hedging position, 
avoiding unnecessary contact during the trading day with surveillance 
staff to verify whether a hedge exemption application is in process, 
the appropriate level for the exemption and whether the exemption is 
being used in a manner that is consistent with the requirements. Market 
participants can anticipate hedging needs well in advance of assuming 
positions in derivatives markets and in many cases need to supply the 
same information after the fact; in such cases, providing the 
information in advance allows the Commission to better direct its 
efforts towards deterring and detecting manipulation. The annual 
updates in proposed Sec.  150.7(f) similarly allow the Commission to 
verify on an ongoing basis that the person's anticipated cash market 
transactions closely track that person's real cash market activities. 
Absent monthly filing pursuant to proposed Sec.  150.7(g), the 
Commission would need to issue a special call to determine why a 
person's commodity derivative contract position is, for example, larger 
than the pro rata balance of her annually reported anticipated 
production.
    The Commission understands that there will be costs associated with 
proposed Sec.  150.7(f) in the filing of Form 704. Costs of filing that 
form are discussed in the context of the proposed part 19 requirements.
    The Commission requests comments on its consideration of the costs 
and benefits of proposed Sec.  150.7. Are there additional costs or 
benefits the Commission should consider? What costs may be incurred 
beyond those incurred to gather information and file Form 704? Should 
the Commission consider alternatives to its annual updating 
requirement? The Commission also recognizes that alternatives may exist 
to discretionary elements of Sec.  150.7 proposed herein. The 
Commission requests comments on whether an alternative to what is 
proposed would result in a superior benefit-cost profile, with support 
for any such position provided.
7. Part 19--Reports
    CEA Section 4i authorizes the Commission to require the filing of 
reports, as described in CEA section 4g, when positions equal or exceed 
position limits. Current part 19 of the Commission's regulations sets 
forth these reporting requirements for persons holding or controlling 
reportable futures and option positions that constitute bona fide hedge 
positions as defined in Sec.  1.3(z) and in markets with federal 
speculative position limits--namely those for grains, the soy complex, 
and cotton. Since having a bona fide hedge exemption affords a 
commercial market participant the opportunity to hold positions that 
exceed a position limit level, it is important for the Commission to be 
able to verify that when an exemption is invoked that it is done so for 
legitimate purposes. As such, commercial entities that hold positions 
in excess of those limits must file information on a monthly basis 
pertaining to owned stocks and purchase and sales commitments for 
entities that claim a bona fide hedging exemption.
    In order to help ensure that the additional exemptions described in 
proposed Sec.  150.3 are used in accordance with the requirements of 
the exemption employed, as well as obtain information necessary to 
verify that any futures, options and swaps positions established in 
referenced contracts are justified, the Commission proposes to make 
conforming and substantive amendments to part 19. First, the Commission 
proposes to amend part 19 by adding new and modified cross-references 
to proposed part 150, including the new definition of bona fide hedging 
position in proposed Sec.  150.1.\809\ Second, the Commission proposes 
to amend Sec.  19.00(a) by extending reporting requirements to any 
person claiming any exemption from federal position limits pursuant to 
proposed Sec.  150.3. The Commission proposes to add three new series 
'04 reporting forms to effectuate these additional reporting 
requirements. Third, the Commission proposes to update the manner of 
part 19 reporting. Lastly, the Commission proposes to update both the 
type of data that would be required in series '04 reports, as well as 
the time allotted for filing such reports.
---------------------------------------------------------------------------

    \809\ These amendments are non-substantive conforming amendments 
and should not have implications for the Commission's consideration 
of costs and benefits.
---------------------------------------------------------------------------

i. Rule Summary
a. Extension of Reporting Requirements
    Proposed part 19 will be expanded to include reporting requirements 
for positions in swaps, in addition to futures and options positions, 
for any instance in which a person relies on an exemption. Therefore, 
positions in ``commodity derivative contracts,'' as defined in proposed 
Sec.  150.1, would replace ``futures and option positions'' throughout 
amended part 19 as shorthand for any futures, option, or swap contract 
in a commodity (other than a security futures product as defined in CEA 
section 1a(45)).\810\
---------------------------------------------------------------------------

    \810\ See supra discussion of proposed amendments to part 19.
---------------------------------------------------------------------------

    The Commission also proposes to extend the reach of part 19 by 
requiring all persons who avail themselves of any exemption from 
federal position limits under proposed Sec.  150.3 to file applicable 
series '04 reports.\811\ The list of positions set forth in proposed 
Sec.  150.3 that are eligible for exemption from the federal position 
includes, but is not limited to, bona fide hedging positions (including 
pass-through swaps and anticipatory bona fide hedge positions), 
qualifying spot month positions in cash-settled referenced contracts, 
and qualifying non-enumerated risk-reducing transactions.
---------------------------------------------------------------------------

    \811\ Furthermore, anyone exceeding the federal limits who has 
received a special call must file a series '04 form.
---------------------------------------------------------------------------

    The Commission currently requires two monthly reports, CFTC Forms 
204 and 304, which are listed in current Sec.  15.02.\812\ The reports, 
collectively referred to as the Commission's ``series '04 reports,'' 
show a trader's positions in the cash market and are used by the 
Commission to determine whether a trader has sufficient cash positions 
that justify futures and option positions above the speculative limits. 
CFTC Form 204 is the Statement of Cash Positions in Grains, which 
includes the soy complex, and CFTC Form 304 Report is the Statement of 
Cash

[[Page 75778]]

Positions in Cotton.\813\ The Commission proposes to add three new 
series '04 reporting forms to effectuate the expanded reporting 
requirements of part 19. Proposed CFTC Form 504, Statement of Cash 
Positions for Conditional Spot Month Exemptions, would be added for use 
by persons claiming the conditional spot month limit exemption pursuant 
to proposed Sec.  150.3(c). Proposed CFTC Form 604, Statement of 
Counterparty Data for Pass-Through Swap Exemptions, would be added for 
use by persons claiming a bona fide hedge exemption for either of two 
specific pass-through swap position types, as discussed further below. 
Proposed CFTC Form 704, Statement of Anticipatory Bona Fide Hedge 
Exemptions, would be added for use by persons claiming a bona fide 
hedge exemption for certain anticipatory bona fide hedging positions.
---------------------------------------------------------------------------

    \812\ 17 CFR 15.02.
    \813\ See supra discussion of series '04 forms.
---------------------------------------------------------------------------

b. Manner of Reporting
    For purposes of reporting cash market positions under current part 
19, the Commission historically has allowed a reporting trader to 
``exclude certain products or byproducts in determining his cash 
positions for bona fide hedging'' if it is ``the regular business 
practice of the reporting trader'' to do so.\814\ Nevertheless, the 
Commission believes that an entity, when calculating the value that is 
subject to risks from a source commodity in order to establish a long 
derivatives position as a hedge for unfilled anticipated requirements, 
need take into account large quantities of a source commodity that it 
may hold in inventory. Under proposed Sec.  19.00(b)(1), a source 
commodity itself can only be excluded from a calculation of a cash 
position if the amount is de minimis, impractical to account for, and/
or on the opposite side of the market from the market participant's 
hedging position.\815\
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    \814\ See 17 CFR 19.00(b)(1) (providing that ``[i]f the regular 
business practice of the reporting trader is to exclude certain 
products or byproducts in determining his cash position for bona 
fide hedging . . . , the same shall be excluded in the report'').
    \815\ Proposed Sec.  19.00(b)(1) adds a caveat to the 
alternative manner of reporting: when reporting for the cash 
commodity of soybeans, soybean oil, or soybean meal, the reporting 
person shall show the cash positions of soybeans, soybean oil and 
soybean meal. This proposed provision for the soybean complex is 
included in the current instructions for preparing Form 204.
---------------------------------------------------------------------------

    Persons who wish to avail themselves of cross-commodity hedges are 
required to file an appropriate series '04 form. Proposed Sec.  
19.00(b)(2) sets forth instructions, which are consistent with the 
provisions in the current section, for reporting a cash position in a 
commodity that is different from the commodity underlying the futures 
contract used for hedging.\816\ Since proposed Sec.  19.00(b)(3) would 
maintain the requirement that cross-hedged positions be shown both in 
terms of the equivalent amount of the commodity underlying the 
commodity derivative contract used for hedging and in terms of the 
actual cash commodity (as provided for on the appropriate series '04 
form), the Commission will be able to determine the hedge ratio used 
merely by comparing the reported positions. Thus, the Commission will 
be positioned to review whether a hedge ratio appears reasonable in 
comparison to, for example, other similarly situated traders.
---------------------------------------------------------------------------

    \816\ Proposed Sec.  19.00(b)(2) would add the term commodity 
derivative contracts (as defined in proposed Sec.  150.1). The 
proposed definition of cross-commodity hedge in proposed Sec.  150.1 
is discussed above.
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    Proposed Sec.  19.00(b)(3) maintains the requirement that standards 
and conversion factors used in computing cash positions for reporting 
purposes must be made available to the Commission upon request. 
Proposed Sec.  19.00(b)(3) would clarify that such information would 
include hedge ratios used to convert the actual cash commodity to the 
equivalent amount of the commodity underlying the commodity derivative 
contract used for hedging, and an explanation of the methodology used 
for determining the hedge ratio.
c. Bona Fide Hedgers and Cotton Merchants and Dealers
    Current Sec.  19.01(a) sets forth the data that must be provided by 
bona fide hedgers (on Form 204) and by merchants and dealers in cotton 
(on Form 304). The Commission proposes to continue using Forms 204 and 
304, with minor changes to the types of data to be reported.\817\ Form 
204 will be expanded to incorporate, in addition to all other positions 
reportable under proposed Sec.  19.00(a)(1)(iii), monthly reporting for 
cotton, including the granularity of equity, certificated and non-
certificated cotton stocks of cotton. Weekly reporting for cotton will 
be retained as a separate report made on Form 304 for the collection of 
data required by the Commission to publish its weekly public cotton 
``on call'' report on www.cftc.gov.
---------------------------------------------------------------------------

    \817\ The list of data required for persons filing on Forms 204 
and 304 would be relocated from current Sec.  19.01(a) to proposed 
Sec.  19.01(a)(3).
---------------------------------------------------------------------------

    Proposed Sec.  19.01(b) would maintain the requirement that reports 
on Form 204 be submitted to the Commission on a monthly basis, as of 
the close of business on the last Friday of the month.
d. Conditional Spot-Month Limit Exemption
    Proposed Sec.  19.01(a)(1) would require persons availing 
themselves of the conditional spot month limit exemption for natural 
gas (pursuant to proposed Sec.  150.3(c)) to report certain detailed 
information concerning their cash market activities. While traders 
could not directly influence the settlement price in the physical-
delivery referenced contract due to the prohibition of holding 
physical-delivery contract positions when invoking the conditional spot 
month exemption, there is no similar restriction on holding the 
underlying cash commodity. While the Commission is concerned about 
traders' activities in the underlying cash market of any derivative 
contract, it is particularly concerned with respect to natural gas 
where there is an existing conditional spot-month limit exemption. 
Accordingly, proposed Sec.  19.01(b) would require that persons 
claiming a conditional spot month limit exemption must report on new 
Form 504 daily, by 9 a.m. Eastern Time on the next business day, for 
each day that a person is over the spot month limit in certain 
commodity contracts specified by the Commission. The scope of 
reporting--purchase and sales contracts through the delivery area for 
the core referenced futures contract and inventory in the delivery 
area--differs from the scope of reporting for bona fide hedgers, since 
the person relying on the conditional spot month limit exemption need 
not be hedging a position.
    Initially, the Commission would require reporting on new Form 504 
for exemptions in the natural gas commodity derivative contracts 
only.\818\ The Commission requests comment as to whether the costs and 
benefits of the enhanced reporting regime support imposing this 
requirement on additional commodity markets before gaining

[[Page 75779]]

additional experience with this exemption in other commodities.
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    \818\ The Commission believes that enhanced reporting for 
natural gas contracts is warranted based on its experience in 
surveillance of natural gas commodity derivative contracts. Absent 
experiential evidence of current need beyond the natural gas realm, 
the Commission proposes to initially not impose reporting 
requirements for persons claiming conditional spot month limit 
exemptions in other commodity derivative contracts until the 
Commission gains additional experience with the limits in proposed 
Sec.  150.2. However, the Commission retains its authority to issue 
``special calls'' under Sec.  18.05. The Commission will closely 
monitor the reporting associated with conditional spot-month limit 
exemptions in natural gas, as well as other information available to 
the Commission for other commodities, and may require reporting on 
Form 504 for other commodity derivative contracts in the future.
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e. Pass-Through Swap Exemption
    Under the definition of bona fide hedging position in proposed 
Sec.  150.1, a person who uses a swap to reduce risks attendant to a 
position that qualifies for a bona fide hedging transaction may pass-
through those bona fides to the counterparty, even if the person's swap 
position is not in excess of a position limit.\819\ As such, positions 
in commodity derivative contracts that reduce the risk of pass-through 
swaps would qualify as bona fide hedging transactions.
---------------------------------------------------------------------------

    \819\ See supra discussion of definition of bona fide hedging 
position in proposed Sec.  150.1.
---------------------------------------------------------------------------

    Proposed Sec.  19.01(a)(2) would require a person relying on the 
pass-through swap exemption who holds either of two position types to 
file a report with the Commission on new form 604. The first type of 
position is a swap executed opposite a bona fide hedger that is not a 
referenced contract and for which the risk is offset with referenced 
contracts. The second type of position is a cash-settled swap executed 
opposite a bona fide hedger that is offset with physical-delivery 
referenced contracts held into a spot month, or, vice versa, a 
physical-delivery swap executed opposite a bona fide hedger that is 
offset with cash-settled referenced contracts held into a spot month.
    The information reported on Form 604 would explain hedgers' needs 
for large referenced contract positions and would give the Commission 
the ability to verify that the positions were a bona fide hedge, with 
heightened daily surveillance of spot month offsets. Persons holding 
any type of pass-through swap position other than the two described 
above would report on form 204.\820\
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    \820\ Persons holding pass-through swap positions that are 
offset with referenced contracts outside the spot month (whether 
such contracts are for physical delivery or are cash-settled) need 
not report on Form 604 because swap positions will be netted with 
referenced contract positions outside the spot month pursuant to 
proposed Sec.  150.2(b).
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f. Swap Off-Sets
    Proposed Sec.  19.01(a)(2)(i) lists the types of data that a person 
who executes a pass-through swap that is not a referenced contract and 
for which the risk is offset with referenced contracts must report on 
new Form 604. Under proposed Sec.  19.01(b), persons holding non-
referenced contract swap offset would submit reports to the Commission 
on a monthly basis, as of the close of business of the last Friday of 
the month. This data collection would permit staff to identify offsets 
of non-referenced-contract pass-through swaps on an ongoing basis for 
further analysis.
    Under proposed Sec.  150.2(a), a trader in the spot month may not 
net across physical-delivery and cash-settled contracts for the purpose 
of complying with federal position limits.\821\ If a person executes a 
cash-settled pass-through swap that is offset with physical-delivery 
contracts held into a spot month (or vice versa), then, pursuant to 
proposed Sec.  19.01(a)(2)(ii), that person must report additional 
information concerning the swap and offsetting referenced contract 
position on new Form 604. Pursuant to proposed Sec.  19.01(b), a person 
holding a spot month swap offset would need to file on form 604 as of 
the close of business on each day during a spot month, and not later 
than 9 a.m. Eastern Time on the next business day following the date of 
the report. The Commission notes that pass-through swap offsets would 
not be permitted during the lesser of the last five days of trading or 
the time period for the spot month. However, the Commission remains 
concerned that a trader could hold an extraordinarily large position 
early in the spot month in the physical-delivery contract along with an 
offsetting short position in a cash-settled contract. Hence, the 
Commission proposes to introduce this new daily reporting requirement 
within the spot month to identify and monitor such offsetting 
positions.
---------------------------------------------------------------------------

    \821\ See supra discussion of proposed Sec.  150.2.
---------------------------------------------------------------------------

ii. Benefits
    The reporting requirements allow the Commission to obtain the 
information necessary to verify whether the relevant exemption 
requirements are fulfilled in a timely manner. This is needed for the 
Commission to help ensure that any person who claims any exemption from 
federal speculative position limits can demonstrate a legitimate 
purpose for doing so. In the absence of the reporting requirements 
detailed in proposed part 19, the Commission would lack critical tools 
to identify abuses related to the exemptions afforded in proposed Sec.  
150.3 in a timely manner and refer them to enforcement. As such, the 
reporting requirements are necessary for the Commission to be able to 
perform its essential surveillance functions. These reporting 
requirements therefore promote the Commission's ability to achieve, to 
the maximum extent practicable, the statutory factors outlined by 
Congress in CEA section 4a(a)(3).
    The Commission requests comment on its considerations of the 
benefits of reporting under part 19. Has the Commission accurately 
identified the benefits of collecting the reported information? Are 
there additional benefits the Commission should consider?
iii. Costs
    The Commission recognizes there will be costs associated with the 
proposed changes and additions to the report filing requirements under 
part 19. Though the Commission anticipates that market participants 
should have ready access to much of the required information, the 
Commission expects that, at least initially, market participants will 
require additional time and effort to become familiar with new and 
amended series '04 forms, to gather the necessary information in the 
required format, and to file reports in the proposed timeframes. The 
Commission has attempted to mitigate the cost impacts of these reports.
    Actual costs incurred by market participants will vary depending on 
the diversity of their cash market positions, the experience that the 
participants currently have regarding filing Form 204 and Form 304 as 
well as a variety of other organizational factors. However, the 
Commission has estimated average incremental burdens associated with 
the proposed rules in order to fulfill its obligations under the 
PRA.\822\
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    \822\ See PRA section below for full details on the Commission's 
estimates.
---------------------------------------------------------------------------

    For Form 204, the Commission estimates that approximately 400 
market participants will file an average of 12 reports annually at an 
estimated labor burden of 2 hours per response for a total per-entity 
hour burden of approximately 24 hours, which computes to a total annual 
burden of 9,600 hours for all affected entities. Using an estimated 
hourly wage of $120 per hour,\823\ the Commission estimates

[[Page 75780]]

an annual per-entity cost of approximately $2,900 and a total annual 
cost of $1,152,000 for all affected entities.
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    \823\ The Commission's estimates concerning the wage rates are 
based on 2011 salary information for the securities industry 
compiled by the Securities Industry and Financial Markets 
Association (``SIFMA''). The Commission is using $120 per hour, 
which is derived from a weighted average of salaries across 
different professions from the SIFMA Report on Management & 
Professional Earnings in the Securities Industry 2011, modified to 
account for an 1800-hour work-year, adjusted to account for the 
average rate of inflation in 2012, and multiplied by 1.33 to account 
for benefits and 1.5 to account for overhead and administrative 
expenses. The Commission anticipates that compliance with the 
provisions would require the work of an information technology 
professional; a compliance manager; an accounting professional; and 
an associate general counsel. Thus, the wage rate is a weighted 
national average of salary for professionals with the following 
titles (and their relative weight); ``programmer (senior)'' and 
``programmer (non-senior)'' (15% weight), ``senior accountant'' 
(15%) ``compliance manager'' (30%), and ``assistant/associate 
general counsel'' (40%). All monetary estimates have been rounded to 
the nearest hundred dollars.
---------------------------------------------------------------------------

    For Form 304, the Commission estimates that approximately 400 
market participants will file an average of 52 reports annually at an 
estimated labor burden of 1 hours per response for a total per-entity 
hour burden of approximately 52 hours, which computes to a total annual 
burden of 20,800 hours for all affected entities. Using an estimated 
hourly wage of $120 per hour,\824\ the Commission estimates an annual 
per-entity cost of approximately $6,300 and a total annual cost of 
$2,500,000 for all affected entities.
---------------------------------------------------------------------------

    \824\ Id.
---------------------------------------------------------------------------

    For the new Form 504, the Commission anticipates that approximately 
40 market participants will file an average of 12 reports annually at 
an estimated labor burden of 15 hours per response for a total per-
entity hour burden of approximately 180 hours, which computes to a 
total annual burden of 7,200 hours for all affected entities. Using an 
estimated hourly wage of $120 per hour,\825\ the Commission estimates 
an annual per-entity cost of approximately $10,800 and a total annual 
cost of $864,000 for all affected entities.
---------------------------------------------------------------------------

    \825\ Id.
---------------------------------------------------------------------------

    For the new Form 604, the Commission anticipates that approximately 
200 market participants will file an average of 10 reports annually at 
an estimated labor burden of 30 hours per response for a total per-
entity hour burden of approximately 300 hours, which computes to a 
total annual burden of 60,000 hours for all affected entities. Using an 
estimated hourly wage of $120 per hour,\826\ the Commission estimates 
an annual per-entity cost of approximately $36,000 and a total annual 
cost of $7,200,000 for all affected entities.
---------------------------------------------------------------------------

    \826\ Id.
---------------------------------------------------------------------------

    Finally, for the new Form 704, the Commission anticipates that 
approximately 200 market participants will file an average of 10 
reports annually at an estimated labor burden of 20 hours per response 
for a total per-entity hour burden of approximately 200 hours, which 
computes to a total annual burden of 40,000 hours for all affected 
entities. Using an estimated hourly wage of $120 per hour,\827\ the 
Commission estimates an annual per-entity cost of approximately $24,000 
and a total annual cost of $4,800,000 for all affected entities.
---------------------------------------------------------------------------

    \827\ Id.
---------------------------------------------------------------------------

    The Commission requests comment regarding its consideration of 
costs pertaining to the amendments to part 19. Has the Commission 
accurately described the ways that market participants may incur costs? 
Are there other costs, direct or indirect, that the Commission should 
consider regarding the proposed part 19? How does the introduction of 
the new series '04 reports affect the likelihood that a trader may seek 
an exemption? What other burdens may arise from the filing of these 
reports? Are the Commission's burden estimates under the PRA 
reasonable? Why or why not? Commenters are encouraged to submit their 
own estimates of costs, including labor burdens and wage estimates, for 
the Commission's consideration.
iv. Consideration of Alternatives
    The Commission also recognizes that alternatives may exist to 
discretionary elements of the part 19 reporting amendments proposed 
herein. The Commission requests comments on whether an alternative to 
what is proposed would result in a superior benefit-cost profile, with 
support for any such position provided.
8. CEA Section 15(a)
    As described above, the Commission interprets the revised CEA 
section 4a as requiring the imposition of speculative position limits 
during the spot-month, any single month, and all-months-combined on all 
commodity derivative contracts, including swaps, that reference the 
same underlying physical commodity on an aggregated basis across 
trading venues. Section 15(a) of the Act requires the Commission to 
evaluate the costs and benefits of its discretionary actions in light 
of five enumerated factors that represent broad areas of market and 
public concern. The Commission welcomes comment on its evaluation under 
CEA section 15(a).
i. Protection of Market Participants and the Public
    Broadly speaking, the Commission's expansion of the federal 
speculative position limits regime to include an additional 19 core-
referenced futures contracts (and the associated referenced contracts) 
will extend protections afforded to the existing legacy contracts. 
Namely, the limits are intended as a measure to prophylactically deter 
manipulation and to diminish, eliminate, or prevent excessive 
speculation in significant price discovery contracts. The proposed 
limits in Sec.  150.2, the methodology used for determining limits at 
the spot, single and all-months combined levels and the determination 
of distinct levels in physically-delivered and cash-settled contracts 
all support the Commission's mission to prevent undue or unnecessary 
burdens on interstate commerce resulting from excess speculation such 
as the sudden or unreasonable fluctuations or unwarranted changes in 
commodity prices. Further, by requiring that market participants who 
avail themselves of the exemptions offered under Sec.  150.3 document 
their exemption eligibility and make such records available on request 
and through regular reporting to the Commission, the Commission is 
protecting market participants--hedgers and speculators alike--from 
another party abusing the exemptions reserved for eligible entities.
    The Commission anticipates that market participants engaged in 
speculative trading will incur costs to monitor their positions vis-a-
vis limit levels. The Commission expects that market participants will 
need to invest additional time and effort to become familiar with new 
and amended series '04 forms, to gather the necessary information in 
the required format, and to file reports in the proposed timeframes.
ii. Efficiency, Competitiveness, and Financial Integrity of Markets
    Position limits help to prevent market manipulation or excessive 
speculation that may unduly influence prices at the expense of the 
efficiency and integrity of markets. The expansion of the federal 
position limits regime to 28 core referenced futures contracts enhances 
the buffer against excessive speculation historically afforded to the 
nine legacy contracts exclusively, improving the financial integrity of 
those markets. Moreover, the proposed limits in Sec.  150.2 promote 
market competitiveness by preventing a trader from gaining too much 
market power.
    The stringently defined exemptions in Sec.  150.3 and the reporting 
requirements assigned to those availing themselves of the exemptions 
provided are the Commission's first line of defense in ensuring that 
participants transacting in the Commission's jurisdictional markets are 
doing so in a competitive and efficient environment.
    In codifying the Commission's historical practice of temporarily 
lifting position limit restrictions, the proposed

[[Page 75781]]

Sec.  150.3(b) financial distress exemption strengthens the benefits of 
accommodating transfers of positions from financially distressed firms 
to financially secure firms or facilitating other necessary remediation 
measures during times of market stress. In addition, it provides market 
participants with a degree of confidence which contributes to the 
overall efficiency and financial integrity of markets.
iii. Price Discovery
    Market manipulation or excessive speculation may result in 
artificial prices. So, in this sense, position limits might also help 
to prevent the price discovery function of the underlying commodity 
markets from being disrupted. On the other hand, imposing position 
limits raises the concerns that liquidity and price discovery may be 
diminished, because certain market segments, i.e., speculative traders, 
are restricted. However, the Commission has mitigated some of these 
concerns by proposing various exemptions to positions limits. In 
addition, applying current DCM-set limits as federal limits means that 
even though additional contract markets will be brought into the 
federal position limits regime, the activity of speculative traders, at 
least initially, will be no less restricted than under the current 
regime.
iv. Sound Risk Management
    Proposed exemptions for bona fide hedgers help to ensure that 
market participants with positions that are hedging legitimate 
commercial needs are properly recognized as hedgers under the 
Commission's speculative position limits regime. This promotes sound 
risk management practices. In addition, the Commission has crafted the 
proposed rules to ensure sufficient market liquidity for bona fide 
hedgers to the maximum extent practicable, e.g., through the 
conditional spot month limit exemption.
    To the extent that monitoring for position limits requires market 
participants to create internal risk limits and evaluate position size 
in relation to the market, position limits may also provide an 
incentive for market participants to engage in sound risk management 
practices.
v. Other Public Interest Considerations
    The regulations proposed under Sec.  150.5 require that exchange-
set limits employ policies that conform to the Commission's general 
policy both for contracts that are subject to federal limits under 
Sec.  150.2 and those that are not, thus harmonizing rules for all 
federal and exchange-set speculative position limits.

B. Paperwork Reduction Act

1. Overview
    The PRA \828\ imposes certain requirements on Federal agencies in 
connection with their conducting or sponsoring any collection of 
information as defined by the PRA. Certain provisions of the 
regulations proposed herein will result in amendments to approved 
collection of information requirements within the meaning of the PRA. 
An agency may not conduct or sponsor, and a person is not required to 
respond to, a collection of information unless it displays a currently 
valid control number issued by the Office of Management and Budget 
(``OMB''). Therefore, the Commission is submitting this proposal to OMB 
for review in accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11. The 
information collection requirements proposed in this proposal would 
amend previously-approved collections associated with OMB control 
numbers 3038-0009 and 3038-0013.
---------------------------------------------------------------------------

    \828\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

    If adopted, responses to these collections of information would be 
mandatory. Several of the reporting requirements are mandatory in order 
to obtain exemptive relief, and are thus mandatory under the PRA to the 
extent a market participant elects to seek such relief. The Commission 
will protect proprietary information according to the Freedom of 
Information Act and 17 CFR part 145, headed ``Commission Records and 
Information.'' In addition, the Commission emphasizes that section 
8(a)(1) of the Act strictly prohibits the Commission, unless 
specifically authorized by the Act, from making public ``data and 
information that would separately disclose the business transactions or 
market positions of any person and trade secrets or names of 
customers.'' \829\ The Commission also is required to protect certain 
information contained in a government system of records pursuant to the 
Privacy Act of 1974.\830\
---------------------------------------------------------------------------

    \829\ 7 U.S.C. 12(a)(1).
    \830\ 5 U.S.C. 552a.
---------------------------------------------------------------------------

    Under the proposed regulations, market participants with positions 
in a ``referenced contract,'' as defined in proposed Sec.  150.1, would 
be subject to the position limit framework established under the 
proposed revisions to parts 19 and 150. Proposed part 19 prescribes new 
forms and reporting requirements for persons claiming a conditional 
spot month limit exemption (proposed Form 504),\831\ a pass-through 
swap exemption (proposed Form 604),\832\ or an anticipatory exemption 
(proposed Form 704).\833\ The proposed amendments to part 19 also 
update and change reporting obligations and required information for 
Form 204 and Form 304.\834\ Proposed part 150 prescribes reporting 
requirements for DCMs listing a core referenced futures contract \835\ 
and traders who wish to apply for an exemption from DCM- or SEF-
established positions limits in non-referenced contracts,\836\ as well 
as recordkeeping requirements for persons who claim exemptions from 
position limits or are counterparties to a person claiming a pass-
through swap offset.\837\
---------------------------------------------------------------------------

    \831\ See proposed Sec. Sec.  19.00(a)(1)(i) and 19.01(a)(1).
    \832\ See proposed Sec. Sec.  19.00(a)(1)(ii) and 19.01(a)(2).
    \833\ The requirement of filing a Form 704 in order to claim an 
anticipatory exemption is stipulated in proposed Sec.  150.7(a) in 
addition to its inclusion in proposed amendments to part 19. See 
proposed Sec. Sec.  19.00(a)(1)(iv), 19.01(a)(4) and 150.7(a).
    \834\ See proposed Sec.  19.01(a)(3).
    \835\ See proposed Sec.  150.2(e)(3)(ii).
    \836\ See proposed Sec.  150.5(b)(5)(C).
    \837\ See proposed Sec.  150.3(g).
---------------------------------------------------------------------------

2. Methodology and Assumptions
    It is not possible at this time to precisely determine the number 
of respondents affected by the proposed rules. Many of the regulations 
that impose PRA burdens are exemptions that a market participant may 
elect to take advantage of, meaning that without intimate knowledge of 
the day-to-day business decisions of all its market participants, the 
Commission could not know which participants, or how many, may elect to 
obtain such an exemption. Further, the Commission is unsure of how many 
participants not currently in the market may be required to or may 
elect to incur the estimated burdens in the future. Finally, many of 
the regulations proposed herein are applying to participants in swaps 
markets for the first time, and, as explained supra, the Commission's 
lack of experience with such markets and with many of the participants 
therein hinders its ability to determine with precision the number of 
affected entities.
    These limitations notwithstanding, the Commission has made best-
effort estimations regarding the likely number of affected entities for 
the purposes of calculating burdens under the PRA. The Commission used 
its proprietary data, collected from market participants, to estimate 
the number of respondents for each of the proposed obligations subject 
to the PRA. As discussed supra,\838\ the

[[Page 75782]]

Commission analyzed data covering the two year period 2011-2012 to 
determine how many participants would be over 60, 80, or 100 percent of 
the proposed limit levels in each of the 28 core referenced futures 
contracts, were such limit levels to be adopted as proposed.
---------------------------------------------------------------------------

    \838\ See supra discussion of number of traders over the limits.
---------------------------------------------------------------------------

    For purposes of the PRA, Commission staff determined the number of 
unique traders over the proposed spot-month position limit level for 
all of the 28 core referenced futures contracts combined. The 
Commission also determined the number of traders over the non-spot-
month position limit level for all of the 28 core referenced futures 
contracts combined. Staff then added those two figures and rounded it 
up to the nearest hundred to arrive at an approximation of 400 
persons.\839\ This base figure was then scaled to estimate, based on 
the Commission's expertise and experience in the administration of 
position limits, how many participants may be affected by each specific 
provision. The analysis reviewed by the Commission does not account for 
hedging and other exemptions from position limits, which leads the 
Commission to believe that the approximate number of traders in excess 
of the limits is a very conservative estimate. The Commission welcomes 
comment on its estimates, the methodology described above, and its 
conclusion regarding the conservativeness of its estimates.
---------------------------------------------------------------------------

    \839\ Staff believes that such rounding preserves the 
reasonability of the estimate without creating a false impression of 
precision.
---------------------------------------------------------------------------

    The Commission's estimates concerning wage rates are based on 2011 
salary information for the securities industry compiled by the 
Securities Industry and Financial Markets Association (``SIFMA''). The 
Commission is using a figure of $120 per hour, which is derived from a 
weighted average of salaries across different professions from the 
SIFMA Report on Management & Professional Earnings in the Securities 
Industry 2011, modified to account for an 1800-hour work-year, adjusted 
to account for the average rate of inflation in 2012. This figure was 
then multiplied by 1.33 to account for benefits \840\ and further by 
1.5 to account for overhead and administrative expenses.\841\ The 
Commission anticipates that compliance with the provisions would 
require the work of an information technology professional; a 
compliance manager; an accounting professional; and an associate 
general counsel. Thus, the wage rate is a weighted national average of 
salary for professionals with the following titles (and their relative 
weight); ``programmer (average of senior and non-senior)'' (15% 
weight), ``senior accountant'' (15%) ``compliance manager'' (30%), and 
``assistant/associate general counsel'' (40%). All monetary estimates 
have been rounded to the nearest hundred dollars. The Commission 
welcomes public comment on its assumptions regarding its estimated 
hourly wage.
---------------------------------------------------------------------------

    \840\ The Bureau of Labor Statistics reports that an average of 
32.8% of all compensation in the financial services industry is 
related to benefits. This figure may be obtained on the Bureau of 
Labor Statistics Web site, at http://www.bls.gov/news.release/ecec.t06.htm. The Commission rounded this number to 33% to use in 
its calculations.
    \841\ Other estimates of this figure have varied dramatically 
depending on the categorization of the expense and the type of 
industry classification used (see, e.g., BizStats at http://www.bizstats.com/corporation-industry-financials/finance-insurance-52/securities-commodity-contracts-other-financial-investments-523/commodity-contracts-dealing-and-brokerage-523135/show and Damodaran 
Online at http://pages.stern.nyu.edu/~adamodar/pc/datasets/
uValuedata.xls) The Commission has chosen to use a figure of 50% for 
overhead and administrative expenses to attempt to conservatively 
estimate the average for the industry.
---------------------------------------------------------------------------

3. Information Provided by Reporting Entities/Persons and Recordkeeping 
Duties
    For purposes of assisting the Commission in setting spot-month 
limits no less frequently than every two years, proposed Sec.  
150.2(e)(3)(ii) adds an additional burden cost to information 
collection 3038-0013 by requiring DCMs to supply the Commission with an 
estimated spot-month deliverable supply for each core referenced 
futures contract listed. The estimate must include documentation as to 
the methodology used in deriving the estimate, including a description 
and any statistical data employed. The Commission estimates that the 
submission would require a labor burden of approximately 20 hours per 
estimate. Thus, a DCM that submits one estimate may incur a burden of 
20 hours for a cost, using the estimated hourly wage of $120, of 
approximately $2,400. DCMs that submit more than one estimate may 
multiply this per-estimate burden by the number of estimates submitted 
to obtain an approximate total burden for all submissions, subject to 
any efficiencies and economies of scale that may result from submitting 
multiple estimates. The Commission welcomes comment regarding the 
estimated burden on DCMs that will result from proposed Sec.  150.2(e).
    Proposed Sec.  150.3(g)(1) adds an additional burden cost to 
information collection 3038-0013 by requiring any person claiming an 
exemption from federal position limits under part 150 to keep and 
maintain books and records concerning all details of their related 
cash, forward, futures, options and swap positions and transactions to 
serve as a reasonable basis to demonstrate reduction of risk on each 
day that the exemption was claimed. These records must be 
comprehensive, in that they must cover anticipated requirements, 
production and royalties, contracts for services, cash commodity 
products and by-products, and cross-commodity hedges. Proposed Sec.  
150.3(g)(2) requires any person claiming a pass-through swap offset 
hedging exemption to obtain a representation that the swap qualifies as 
a pass-through swap for purposes of a bona fide hedging position. 
Additionally, proposed Sec.  150.3(g)(3) requires any person 
representing to another person that a swap qualifies as a pass-through 
swap for purposes of a bona fide hedging position, to keep and make 
available to the Commission upon request all relevant books and records 
supporting such a representation for at least two years following the 
expiration of the swap.
    The Commission estimates that approximately 400 traders will claim 
an average of 50 exemptions each per year that fall within the scope of 
the recordkeeping requirements of proposed Sec.  150.3(g). At 
approximately one hour per exemption claimed to keep and maintain the 
required books and records, the Commission estimates that industry will 
incur a total of 20,000 annual labor hours amounting to $2,400,000 in 
additional labor costs. The Commission requests public comment 
regarding the burden associated with the recordkeeping requirements of 
proposed Sec.  150.3(g) and its estimates thereto.
    Proposed Sec.  150.5(b)(5)(iii) adds an additional burden cost to 
information collection 3038-0013 by requiring traders who wish to avail 
themselves of any exemption from a DCM or SEF's speculative position 
limit rules that is allowed for under Sec.  150.5(b)(5)(A)-(B) to 
submit an application to the DCM or SEF explaining how the exemption 
would be in accord with sound commercial practices and would allow for 
a position that could be liquidated in an orderly fashion. As noted 
supra, the Commission understands that requiring traders to apply for 
exemptive relief comports with existing DCM practice; thus, the 
Commission anticipates that the codification of this requirement will 
have the practical effect of incrementally increasing, rather than 
creating, the burden of applying for such exemptive relief. The 
Commission estimates that approximately 400 traders will claim 
exemptions from DCM or

[[Page 75783]]

SEF-established speculative position limits each year, with each trader 
on average making 100 related submissions to the DCM or SEF each year. 
Each submission is estimated to take 2 hours to complete and file, 
meaning that these traders would incur a total burden of 80,000 labor 
hours per year for an industry-wide additional labor cost of 
$9,600,000. The Commission welcomes all comment regarding the estimated 
burden on market participants wishing to avail themselves of a DCM or 
SEF exemption.
    Proposed Sec.  19.01(a)(1) adds an additional burden cost to 
information collection 3038-0009 for persons claiming a conditional 
spot month limit exemption pursuant to Sec.  150.3(c), by requiring the 
filing of Form 504 for special commodities so designated by the 
Commission under Sec.  19.03. A Form 504 filing shows the composition 
of the cash position of each commodity underlying a referenced contract 
that is held or controlled for which the exemption is claimed,\842\ 
including the ``as of'' date, the quantity of stocks owned of such 
commodity, the quantity of fixed-price purchase commitments open 
providing for receipt of such cash commodity, the quantity of fixed-
price sale commitments open providing for delivery of such cash 
commodity, the quantity of unfixed-price purchase commitments open 
providing for receipt of such cash commodity, and the quantity of 
unfixed-price sale commitments open providing for delivery of such cash 
commodity. The Commission estimates that approximately 40 traders will 
claim a conditional spot month limit 12 times per year, and each 
corresponding submission will take 15 labor hours to complete and file. 
Therefore, the Commission estimates that the Form 504 reporting 
requirement will result in approximately 7,200 total annual labor hours 
for an additional industry-wide labor cost of $864,000. The Commission 
requests comment on its estimates regarding new Form 504. In 
particular, the Commission welcomes comment regarding the number of 
entities who may partake of the conditional limit in natural gas and 
would thus be required to file Form 504.
---------------------------------------------------------------------------

    \842\ The Commission proposes that initially only the natural 
gas commodity derivative contracts would be designated under Sec.  
19.03 for Form 504 reporting. As such, the Commission's estimates 
reflect only the burden for traders in that commodity. The 
Commission is not able to estimate the expanded cost of any future 
Commission determination to designate another commodity under Sec.  
19.03 as a special commodity for which Form 504 filings would be 
required. See supra discussion regarding the proposed conditional 
spot month limit.
---------------------------------------------------------------------------

    Proposed Sec.  19.01(a)(2) adds an additional burden cost to 
information collection 3038-0009 by requiring persons claiming a pass-
through swap exemption pursuant to Sec.  150.3(a)(1)(i) to file Form 
604 showing various data depending on whether the offset is for non-
referenced contract swaps or spot-month swaps including, at a minimum, 
the underlying commodity or commodity reference price, the applicable 
clearing identifiers, the notional quantity, the gross long or short 
position in terms of futures-equivalents in the core referenced futures 
contracts, and the gross long or short positions in the referenced 
contract for the offsetting risk position. The Commission estimates 
that approximately 200 traders will claim a pass-through swap exemption 
an average of ten times per year each. At approximately 30 labor hours 
to complete each corresponding submission for a total burden to traders 
of 60,000 annual labor hours, compliance with the Form 604 filing 
requirements industry-wide will impose an additional $7,200,000 in 
labor costs. The Commission requests comment on its estimates regarding 
new Form 604. In particular, the Commission welcomes comment regarding 
the number of entities who may utilize the pass-through swap exemption 
and the burden incurred to file Form 604.
    Proposed Sec.  19.01(a)(3) increases existing burden costs 
previously approved under information collection 3038-0009 by expanding 
the number of cash commodities that existing Form 204 covers. 
Additionally, proposed Sec.  19.01(a)(3) requires additional data to be 
reported on Form 204 and proposed Sec.  19.02 requires additional data 
to be reported on existing Form 304 (call cotton). Both forms are 
required to be filed when a trader accumulates a net long or short 
commodity derivative position in a core referenced futures contract 
that exceeds a federal limit, and inform the Commission of the trader's 
cash positions underlying those commodity derivative contracts for 
purposes of claiming bona fide hedging exemptions.
    The Commission estimates that approximately 400 traders will be 
required to file Form 204 12 times per year each. At an estimated two 
labor hours to complete and file each Form 204 report for a total 
annual burden to industry of 9,600 labor hours, the Form 204 reporting 
requirement will cost industry $1,200,000 in labor costs. The 
Commission also estimates that approximately 400 traders will be 
required to make a Form 304 submission for call cotton 52 times per 
year each. At one hour to complete each submission (representing a net 
increase of a half hour from the previous estimate) for a total annual 
burden to industry of 20,800 labor hours, the Form 304 reporting 
requirement will impose upon industry $2,500,000 in labor costs. 
Previously, the Commission estimated the combined annual labor hours 
for both forms to be 1,350 hours, which amounted to a total labor cost 
to industry of $68,850 per annum.\843\ Therefore, the Commission is 
increasing its net estimate of labor hours and costs associated with 
existing Form 204 and Form 304 for collection 3038-0009 by 30,400 hours 
and $3,700,000.\844\ The Commission requests comment with respect to 
its estimates regarding the increased number of entities and additional 
information required to file Forms 204 and 304.
---------------------------------------------------------------------------

    \843\ This estimate was based upon an average wage rate of $51 
per hour. Adjusted to the hourly wage rate used for purposes of this 
PRA estimate, the previous total labor cost would have been 
$202,500.
    \844\ The Commission notes that the burdens associated with 
Forms 204 and 304 in collection 3038-0009 represent a fraction of 
the total burden under that collection.
---------------------------------------------------------------------------

    Proposed Sec.  19.01(a)(4) adds an additional burden cost to 
information collection 3038-0009 by requiring traders claiming 
anticipatory exemptions to file Form 704 for the initial statement 
pursuant to Sec.  150.7(d), the supplemental statement pursuant to 
Sec.  150.7(e), and the annual update pursuant to Sec.  150.7(f), as 
well as Form 204 monthly reporting the remaining unsold, unfilled and 
other anticipated activity for the Specified Period in Form 704, 
Section A. The Commission estimates that approximately 200 traders will 
claim anticipatory exemptions every year an average of 10 times each. 
At an estimated 20 labor hours to complete and file Form 704 for a 
total annual burden to traders of 40,000 labor hours, the anticipatory 
exemption filing requirement will cost industry an additional 
$4,800,000 in labor costs. The Commission requests comment on its 
estimates regarding new Form 704. In particular, the Commission 
welcomes comment regarding the number of entities who may utilize the 
anticipatory hedge exemption and the burden incurred to file Form 704.
4. Comments on Information Collection
    The Commission invites the public and other federal agencies to 
submit comments on any aspect of the reporting and recordkeeping 
burdens discussed above. Pursuant to 44 U.S.C. 3506(c)(2)(B), the 
Commission solicits comments in order to: (1) Evaluate

[[Page 75784]]

whether the proposed collections of information are necessary for the 
proper performance of the functions of the Commission, including 
whether the information will have practical utility; (2) evaluate the 
accuracy of the Commission's estimate of the burden of the proposed 
collections of information; (3) determine whether there are ways to 
enhance the quality, utility, and clarity of the information to be 
collected; and (4) minimize the burden of the collections of 
information on those who are to respond, including through the use of 
automated collection techniques or other forms of information 
technology. Comments may be submitted directly to the Office of 
Information and Regulatory Affairs, by fax at (202) 395-6566 or by 
email at [email protected]. Please provide the Commission 
with a copy of comments submitted so that all comments can be 
summarized and addressed in the final rule preamble. Refer to the 
Addresses section of this notice for comment submission instructions to 
the Commission. A copy of the supporting statements for the collection 
of information discussed above may be obtained by visiting RegInfo.gov. 
OMB is required to make a decision concerning the collection of 
information between 30 and 60 days after publication of this release. 
Consequently, a comment to OMB is most assured of being fully 
considered if received by OMB (and the Commission) within 30 days after 
the publication of this notice of proposed rulemaking.

C. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') requires that Federal 
agencies consider whether the rules they propose will have a 
significant economic impact on a substantial number of small entities 
and, if so, provide a regulatory flexibility analysis respecting the 
impact.'' \845\ A regulatory flexibility analysis or certification 
typically is required for ``any rule for which the agency publishes a 
general notice of proposed rulemaking pursuant to'' the notice-and-
comment provisions of the Administrative Procedure Act, 5 U.S.C. 
553(b).\846\ The requirements related to the proposed amendments fall 
mainly on registered entities, exchanges, futures commission merchants, 
swap dealers, clearing members, foreign brokers, and large traders.
---------------------------------------------------------------------------

    \845\ 5 U.S.C. 601 et seq.
    \846\ 5 U.S.C. 601(2), 603-05.
---------------------------------------------------------------------------

    The Commission has previously determined that registered DCMs, 
FCMs, SDs, MSPs, ECPs, SEFs, clearing members, foreign brokers and 
large traders are not small entities for purposes of the RFA.\847\ 
While the requirements under the proposed rulemaking may impact non-
financial end users, the Commission notes that position limits levels 
and filing requirements associated with bona fide hedging apply only to 
large traders, while requirements to keep records supporting a 
transaction's qualification for pass-through swap treatment incurs a 
marginal burden that is mitigated through overlapping recordkeeping 
requirements for reportable futures traders (current Sec.  18.05) and 
reportable swap traders (current Sec.  20.6(b)); furthermore, these 
records are ones that such entities maintain, as they would other 
documents evidencing material financial relationships, in the ordinary 
course of their businesses.
---------------------------------------------------------------------------

    \847\ See Policy Statement and Establishment of Definitions of 
``Small Entities'' for Purposes of the Regulatory Flexibility Act, 
47 FR 18618, 18619, Apr. 30, 1982 (DCMs, FCMs, and large traders) 
(``RFA Small Entities Definitions''); Opting Out of Segregation, 66 
FR 20740, 20743, Apr. 25, 2001 (ECPs); Position Limits for Futures 
and Swaps; Final Rule and Interim Final Rule, 76 FR 71626, 71680, 
Nov. 18, 2011 (clearing members); Core Principles and Other 
Requirements for Swap Execution Facilities, 78 FR 33476, 33548, June 
4, 2013 (SEFs); A New Regulatory Framework for Clearing 
Organizations, 66 FR 45604, 45609, Aug. 29, 2001 (DCOs); 
Registration of Swap Dealers and Major Swap Participants, 77 FR 
2613, Jan. 19, 2012, (SDs and MSPs); and Special Calls, 72 FR 50209, 
Aug. 31, 2007 (foreign brokers).
---------------------------------------------------------------------------

    Accordingly, the Chairman, on behalf of the Commission, hereby 
certifies, pursuant to 5 U.S.C. 605(b), that the actions proposed to be 
taken herein would not have a significant economic impact on a 
substantial number of small entities.''

IV. Appendices

Appendix A--Studies relating to position limits reviewed and evaluated 
by the Commission

    1. Acharya, Viral V.; Ramadorai, Tarun; and Lochstoer, Lars, 
``Limits to Arbitrage and Hedging: Evidence from Commodity 
Markets,'' January 8, 2013, Journal of Financial Economics.
    2. Allen, Franklin; Litov, Lubomir; and Mei, Jianping, ``Large 
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[[Page 75785]]

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List of Subjects

17 CFR Part 1

    Agricultural commodity, Agriculture, Brokers, Committees, Commodity 
futures, Conflicts of interest, Consumer protection, Definitions, 
Designated contract markets, Directors, Major swap participants, 
Minimum financial requirements for intermediaries, Reporting and 
recordkeeping requirements, Swap dealers, Swaps.

17 CFR Parts 15 and 17

    Brokers, Commodity futures, Reporting and recordkeeping 
requirements, Swaps.

17 CFR Part 19

    Commodity futures, Cottons, Grains, Reporting and recordkeeping 
requirements, Swaps.

17 CFR Part 32

    Commodity futures, Consumer protection, Fraud, Reporting and 
recordkeeping requirements.

17 CFR Part 37

    Registered entities, Registration application, Reporting and 
recordkeeping requirements, Swaps, Swap execution facilities.

17 CFR Part 38

    Block transaction, Commodity futures, Designated contract markets, 
Reporting and recordkeeping requirements, Transactions off the 
centralized market.

17 CFR Part 140

    Authority delegations (Government agencies), Conflict of interests, 
Organizations and functions (Government agencies).

17 CFR Part 150

    Bona fide hedging, Commodity futures, Cotton, Grains, Position 
limits, Referenced Contracts, Swaps.

    For the reasons stated in the preamble, the Commodity Futures 
Trading Commission proposes to amend 17 CFR chapter I as follows:

PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

0
1. The authority citation for part 1 continues to read as follows:

    Authority:  7 U.S.C. 1a, 2, 2a, 5, 6, 6a, 6b, 6c, 6d, 6e, 6f, 
6g, 6h, 6i, 6k, 6l, 6m, 6n, 6o, 6p, 6r, 6s, 7, 7a-1, 7a-2, 7b, 7b-3, 
8, 9, 10a, 12, 12a, 12c, 13a, 13a-1, 16, 16a, 19, 21, 23, and 24, as 
amended by Title VII of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act, Pub. L. 111-203, 124 Stat. 1376 (2010).


Sec.  1.3  [Amended]

0
2. Amend Sec.  1.3 by removing and reserving paragraph (z).


Sec. Sec.  1.47 and 1.48   [Removed and Reserved]

0
3. Remove and reserve Sec. Sec.  1.47 and 1.48.

PART 15--REPORTS--GENERAL PROVISIONS

0
4. The authority citation for part 15 continues to read as follows:

    Authority: 7 U.S.C. 2, 5, 6a, 6c, 6f, 6g, 6i, 6k, 6m, 6n, 7, 7a, 
9, 12a, 19, and 21, as amended by Title VII of the Dodd-Frank Wall 
Street Reform and Consumer Protection Act, Pub. L. 111-203, 124 
Stat. 1376 (2010).

0
5. Amend Sec.  15.00 by revising paragraph (p) to read as follows:


Sec.  15.00  Definitions of terms used in parts 15 to 19, and 21 of 
this chapter.

* * * * *
    (p) Reportable position means:
    (1) For reports specified in parts 17 and 18, and Sec.  19.00(a)(2) 
and (3), of this chapter any open contract position that at the close 
of the market on any business day equals or exceeds the quantity 
specified in Sec.  15.03 in either:
    (i) Any one futures of any commodity on any one reporting market, 
excluding futures contracts against which notices of delivery have been 
stopped by a trader or issued by the clearing organization of a 
reporting market; or
    (ii) Long or short put or call options that exercise into the same 
future of any commodity, or long or short put or call options for 
options on physicals that have identical expirations and exercise into 
the same physical, on any one reporting market.
    (2) For the purposes of reports specified in Sec.  19.00(a)(1) of 
this chapter, any position in commodity derivative contracts, as 
defined in Sec.  150.1 of this chapter, that exceeds a position limit 
in Sec.  150.2 of this chapter for the particular commodity.
* * * * *
0
6. Amend Sec.  15 .01 by revising paragraph (d) to read as follows:


Sec.  15.01  Persons required to report.

* * * * *
    (d) Persons, as specified in part 19 of this chapter, either:
    (1) Who hold or control commodity derivative contracts (as defined 
in Sec.  150.1 of this chapter) that exceed a position limit in Sec.  
150.2 of this chapter for the commodities enumerated in that section; 
or
    (2) Who are merchants or dealers of cotton holding or controlling 
positions for future delivery in cotton that equal or exceed the amount 
set forth in Sec.  15.03.
0
7. Revise Sec.  15.02 to read as follows:


Sec.  15.02  Reporting forms.

    Forms on which to report may be obtained from any office of the 
Commission or via the Internet (http://www.cftc.gov). Forms to be used 
for the filing of reports follow, and persons required to file these 
forms may be determined by referring to the rule listed in the column 
opposite the form number.

------------------------------------------------------------------------
           Form No.                        Title                 Rule
------------------------------------------------------------------------
40............................  Statement of Reporting             18.04
                                 Trader.
71............................  Identification of Omnibus          17.01
                                 Accounts and Sub-accounts.
101...........................  Positions of Special               17.00
                                 Accounts.
102...........................  Identification of Special          17.01
                                 Accounts, Volume Threshold
                                 Accounts, and Consolidated
                                 Accounts.
204...........................  Cash Positions of Hedgers          19.00
                                 (excluding Cotton).

[[Page 75788]]

 
304...........................  Cash Positions of Cotton           19.00
                                 Traders.
504...........................  Cash Positions for                 19.00
                                 Conditional Spot Month
                                 Exemptions.
604...........................  Counterparty Data for Pass-        19.00
                                 Through Swap Exemptions.
704...........................  Statement of Anticipatory          19.00
                                 Bona Fide Hedge Exemptions.
------------------------------------------------------------------------


(Approved by the Office of Management and Budget under control numbers 
3038-0007, 3038-0009, and 3038-0103)

PART 17--REPORTS BY REPORTING MARKETS, FUTURES COMMISSION 
MERCHANTS, CLEARING MEMBERS, AND FOREIGN BROKERS

0
8. The authority citation for part 17, as amended November 18, 2013, at 
78 FR 69230, effective February 18, 2014, continues to read as follows:

    Authority: 7 U.S.C. 2, 6a, 6c, 6d, 6f, 6g, 6i, 6t, 7, 7a, and 
12a, as amended by Title VII of the Dodd-Frank Wall Street Reform 
and Consumer Protection Act, Pub. L. 111-203, 124 Stat. 1376 (2010).

0
9. Amend Sec.  17.00 by revising paragraph (b) 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.
* * * * *
0
10. Amend Sec.  17.03, as amended November 18, 2013, at 78 FR 69232, 
effective February 18, 2014, by adding paragraph (h) to read as 
follows:


Sec.  17.03  Delegation of authority to the Director of the Office of 
Data and Technology or the Director of the Division of Market 
Oversight.

* * * * *
    (h) Pursuant to Sec.  17.00(b), and as specifically provided in 
Sec.  150.4 of this chapter, the authority shall be designated to the 
Director of the Division of Market Oversight to instruct an futures 
commission merchant, clearing member or foreign broker to consider as a 
single account for the purpose of determining special account status 
and for reporting purposes all accounts one person holds or controls, 
or in which the person has a financial interest.
0
11. Revise part 19 to read as follows:

PART 19--REPORTS BY PERSONS HOLDING POSITIONS EXEMPT FROM POSITION 
LIMITS AND BY MERCHANTS AND DEALERS IN COTTON

Sec.
19.00 General provisions.
19.01 Reports on stocks and fixed price purchases and sales.
19.02 Reports pertaining to cotton on call purchases and sales.
19.03 Reports pertaining to special commodities.
19.04 Delegation of authority to the Director of the Division of 
Market Oversight.
19.05-19.10 [Reserved]
Appendix Appendix A to Part 19--Forms 204, 304, 504, 604, and 704

    Authority:  7 U.S.C. 6g(a), 6a, 6c(b), 6i, and 12a(5), as 
amended by Title VII of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act, Pub. L. 111-203, 124 Stat. 1376 (2010).


Sec.  19.00  General provisions.

    (a) Who must file series '04 reports. The following persons are 
required to file series '04 reports:
    (1) Persons filing for exemption to speculative position limits. 
All persons holding or controlling positions in commodity derivative 
contracts, as defined in Sec.  150.1 of this chapter, in excess of any 
speculative position limit provided under Sec.  150.2 of this chapter 
and for any part of which a person relies on an exemption to 
speculative position limits under Sec.  150.3 of this chapter as 
follows:
    (i) Conditional spot month limit exemption. A conditional spot 
month limit exemption under Sec.  150.3(c) of this chapter for any 
commodity specially designated by the Commission under Sec.  19.03 for 
reporting;
    (ii) Pass-through swap exemption. A pass-through swap exemption 
under Sec.  150.3(a)(1)(i) of this chapter and as defined in paragraph 
(2)(ii) of the definition of ``bona fide hedging position'' in Sec.  
150.1 of this chapter, reporting separately for:
    (A) Non-referenced-contract swap offset. A swap that is not a 
referenced contract, as that term is defined in Sec.  150.1 of this 
chapter, and which is executed opposite a counterparty for which the 
swap would qualify as a bona fide hedging position and for which the 
risk is offset with a referenced contract; and
    (B) Spot-month swap offset. A cash-settled swap, regardless of 
whether it is a referenced contract, executed opposite a counterparty 
for which the swap would qualify as a bona fide hedging position and 
for which the risk is offset with a physical-delivery referenced 
contract in its spot month;
    (iii) Other exemption. Any other exemption from speculative 
position limits under Sec.  150.3 of this chapter, including for a bona 
fide hedging position as defined in Sec.  150.1 of this chapter or any 
exemption granted under Sec.  150.3(b) or (d) of this chapter; or
    (iv) Anticipatory exemption. An anticipatory exemption under Sec.  
150.7 of this chapter.
    (2) Persons filing cotton on call reports. Merchants and dealers of 
cotton holding or controlling positions for futures delivery in cotton 
that are reportable pursuant to Sec.  15.00(p)(1)(i) of this chapter; 
or
    (3) Persons responding to a special call. All persons exceeding 
speculative position limits under Sec.  150.2 of this chapter or all 
persons holding or controlling positions for future delivery that are 
reportable pursuant to Sec.  15.00(p)(1) of this chapter who have 
received a special call for series '04 reports from the Commission or 
its designee. Persons subject to a special call shall file CFTC Form 
204, 304, 504, 604 or 704 as instructed in the special call. Filings in 
response to a special call shall be made within one business day of 
receipt of the special call unless otherwise specified in the call. For 
the purposes of this paragraph, the Commission hereby delegates to the 
Director of the Division of Market Oversight, or to such other person 
designated by the Director, authority to issue calls for series '04 
reports.
    (b) Manner of reporting. The manner of reporting the information 
required in Sec.  19.01 is subject to the following:
    (1) Excluding certain source commodities, products or byproducts of 
the cash commodity hedged. If the regular business practice of the 
reporting person is to exclude certain source commodities, products or 
byproducts in determining his cash positions for bona fide hedging 
positions (as defined in Sec.  150.1 of this chapter), the same shall 
be excluded in

[[Page 75789]]

the report, provided that the amount of the source commodity being 
excluded is de minimis, impractical to account for, and/or on the 
opposite side of the market from the market participant's hedging 
position. Such persons shall furnish to the Commission or its designee 
upon request detailed information concerning the kind and quantity of 
source commodity, product or byproduct so excluded. Provided however, 
when reporting for the cash commodity of soybeans, soybean oil, or 
soybean meal, the reporting person shall show the cash positions of 
soybeans, soybean oil and soybean meal.
    (2) Cross hedges. Cash positions that represent a commodity, or 
products or byproducts of a commodity, that is different from the 
commodity underlying a commodity derivative contract that is used for 
hedging, shall be shown both in terms of the equivalent amount of the 
commodity underlying the commodity derivative contract used for hedging 
and in terms of the actual cash commodity as provided for on the 
appropriate series '04 form.
    (3) Standards and conversion factors. In computing their cash 
position, every person shall use such standards and conversion factors 
that are usual in the particular trade or that otherwise reflect the 
value-fluctuation-equivalents of the cash position in terms of the 
commodity underlying the commodity derivative contract used for 
hedging. Such person shall furnish to the Commission upon request 
detailed information concerning the basis for and derivation of such 
conversion factors, including:
    (i) The hedge ratio used to convert the actual cash commodity to 
the equivalent amount of the commodity underlying the commodity 
derivative contract used for hedging; and
    (ii) An explanation of the methodology used for determining the 
hedge ratio.


Sec.  19.01  Reports on stocks and fixed price purchases and sales.

    (a) Information required.--(1) Conditional spot month limit 
exemption. Persons required to file '04 reports under Sec.  
19.00(a)(1)(i) shall file CFTC Form 504 showing the composition of the 
cash position of each commodity underlying a referenced contract that 
is held or controlled including:
    (i) The as of date;
    (ii) The quantity of stocks owned of such commodity that either:
    (A) Is in a position to be delivered on the physical-delivery core 
referenced futures contract; or
    (B) Underlies the cash-settled core referenced futures contract;
    (iii) The quantity of fixed-price purchase commitments open 
providing for receipt of such cash commodity in:
    (A) The delivery period for the physical-delivery core referenced 
futures contract; or
    (B) The time period for cash-settlement price determination for the 
cash-settled core referenced futures contract;
    (iv) The quantity of unfixed-price sale commitments open providing 
for delivery of such cash commodity in:
    (A) The delivery period for the physical-delivery core referenced 
futures contract; or
    (B) The time period for cash-settlement price determination for the 
cash-settled core referenced futures contract;
    (v) The quantity of unfixed-price purchase commitments open 
providing for receipt of such cash commodity in:
    (A) The delivery period for the physical-delivery core referenced 
futures contract; or
    (B) The time period for cash-settlement price determination for the 
cash-settled core referenced futures contract; and
    (vi) The quantity of fixed-price sale commitments open providing 
for delivery of such cash commodity in:
    (A) The delivery period for the physical-delivery core referenced 
futures contract; or
    (B) The time period for cash-settlement price determination for the 
cash-settled core referenced futures contract.
    (2) Pass-through swap exemption. Persons required to file '04 
reports under Sec.  19.00(a)(1)(ii) shall file CFTC Form 604:
    (i) Non-referenced-contract swap offset. For each swap that is not 
a referenced contract and which is executed opposite a counterparty for 
which the transaction would qualify as a bona fide hedging position and 
for which the risk is offset with a referenced contract, showing:
    (A) The underlying commodity or commodity reference price;
    (B) The applicable clearing identifiers;
    (C) The notional quantity;
    (D) The gross long or short position in terms of futures-
equivalents in the core referenced futures contract; and
    (E) The gross long or short positions in the referenced contract 
for the offsetting risk position; and
    (ii) Spot-month swap offset. For each cash-settled swap executed 
opposite a counterparty for which the transaction would qualify as a 
bona fide hedging position and for which the risk is offset with a 
physical-delivery referenced contract held into a spot month, showing 
for such cash-settled swap that is not a referenced contract the 
information required under paragraph (a)(2)(i) of this section and for 
such cash-settled swap that is a referenced contract:
    (A) The gross long or short position for such cash-settled swap in 
terms of futures-equivalents in the core referenced futures contract; 
and
    (B) The gross long or short positions in the physical-delivery 
referenced contract for the offsetting risk position.
    (3) Other exemptions. Persons required to file '04 reports under 
Sec.  19.00(a)(1)(iii) shall file CFTC Form 204 reports showing the 
composition of the cash position of each commodity hedged or underlying 
a reportable position including:
    (i) The as of date, an indication of any enumerated bona fide 
hedging position exemption(s) claimed, the commodity derivative 
contract held or controlled, and the equivalent core reference futures 
contract;
    (ii) The quantity of stocks owned of such commodities and their 
products and byproducts;
    (iii) The quantity of fixed-price purchase commitments open in such 
cash commodities and their products and byproducts;
    (iv) The quantity of fixed-price sale commitments open in such cash 
commodities and their products and byproducts;
    (v) The quantity of unfixed-price purchase and sale commitments 
open in such cash commodities and their products and byproducts, in the 
case of offsetting unfixed-price cash commodity sales and purchases; 
and
    (vi) For cotton, additional information that includes:
    (A) The quantity of equity in cotton held by the Commodity Credit 
Corporation under the provisions of the Upland Cotton Program of the 
Agricultural Stabilization and Conservation Service of the U.S. 
Department of Agriculture;
    (B) The quantity of certificated cotton owned; and
    (C) The quantity of non-certificated stocks owned.
    (4) Anticipatory exemptions. Persons required to file '04 reports 
under Sec.  19.00(a)(1)(iv) shall file:
    (i) CFTC Form 704 for the initial statement pursuant to Sec.  
150.7(d) of this chapter, the supplemental statement pursuant to Sec.  
150.7(e) of this chapter, and the annual update pursuant to Sec.  
150.7(f) of this chapter; and
    (ii) CFTC Form 204 monthly on the remaining unsold, unfilled and 
other

[[Page 75790]]

anticipated activity for the Specified Period that was reported on such 
person's most recently filed Form 704, Section A pursuant to Sec.  
150.7(g) of this chapter.
    (b) Time and place of filing reports.--(1) General. Except for 
reports filed in response to special calls made under Sec.  19.00(a)(3) 
or reports required under Sec.  19.00(a)(1)(i), (a)(1)(ii)(B), or Sec.  
19.01(a)(4)(i), each report shall be made monthly:
    (i) As of the close of business on the last Friday of the month, 
and
    (ii) As specified in paragraph (b)(3) of this section, and not 
later than 9 a.m. Eastern Time on the third business day following the 
date of the report.
    (2) Conditional spot month limit. Persons required to file '04 
reports under Sec.  19.00(a)(1)(i) shall file each report for special 
commodities as specified by the Commission under Sec.  19.03:
    (i) As of the close of business for each day the person exceeds the 
limit during a spot period up to and through the day the person's 
position first falls below the position limit; and
    (ii) As specified in paragraph (b)(3) of this section, and not 
later than 9 a.m. Eastern Time on the next business day following the 
date of the report.
    (3) Electronic filing. CFTC '04 reports must be transmitted using 
the format, coding structure, and electronic data transmission 
procedures approved in writing by the Commission.


Sec.  19.02  Reports pertaining to cotton on call purchases and sales.

    (a) Information required. Persons required to file '04 reports 
under Sec.  19.00(a)(2) shall file CFTC Form 304 reports showing the 
quantity of call cotton bought or sold on which the price has not been 
fixed, together with the respective futures on which the purchase or 
sale is based. As used herein, call cotton refers to spot cotton bought 
or sold, or contracted for purchase or sale at a price to be fixed 
later based upon a specified future.
    (b) Time and place of filing reports. Each report shall be made 
weekly as of the close of business on Friday and filed using the 
procedure under Sec.  19.01(b)(3), not later than 9 a.m. Eastern Time 
on the third business day following the date of the report.


Sec.  19.03  Reports pertaining to special commodities.

    From time to time to facilitate surveillance in certain commodity 
derivative contracts, the Commission may designate a commodity 
derivative contract for reporting under Sec.  19.00(a)(1)(i) and will 
publish such determination in the Federal Register and on its Web site. 
Persons holding or controlling positions in such special commodity 
derivative contracts must, beginning 30 days after notice is published 
in the Federal Register, comply with the reporting requirements under 
Sec.  19.00(a)(1)(i) and file Form 504 for conditional spot month limit 
exemptions.


Sec.  19.04  Delegation of authority to the Director of the Division of 
Market Oversight.

    (a) The Commission hereby delegates, until it orders otherwise, to 
the Director of the Division of Market Oversight or such other employee 
or employees as the Director may designate from time to time, the 
authority in Sec.  19.01 to provide instructions or to determine the 
format, coding structure, and electronic data transmission procedures 
for submitting data records and any other information required under 
this part.
    (b) The Director of the Division of Market Oversight may submit to 
the Commission for its consideration any matter which has been 
delegated in this section.
    (c) Nothing in this section prohibits the Commission, at its 
election, from exercising the authority delegated in this section.


Sec. Sec.  19.05-19.10  [Reserved]

Appendix A to Part 19--Forms 204, 304, 504, 604, and 704

    Note:  This Appendix includes representations of the proposed 
reporting forms, which would be submitted in an electronic format 
published pursuant to the proposed rules, either via the 
Commission's web portal or via XML-based, secure FTP transmission.

BILLING CODE 6351-01-P

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PART 32--REGULATION OF COMMODITY OPTION TRANSACTIONS

0
12. The authority citation for part 32 continues to read as follows:

    Authority:  7 U.S.C. 1a, 2, 6c, and 12a, unless otherwise noted.

0
13. Amend Sec.  32.3 by revising paragraph (c)(2) to read as follows:


Sec.  32.3  Trade options.

* * * * *
    (c) * * *
    (2) Part 150 (Position Limits) of this chapter;
* * * * *

PART 37--SWAP EXECUTION FACILITIES

0
14. The authority citation for part 37 continues to read as follows:

    Authority:  7 U.S.C. 1a, 2, 5, 6, 6c, 7, 7a-2, 7b-3, and 12a, as 
amended by Titles VII and VIII of the Dodd-Frank Wall Street Reform 
and Consumer Protection Act, Pub. L. 111-203, 124 Stat. 1376

0
15. Revise Sec.  37.601 to read as follows:


Sec.  37.601  Additional sources for compliance.

    A swap execution facility that is a trading facility must meet the 
requirements of part 150 of this chapter, as applicable.
0
16. In Appendix B to part 37, under the heading Core Principle 6 of 
Section 5H of the Act, revise the introductory text of paragraph (B) 
and paragraph (B)(2)(a) to read as follows:

Appendix B to Part 37--Guidance on, and Acceptable Practices in, 
Compliance with Core Principles

* * * * *

CORE PRINCIPLE 6 OF SECTION 5H OF THE ACT--POSITION LIMITS OR 
ACCOUNTABILITY

* * * * *
    (B) Position limits. For any contract that is subject to a 
position limitation established by the Commission pursuant to 
section 4a(a) of the Act, the swap execution facility that is a 
trading facility shall:
* * * * *
    (2) * * *
    (a) Guidance. A swap execution facility that is a trading 
facility must meet the requirements of part 150 of this chapter, as 
applicable. A swap execution facility that is not a trading facility 
should consider part 150 of this chapter as guidance.
* * * * *

PART 38--DESIGNATED CONTRACT MARKETS

0
17. The authority citation for part 38 continues to read as follows:

    Authority:  7 U.S.C. 1a, 2, 6, 6a, 6c, 6d, 6e, 6f, 6g, 6i, 6j, 
6k, 6l, 6m, 6n, 7, 7a-2, 7b, 7b-1, 7b-3, 8, 9, 15, and 21, as 
amended by the Dodd-Frank Wall Street Reform and Consumer Protection 
Act, Pub. L. 111-203, 124 Stat. 1376.

0
18. Revise Sec.  38.301 to read as follows:


Sec.  38.301  Position limitations and accountability.

    A designated contract market must meet the requirements of part 150 
of this chapter, as applicable.

PART 140--ORGANIZATION, FUNCTIONS, AND PROCEDURES OF THE COMMISSION

0
19. The authority citation for part 140 continues to read as follows:

    Authority:  7 U.S.C. 2(a)(12), 13(c), 13(d), 13(e), and 16(b).


Sec.  140.97  [Removed and Reserved]

0
20. Remove and reserve Sec.  140.97.

PART 150--LIMITS ON POSITIONS

0
21. The authority citation for part 150 is revised to read as follows:

    Authority:  7 U.S.C. 1a, 2, 5, 6, 6a, 6c, 6f, 6g, 6t, 12a, 19, 
as amended by Title VII of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act, Pub. L. 111-203, 124 Stat. 1376 (2010).

0
22. Revise Sec.  150.1 to read as follows:


Sec.  150.1  Definitions.

    As used in this part--
    Basis contract means a commodity derivative contract that is cash-
settled based on the difference in:
    (1) The price, directly or indirectly, of:
    (i) A particular core referenced futures contract; or
    (ii) A commodity deliverable on a particular core referenced 
futures contract, whether at par, a fixed discount to par, or a premium 
to par; and
    (2) The price, at a different delivery location or pricing point 
than that of the same particular core referenced futures contract, 
directly or indirectly, of:
    (i) A commodity deliverable on the same particular core referenced 
futures contract, whether at par, a fixed discount to par, or a premium 
to par; or
    (ii) A commodity that is listed in Appendix B of this part as 
substantially the same as a commodity underlying the same core 
referenced futures contract.
    Bona fide hedging position means any position whose purpose is to 
offset price risks incidental to commercial cash, spot, or forward 
operations, and such position is established and liquidated in an 
orderly manner in accordance with sound commercial practices, provided 
that:
    (1) Hedges of an excluded commodity. For a position in commodity 
derivative contracts in an excluded commodity, as that term is defined 
in section 1a(19) of the Act:
    (i) Such position is economically appropriate to the reduction of 
risks in the conduct and management of a commercial enterprise; and
    (ii)(A) Is enumerated in paragraph (3), (4) or (5) of this 
definition; or
    (B) Such position is recognized as a bona fide hedging position by 
the designated contract market or swap execution facility that is a 
trading facility, pursuant to such market's rules submitted to the 
Commission, which rules may include risk management exemptions 
consistent with Appendix A of this part; and
    (2) Hedges of a physical commodity. For a position in commodity 
derivative contracts in a physical commodity:
    (i) Such position:
    (A) Represents a substitute for transactions made or to be made, or 
positions taken or to be taken, at a later time in a physical marketing 
channel;
    (B) Is economically appropriate to the reduction of risks in the 
conduct and management of a commercial enterprise;
    (C) Arises from the potential change in the value of--
    (1) Assets which a person owns, produces, manufactures, processes, 
or merchandises or anticipates owning, producing, manufacturing, 
processing, or merchandising;
    (2) Liabilities which a person owes or anticipates incurring; or
    (3) Services that a person provides, purchases, or anticipates 
providing or purchasing; and
    (D) Is enumerated in paragraph (3), (4) or (5) of this definition; 
or
    (ii)(A) Pass-through swap offsets. Such position reduces risks 
attendant to a position resulting from a swap in the same physical 
commodity that was executed opposite a counterparty for which the 
position at the time of the transaction would qualify as a bona fide 
hedging position pursuant to paragraph (2)(i) of this definition (a 
pass-through swap counterparty), provided that no such risk-reducing 
position is maintained in any physical-delivery commodity derivative 
contract during the lesser of the last five days of trading or the time 
period for the spot month in such physical-delivery commodity 
derivative contract; and
    (B) Pass-through swaps. Such swap position was executed opposite a 
pass-through swap counterparty and to the extent such swap position has 
been offset pursuant to paragraph (2)(ii)(A) of this definition.

[[Page 75824]]

    (3) Enumerated hedging positions. A bona fide hedging position 
includes any of the following specific positions:
    (i) Hedges of inventory and cash commodity purchase contracts. 
Short positions in commodity derivative contracts that do not exceed in 
quantity ownership or fixed-price purchase contracts in the contract's 
underlying cash commodity by the same person.
    (ii) Hedges of cash commodity sales contracts. Long positions in 
commodity derivative contracts that do not exceed in quantity the 
fixed-price sales contracts in the contract's underlying cash commodity 
by the same person and the quantity equivalent of fixed-price sales 
contracts of the cash products and by-products of such commodity by the 
same person.
    (iii) Hedges of unfilled anticipated requirements. Provided that 
such positions in a physical-delivery commodity derivative contract, 
during the lesser of the last five days of trading or the time period 
for the spot month in such physical-delivery contract, do not exceed 
the person's unfilled anticipated requirements of the same cash 
commodity for that month and for the next succeeding month:
    (A) Long positions in commodity derivative contracts that do not 
exceed in quantity unfilled anticipated requirements of the same cash 
commodity, and that do not exceed twelve months for an agricultural 
commodity, for processing, manufacturing, or use by the same person; 
and
    (B) Long positions in commodity derivative contracts that do not 
exceed in quantity unfilled anticipated requirements of the same cash 
commodity for resale by a utility that is required or encouraged to 
hedge by its public utility commission on behalf of its customers' 
anticipated use.
    (iv) Hedges by agents. Long or short positions in commodity 
derivative contracts by an agent who does not own or has not contracted 
to sell or purchase the offsetting cash commodity at a fixed price, 
provided that the agent is responsible for merchandising the cash 
positions that are being offset in commodity derivative contracts and 
the agent has a contractual arrangement with the person who owns the 
commodity or holds the cash market commitment being offset.
    (4) Other enumerated hedging positions. A bona fide hedging 
position also includes the following specific positions, provided that 
no such position is maintained in any physical-delivery commodity 
derivative contract during the lesser of the last five days of trading 
or the time period for the spot month in such physical-delivery 
contract:
    (i) Hedges of unsold anticipated production. Short positions in 
commodity derivative contracts that do not exceed in quantity unsold 
anticipated production of the same commodity, and that do not exceed 
twelve months of production for an agricultural commodity, by the same 
person.
    (ii) Hedges of offsetting unfixed-price cash commodity sales and 
purchases. Short and long positions in commodity derivative contracts 
that do not exceed in quantity that amount of the same cash commodity 
that has been bought and sold by the same person at unfixed prices:
    (A) Basis different delivery months in the same commodity 
derivative contract; or
    (B) Basis different commodity derivative contracts in the same 
commodity, regardless of whether the commodity derivative contracts are 
in the same calendar month.
    (iii) Hedges of anticipated royalties. Short positions in commodity 
derivative contracts offset by the anticipated change in value of 
mineral royalty rights that are owned by the same person, provided that 
the royalty rights arise out of the production of the commodity 
underlying the commodity derivative contract.
    (iv) Hedges of services. Short or long positions in commodity 
derivative contracts offset by the anticipated change in value of 
receipts or payments due or expected to be due under an executed 
contract for services held by the same person, provided that the 
contract for services arises out of the production, manufacturing, 
processing, use, or transportation of the commodity underlying the 
commodity derivative contract, and which may not exceed one year for 
agricultural commodities.
    (5) Cross-commodity hedges. Positions in commodity derivative 
contracts described in paragraph (2)(ii), paragraphs (3)(i) through 
(iv) and paragraphs (4)(i) through (iv) of this definition may also be 
used to offset the risks arising from a commodity other than the same 
cash commodity underlying a commodity derivative contract, provided 
that the fluctuations in value of the position in the commodity 
derivative contract, or the commodity underlying the commodity 
derivative contract, are substantially related to the fluctuations in 
value of the actual or anticipated cash position or pass-through swap 
and no such position is maintained in any physical-delivery commodity 
derivative contract during the lesser of the last five days of trading 
or the time period for the spot month in such physical-delivery 
contract.
    Commodity derivative contract means, for this part, any futures, 
option, or swap contract in a commodity (other than a security futures 
product as defined in section 1a(45) of the Act).
    Core referenced futures contract means a futures contract that is 
listed in Sec.  150.2(d).
    Eligible affiliate. An eligible affiliate means an entity with 
respect to which another person:
    (1) Directly or indirectly holds either:
    (i) A majority of the equity securities of such entity, or
    (ii) The right to receive upon dissolution of, or the contribution 
of, a majority of the capital of such entity;
    (2) Reports its financial statements on a consolidated basis under 
Generally Accepted Accounting Principles or International Financial 
Reporting Standards, and such consolidated financial statements include 
the financial results of such entity; and
    (3) Is required to aggregate the positions of such entity under 
Sec.  150.4 and does not claim an exemption from aggregation for such 
entity.
    Eligible entity means a commodity pool operator; the operator of a 
trading vehicle which is excluded or which 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, limited member 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) Which authorizes an independent account controller 
independently to control all trading decisions with respect to the 
eligible entity's client positions and accounts that the independent 
account controller holds directly or indirectly, or on the eligible 
entity's behalf, but without the eligible entity's day-to-day 
direction; and
    (2) Which maintains:
    (i) Only such minimum control over the independent account 
controller as is consistent with its fiduciary responsibilities to the 
managed positions and accounts, and necessary to fulfill its duty to 
supervise diligently the trading done on its behalf; or
    (ii) If a limited partner, limited member or shareholder of a 
commodity pool the operator of which is exempt from registration under 
Sec.  4.13 of this

[[Page 75825]]

chapter, only such limited control as is consistent with its status.
    Entity means a ``person'' as defined in section 1a of the Act.
    Excluded commodity means an ``excluded commodity'' as defined in 
section 1a of the Act.
    Futures-equivalent means
    (1) An option contract, whether an option on a future or an option 
that is a swap, which has been adjusted by an economically reasonable 
and analytically supported risk factor, or delta coefficient, for that 
option computed as of the previous day's close or the current day's 
close or contemporaneously during the trading day, and;
    (2) A swap which has been converted to an economically equivalent 
amount of an open position in a core referenced futures contract.
    Independent account controller means a person--
    (1) Who specifically is authorized by an eligible entity, as 
defined in this section, independently to control trading decisions on 
behalf of, but without the day-to-day direction of, the eligible 
entity;
    (2) Over whose trading the eligible entity maintains only such 
minimum control as is consistent with its fiduciary responsibilities 
for managed positions and accounts 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;
    (3) Who trades independently of the eligible entity and of any 
other independent account controller trading for the eligible entity;
    (4) Who has no knowledge of trading decisions by any other 
independent account controller; and
    (5) Who is
    (i) Registered as a futures commission merchant, an introducing 
broker, a commodity trading advisor, or an associated person of any 
such registrant, or
    (ii) A general partner, managing member or manager of a commodity 
pool the operator of which is excluded from registration under Sec.  
4.5(a)(4) of this chapter or Sec.  4.13 of this chapter, provided that 
such general partner, managing member or manager complies with the 
requirements of Sec.  150.4(c).
    Intermarket spread position means a long position in a commodity 
derivative contract in a particular commodity at a particular 
designated contract market or swap execution facility and a short 
position in another commodity derivative contract in that same 
commodity away from that particular designated contract market or swap 
execution facility.
    Intramarket spread position means a long position in a commodity 
derivative contract in a particular commodity and a short position in 
another commodity derivative contract in the same commodity on the same 
designated contract market or swap execution facility.
    Long position means a long call option, a short put option or a 
long underlying futures contract, or a long futures-equivalent swap.
    Physical commodity means any agricultural commodity as that term is 
defined in Sec.  1.3 of this chapter or any exempt commodity as that 
term is defined in section 1a(20) of the Act.
    Pre-enactment swap means any swap entered into prior to enactment 
of the Dodd-Frank Act of 2010 (July 21, 2010), the terms of which have 
not expired as of the date of enactment of that Act.
    Pre-existing position means any position in a commodity derivative 
contract acquired in good faith prior to the effective date of any 
bylaw, rule, regulation or resolution that specifies an initial 
speculative position limit level or a subsequent change to that level.
    Referenced contract means, on a futures equivalent basis with 
respect to a particular core referenced futures contract, a core 
referenced futures contract listed in Sec.  150.2(d), or a futures 
contract, options contract, or swap, and excluding any guarantee of a 
swap, a basis contract, or a commodity index contract:
    (1) That is:
    (i) Directly or indirectly linked, including being partially or 
fully settled on, or priced at a fixed differential to, the price of 
that particular core referenced futures contract; or
    (ii) Directly or indirectly linked, including being partially or 
fully settled on, or priced at a fixed differential to, the price of 
the same commodity underlying that particular core referenced futures 
contract for delivery at the same location or locations as specified in 
that particular core referenced futures contract; and
    (2) Where:
    (i) Calendar spread contract means a cash-settled agreement, 
contract, or transaction that represents the difference between the 
settlement price in one or a series of contract months of an agreement, 
contract or transaction and the settlement price of another contract 
month or another series of contract months' settlement prices for the 
same agreement, contract or transaction;
    (ii) Commodity index contract means an agreement, contract, or 
transaction that is not a basis or any type of spread contract, based 
on an index comprised of prices of commodities that are not the same or 
substantially the same;
    (iii) Spread contract means either a calendar spread contract or an 
intercommodity spread contract; and
    (iv) Intercommodity spread contract means a cash-settled agreement, 
contract or transaction that represents the difference between the 
settlement price of a referenced contract and the settlement price of 
another contract, agreement, or transaction that is based on a 
different commodity.
    Short position means a short call option, a long put option or a 
short underlying futures contract, or a short futures-equivalent swap.
    Speculative position limit means the maximum position, either net 
long or net short, in a commodity derivatives contract that may be held 
or controlled by one person, absent an exemption, such as an exemption 
for a bona fide hedging position. This limit may apply to a person's 
combined position in all commodity derivative contracts in a particular 
commodity (all-months-combined), a person's position in a single month 
of commodity derivative contracts in a particular commodity, or a 
person's position in the spot month of commodity derivative contacts in 
a particular commodity. Such a limit may be established under federal 
regulations or rules of a designated contract market or swap execution 
facility. An exchange may also apply other limits, such as a limit on 
gross long or gross short positions, or a limit on holding or 
controlling delivery instruments.
    Spot month means--
    (1) For physical-delivery commodity derivative contracts, the 
period of time beginning at the earlier of the close of trading on the 
trading day preceding the first day on which delivery notices can be 
issued to the clearing organization of a contract market, or the close 
of trading on the trading day preceding the third-to-last trading day, 
until the contract is no longer listed for trading (or available for 
transfer, such as through exchange for physical transactions).
    (2) For cash-settled contracts, spot month means the period of time 
beginning at the earlier of the close of trading on the trading day 
preceding the period in which the underlying cash-settlement price is 
calculated, or the close of trading on the trading day preceding the 
third-to-last trading day, until the contract cash-settlement price is 
determined and published; provided however, if the cash-settlement 
price is determined based on prices of a core referenced futures 
contract during the spot month period for that core

[[Page 75826]]

referenced futures contract, then the spot month for that cash-settled 
contract is the same as the spot month for that core referenced futures 
contract.
    Swap means ``swap'' as that term is defined in section 1a of the 
Act and as further defined in Sec.  1.3 of this chapter.
    Swap dealer means ``swap dealer'' as that term is defined in 
section 1a of the Act and as further defined in Sec.  1.3 of this 
chapter.
    Transition period swap means a swap entered into during the period 
commencing after the enactment of the Dodd-Frank Act of 2010 (July 21, 
2010), and ending 60 days after the publication in the Federal Register 
of final amendments to part 150 of this chapter implementing section 
737 of the Dodd-Frank Act of 2010.
0
23. Revise Sec.  150.2 to read as follows:


Sec.  150.2  Speculative position limits.

    (a) Spot-month speculative position limits. No person may hold or 
control positions in referenced contracts in the spot month, net long 
or net short, in excess of the level specified by the Commission for:
    (1) Physical-delivery referenced contracts; and, separately,
    (2) Cash-settled referenced contracts;
    (b) Single-month and all-months-combined speculative position 
limits. No person may hold or control positions, net long or net short, 
in referenced contracts in a single month or in all months combined 
(including the spot month) in excess of the levels specified by the 
Commission.
    (c) For purposes of this part:
    (1) The spot month and any single month shall be those of the core 
referenced futures contract; and
    (2) An eligible affiliate is not required to comply separately with 
speculative position limits.
    (d) Core referenced futures contracts. Speculative position limits 
apply to referenced contracts based on the core referenced futures 
contracts listed in the following table:

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

    (e) Levels of speculative position limits. (1) Initial levels. The 
initial levels of speculative position limits are fixed by the 
Commission at the levels listed in Appendix D of this part and shall be 
effective 60 days after publication in the Federal Register.
    (2) Subsequent levels. (i) The Commission shall fix subsequent 
levels of speculative position limits in accordance with the procedures 
in this

[[Page 75827]]

section and publish such levels on the Commission's Web site at http://www.cftc.gov.
    (ii) Such subsequent speculative position limit levels shall each 
apply beginning on the close of business of the last business day of 
the second complete calendar month after publication of such levels; 
provided however, if such close of business is in a spot month of a 
core referenced futures contract, the subsequent spot-month level shall 
apply beginning with the next spot month for that contract.
    (iii) All subsequent levels of speculative position limits shall be 
rounded up to the nearest hundred contracts.
    (3) Procedure for computing levels of spot-month limits. (i) No 
less frequently than every two calendar years, the Commission shall fix 
the level of the spot-month limit no greater than one-quarter of the 
estimated spot-month deliverable supply in the relevant core referenced 
futures contract. Unless the Commission determines to rely on its own 
estimate of deliverable supply, the Commission shall utilize the 
estimated spot-month deliverable supply provided by a designated 
contract market.
    (ii) Each designated contract market in a core referenced futures 
contract shall supply to the Commission an estimated spot-month 
deliverable supply. A designated contract market may use the guidance 
regarding deliverable supply in Appendix C of part 38 of this chapter. 
Each estimate must be accompanied by a description of the methodology 
used to derive the estimate and any statistical data supporting the 
estimate, and must be submitted no later than the following:
    (A) For energy commodities, January 31 of the second calendar year 
following the most recent Commission action establishing such limit 
levels;
    (B) For metals commodities, March 31 of the second calendar year 
following the most recent Commission action establishing such limit 
levels;
    (C) For legacy agricultural commodities, May 31 of the second 
calendar year following the most recent Commission action establishing 
such limit levels; and
    (D) For other agricultural commodities, August 31 of the second 
calendar year following the most recent Commission action establishing 
such limit levels.
    (4) Procedure for computing levels of single-month and all-months-
combined limits. No less frequently than every two calendar years, the 
Commission shall fix the level, for each referenced contract, of the 
single-month limit and the all-months-combined limit. Each such limit 
shall be based on 10 percent of the estimated average open interest in 
referenced contracts, up to 25,000 contracts, with a marginal increase 
of 2.5 percent thereafter.
    (i) Time periods for average open interest. The Commission shall 
estimate average open interest in referenced contracts based on the 
largest annual average open interest computed for each of the past two 
calendar years. The Commission may estimate average open interest in 
referenced contracts using either month-end open contracts or open 
contracts for each business day in the time period, as practical.
    (ii) Data sources for average open interest. The Commission shall 
estimate average open interest in referenced contracts using data 
reported to the Commission pursuant to part 16 of this chapter, and 
open swaps reported to the Commission pursuant to part 20 of this 
chapter or data obtained by the Commission from swap data repositories 
collecting data pursuant to part 45 of this chapter. Options listed on 
designated contract markets shall be adjusted using an option delta 
reported to the Commission pursuant to part 16 of this chapter. Swaps 
shall be counted on a futures equivalent basis, equal to the 
economically equivalent amount of core referenced futures contracts 
reported pursuant to part 20 of this chapter or as calculated by the 
Commission using swap data collected pursuant to part 45 of this 
chapter.
    (iii) Publication of average open interest. The Commission shall 
publish estimates of average open interest in referenced contracts on a 
monthly basis, as practical, after such data is submitted to the 
Commission.
    (iv) Minimum levels. Provided however, notwithstanding the above, 
the minimum levels shall be the greater of the level of the spot month 
limit determined under paragraph (e)(3) of this section and 1,000 for 
referenced contracts in an agricultural commodity or 5,000 for 
referenced contracts in an exempt commodity.
    (f) Pre-existing Positions--(1) Pre-existing positions in a spot-
month. Other than pre-enactment and transition period swaps exempted 
under Sec.  150.3(d), a person shall comply with spot month speculative 
position limits.
    (2) Pre-existing positions in a non-spot-month. A single-month or 
all-months-combined speculative position limit established under this 
section shall not apply to any commodity derivative contract acquired 
in good faith prior to the effective date of such limit, provided, 
however, that if such position is not a pre-enactment or transition 
period swap then that position shall be attributed to the person if the 
person's position is increased after the effective date of such limit.
    (g) Positions on Foreign Boards of Trade. The aggregate speculative 
position limits established under this section shall apply to a person 
with positions in referenced contracts executed on, or pursuant to the 
rules of a foreign board of trade, provided that:
    (1) Such referenced contracts settle against any price (including 
the daily or final settlement price) of one or more contracts listed 
for trading on a designated contract market or swap execution facility 
that is a trading facility; and
    (2) The foreign board of trade makes available such referenced 
contracts to its members or other participants located in the United 
States through direct access to its electronic trading and order 
matching system.
    (h) Anti-evasion provision. For the purposes of applying the 
speculative position limits in this section, a commodity index contract 
used to circumvent speculative position limits shall be considered to 
be a referenced contract.
    (1) Delegation of authority to the Director of the Division of 
Market Oversight. (i) The Commission hereby delegates, until it orders 
otherwise, to the Director of the Division of Market Oversight or such 
other employee or employees as the Director may designate from time to 
time, the authority in paragraph (e) of this section to fix and publish 
subsequent levels of speculative position limits.
    (ii) The Director of the Division of Market Oversight may submit to 
the Commission for its consideration any matter which has been 
delegated in this section.
    (iii) Nothing in this section prohibits the Commission, at its 
election, from exercising the authority delegated in this section.
    (iv) The Commission will periodically update these initial levels 
for speculative position limits and publish such subsequent levels on 
its Web site at: http://www.cftc.gov.
    (2) Reserved.
0
24. Revise Sec.  150.3 to read as follows:


Sec.  150.3  Exemptions.

    (a) Positions which may exceed limits. The position limits set 
forth in Sec.  150.2 may be exceeded to the extent that:
    (1) Such positions are:
    (i) Bona fide hedging positions as defined in Sec.  150.1, provided 
that for anticipatory bona fide hedge positions under paragraphs 
(3)(iii), (4)(i), (4)(iii), and (4)(iv) of the bona fide hedging 
position definition in Sec.  150.1 the person

[[Page 75828]]

complies with the filing procedure found in Sec.  150.7;
    (ii) Financial distress positions exempted under paragraph (b) of 
this section;
    (iii) Conditional spot-month limit positions exempted under 
paragraph (c) of this section; or
    (iv) Other positions exempted under paragraph (e) of this section; 
and that
    (2) The recordkeeping requirements of paragraph (g) of this section 
are met; and further that
    (3) The reporting requirements of part 19 of this chapter are met.
    (b) Financial distress exemptions. Upon specific request made to 
the Commission, the Commission may exempt a person or related persons 
under financial distress circumstances for a time certain from any of 
the requirements of this part. Financial distress circumstances include 
situations involving the potential default or bankruptcy of a customer 
of the requesting person or persons, an affiliate of the requesting 
person or persons, or a potential acquisition target of the requesting 
person or persons.
    (c) Conditional spot-month limit exemption. The position limits set 
forth in Sec.  150.2 may be exceeded for cash-settled referenced 
contracts provided that such positions do not exceed five times the 
level of the spot-month limit specified by the Commission and the 
person holding or controlling such positions does not hold or control 
positions in spot-month physical-delivery referenced contracts.
    (d) Pre-enactment and transition period swaps exemption. The 
speculative position limits set forth in Sec.  150.2 shall not apply to 
positions acquired in good faith in any pre-enactment swap, or in any 
transition period swap, in either case as defined by Sec.  150.1, 
provided, however, that a person may net such positions with post-
effective date commodity derivative contracts for the purpose of 
complying with any non-spot-month speculative position limit.
    (e) Other exemptions. Any person engaging in risk-reducing 
practices commonly used in the market, which they believe may not be 
specifically enumerated in the definition of bona fide hedging position 
in Sec.  150.1, may request:
    (1) An interpretative letter from Commission staff, under Sec.  
140.99 of this chapter, concerning the applicability of the bona fide 
hedging position exemption; or
    (2) Exemptive relief from the Commission under section 4a(a)(7) of 
the Act.
    (3) Appendix C of this part provides a non-exhaustive list of 
examples of bona fide hedging positions as defined under Sec.  150.1.
    (f) Previously granted exemptions. Exemptions granted by the 
Commission under Sec.  1.47 of this chapter for swap risk management 
shall not apply to swap positions entered into after the effective date 
of initial position limits implementing section 737 of the Dodd-Frank 
Act of 2010.
    (g) Recordkeeping. (1) Persons who avail themselves of exemptions 
under this section, including exemptions granted under section 4a(a)(7) 
of the Act, shall keep and maintain complete books and records 
concerning all details of their related cash, forward, futures, futures 
options and swap positions and transactions, including anticipated 
requirements, production and royalties, contracts for services, cash 
commodity products and by-products, and cross-commodity hedges, and 
shall make such books and records, including a list of pass-through 
swap counterparties, available to the Commission upon request under 
paragraph (h) of this section.
    (2) Further, a party seeking to rely upon the pass-through swap 
offset in paragraph (2)(ii) of the definition of ``bona fide hedging 
position'' in Sec.  150.1, in order to exceed the position limits of 
Sec.  150.2 with respect to such a swap, may only do so if its 
counterparty provides a written representation (e.g., in the form of a 
field or other representation contained in a mutually executed trade 
confirmation) that, as to such counterparty, the swap qualifies in good 
faith as a ``bona fide hedging position,'' as defined in Sec.  150.1, 
at the time the swap was executed. That written representation shall be 
retained by the parties to the swap for a period of at least two years 
following the expiration of the swap and furnished to the Commission 
upon request.
    (3) Any person that represents to another person that a swap 
qualifies as a pass-through swap under paragraph (2)(ii) of the 
definition of ``bona fide hedging position'' in Sec.  150.1 shall keep 
and make available to the Commission upon request all relevant books 
and records supporting such a representation for a period of at least 
two years following the expiration of the swap.
    (h) Call for information. Upon call by the Commission, the Director 
of the Division of Market Oversight or the Director's delegate, any 
person claiming an exemption from speculative position limits under 
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; the 
commodity derivative contracts or cash market positions which support 
the claim of exemption; and the relevant business relationships 
supporting a claim of exemption.
    (i) Aggregation of accounts. Entities required to aggregate 
accounts or positions under Sec.  150.4 shall be considered the same 
person for the purpose of determining whether they are eligible for a 
bona fide hedging position exemption under paragraph (a)(1)(i) of this 
section with respect to such aggregated account or position.
    (j) Delegation of authority to the Director of the Division of 
Market Oversight. (1) The Commission hereby delegates, until it orders 
otherwise, to the Director of the Division of Market Oversight or such 
other employee or employees as the Director may designate from time to 
time, the authority in paragraph (b) of this section to provide 
exemptions in circumstances of financial distress.
    (2) The Director of the Division of Market Oversight may submit to 
the Commission for its consideration any matter which has been 
delegated in this section.
    (3) Nothing in this section prohibits the Commission, at its 
election, from exercising the authority delegated in this section.
0
25. Revise Sec.  150.5 to read as follows:


Sec.  150.5  Exchange-set speculative position limits.

    (a) Requirements and acceptable practices for commodity derivative 
contracts subject to federal position limits. (1) For any commodity 
derivative contract that is subject to a speculative position limit 
under Sec.  150.2, the designated contract market or swap execution 
facility that is a trading facility shall set a speculative position 
limit no higher than the level specified in Sec.  150.2.
    (2) Exemptions. (i) Hedge exemption. Any hedge exemption rules 
adopted by a designated contract markets or a swap execution facility 
that is a trading facility must conform to the definition of bona fide 
hedging position in Sec.  150.1.
    (ii) Other exemptions. In addition to the express exemptions 
specified in Sec.  150.3, a designated contract market or swap 
execution facility that is a trading facility may grant other 
exemptions for:
    (A) Intramarket spread positions as defined in Sec.  150.1, 
provided that such positions must be outside of the spot month for 
physical-delivery contracts and must not exceed the all-months limit 
set forth in Sec.  150.2 when combined

[[Page 75829]]

with any other net positions in the single month;
    (B) Intermarket spread positions as defined in Sec.  150.1, 
provided that such positions must be outside of the spot month for 
physical-delivery contracts.
    (iii) Application for exemption. Traders must apply to the 
designated contract market or swap execution facility that is a trading 
facility for any exemption from its speculative position limit rules. 
The designated contract market or swap execution facility that is a 
trading facility may limit bona fide hedging positions, or any other 
positions that have been exempted pursuant to Sec.  150.3, which it 
determines are not in accord with sound commercial practices, or which 
exceed an amount that may be established and liquidated in an orderly 
fashion.
    (3) Pre-enactment and transition period swap positions. Speculative 
position limits set forth in Sec.  150.2 shall not apply to positions 
acquired in good faith in any pre-enactment swap, or in any transition 
period swap, in either case as defined by Sec.  150.1. Provided, 
however, that a designated contract market or swap execution facility 
that is a trading facility shall allow a person to net such position 
with post-effective date commodity derivative contracts for the purpose 
of complying with any non-spot-month speculative position limit.
    (4) Pre-existing positions. (i) Pre-existing positions in a spot-
month. A designated contract market or swap execution facility that is 
a trading facility must require compliance with spot month speculative 
position limits for pre-existing positions in commodity derivative 
contracts other than pre-enactment and transition period swaps.
    (ii) Pre-existing positions in a non-spot-month. A single-month or 
all-months-combined speculative position limit established under Sec.  
150.2 shall not apply to any commodity derivative contract acquired in 
good faith prior to the effective date of such limit, provided, 
however, that such position shall be attributed to the person if the 
person's position is increased after the effective date of such limit.
    (5) Aggregation. Designated contract markets and swap execution 
facilities that are trading facilities must have aggregation rules that 
conform to Sec.  150.4.
    (6) Additional acceptable practices. A designated contract market 
or swap execution facility that is a trading facility may:
    (i) Impose additional restrictions on a person with a long position 
in the spot month of a physical-delivery contract who stands for 
delivery, takes that delivery, then re-establishes a long position;
    (ii) Establish limits on the amount of delivery instruments that a 
person may hold in a physical-delivery contract; and
    (iii) Impose such other restrictions as it deems necessary to 
reduce the potential threat of market manipulation or congestion, to 
maintain orderly execution of transactions, or for such other purposes 
consistent with its responsibilities.
    (b) Requirements and acceptable practices for commodity derivative 
contracts that are not subject to the limits set forth in Sec.  150.2, 
including derivative contracts in a physical commodity as defined in 
Sec.  150.1 and in an excluded commodity as defined in section 1a(19) 
of the Act--(1) Levels at initial listing. At the time of each 
commodity derivative contract's initial listing, a designated contract 
market or swap execution facility that is a trading facility should 
base speculative position limits on the following:
    (i) Spot month position limits. (A) Commodities with a measurable 
deliverable supply. For all commodity derivative contracts not subject 
to the limits set forth in Sec.  150.2 that are based on a commodity 
with a measurable deliverable supply, the spot month limit level should 
be established at a level that is no greater than one-quarter of the 
estimated spot month deliverable supply, calculated separately for each 
month to be listed (Designated Contract Markets and Swap Execution 
Facilities may refer to the guidance in paragraph (b)(1)(i) of Appendix 
C of part 38 for guidance on estimating spot-month deliverable supply);
    (B) Commodities without a measurable deliverable supply. For 
commodity derivative contracts that are based on a commodity with no 
measurable deliverable supply, the spot month limit level should be set 
at a level that is necessary and appropriate to reduce the potential 
threat of market manipulation or price distortion of the contract's or 
the underlying commodity's price or index.
    (ii) Individual non-spot or all-months-combined position limits. 
(A) Agricultural commodity derivative contracts. For agricultural 
commodity derivative contracts not subject to the limits set forth in 
Sec.  150.2, the individual non-spot or all-months-combined levels 
should be no greater than 1,000 contracts, when the notional quantity 
per contract is no larger than a typical cash market transaction in the 
underlying commodity. If the notional quantity per contract is larger 
than the typical cash market transaction, then the individual non-spot 
month limit or all-months combined limit level should be scaled down 
accordingly. If the commodity derivative contract is substantially the 
same as a pre-existing designated contract market or swap execution 
facility commodity derivative contract, then the designated contract or 
swap execution facility may adopt the same limit as applies to that 
pre-existing commodity derivative contract;
    (B) Exempt or excluded commodity derivative contracts. For exempt 
commodity derivative contracts not subject to the limits set forth in 
Sec.  150.2 or excluded commodity derivative contracts, the individual 
non-spot or all-months-combined levels should be no greater than 5,000 
contracts, when the notional quantity per contract is no larger than a 
typical cash market transaction in the underlying commodity. If the 
notional quantity per contract is larger than the typical cash market 
transaction, then the individual non-spot month limit or all-months 
combined limit level should be scaled down accordingly. If the 
commodity derivative contract is substantially the same as a pre-
existing commodity derivative contract, then the designated contract 
market or swap execution facility may adopt the same limit as applies 
to that pre-existing commodity derivative contract.
    (iii) Commodity derivative contracts that are cash-settled by 
referencing a daily settlement price of an existing contract. For 
commodity derivative contracts that are cash-settled by referencing a 
daily settlement price of an existing contract listed on a designated 
contract market or swap execution facility that is a trading facility, 
the cash-settled contract should adopt the same spot-month, individual 
non-spot-month, and all-months-combined position limits as the original 
price referenced contract.
    (2) Adjustments to levels. Designated contract markets and swap 
execution facilities that are trading facilities should adjust their 
speculative limit levels as follows:
    (i) Spot month position limits. The spot month position limit level 
should be reviewed no less than once every twenty-four months from the 
date of initial listing and should be maintained at a level that is:
    (A) No greater than one-quarter of the estimated spot month 
deliverable supply, calculated separately for each month to be listed; 
or
    (B) In the case of a commodity derivative contract based on a 
commodity without a measurable deliverable supply, necessary and 
appropriate to reduce the potential threat of market manipulation or 
price

[[Page 75830]]

distortion of the contract's or the underlying commodity's price or 
index.
    (ii) Individual non-spot or all-months-combined position limits. 
Individual non-spot or all-months-combined levels should 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. In any case, such levels should be reviewed no less than once 
every twenty-four months from the date of initial listing.
    (3) Position accountability in lieu of speculative position limits. 
A designated contract market or swap execution facility that is a 
trading facility may adopt a bylaw, rule, regulation, or resolution, 
substituting for the exchange set speculative position limits specified 
under this paragraph (b), an exchange rule requiring traders to consent 
to provide information about their position upon request by the 
exchange and to consent to halt increasing further a trader's position 
or to reduce their positions in an orderly manner, in each case upon 
request by the exchange as follows:
    (i) Physical commodity derivative contracts. On a physical 
commodity derivative contract that is not subject to the limits set 
forth in Sec.  150.2, having an average month-end open interest of 
50,000 contracts and an average daily volume of 5,000 or more contracts 
during the most recent calendar year and a liquid cash market, a 
designated contract market or swap execution facility that is a trading 
facility may adopt individual non-spot month or all-months-combined 
position accountability levels, provided, however, that such designated 
contract market or swap execution facility that is a trading facility 
should adopt a spot month speculative position limit with a level no 
greater than one-quarter of the estimated spot month deliverable 
supply;
    (ii) Excluded commodity derivative contracts--(A) Spot month. On an 
excluded commodity derivative contract for which there is a highly 
liquid cash market and no legal impediment to delivery, a designated 
contract market or swap execution facility that is a trading facility 
may adopt position accountability in lieu of position limits in the 
spot month. For an excluded commodity derivative contract based on a 
commodity without a measurable deliverable supply, a designated 
contract market or swap execution facility that is a trading facility 
may adopt position accountability in lieu of position limits in the 
spot month. For all other excluded commodity derivative contracts, a 
designated contract market or swap execution facility that is a trading 
facility should adopt a spot-month position limit with a level no 
greater than one-quarter of the estimated deliverable supply;
    (B) Individual non-spot or all-months-combined position limits. On 
an excluded commodity derivative contract, a designated contract market 
or swap execution facility that is a trading facility may adopt 
position accountability levels in lieu of position limits in the 
individual non-spot month or all-months-combined.
    (iii) New commodity derivative contracts that are substantially the 
same as an existing contract. On a new commodity derivative contract 
that is substantially the same as an existing commodity derivative 
contract listed for trading on a designated contract market or swap 
execution facility that is a trading facility, which has adopted 
position accountability in lieu of position limits, the designated 
contract market or swap execution facility may adopt for the new 
contract when it is initially listed for trading the position 
accountability levels of the existing contract.
    (4) Calculation of trading volume and open interest. For purposes 
of this paragraph, trading volume and open interest should be 
calculated by:
    (i) Open interest. (A) Averaging the month-end open positions in a 
futures contract and its related option contract, on a delta-adjusted 
basis, for all months listed during the most recent calendar year; and
    (B) Averaging the month-end futures-equivalent amount of open 
positions in swaps in a particular commodity (such as, for swaps that 
are not referenced contracts, by combining the notional month-end open 
positions in swaps in a particular commodity, including options in that 
same commodity that are swaps on a delta-adjusted basis, and dividing 
by a notional quantity per contract that is no larger than a typical 
cash market transaction in the underlying commodity).
    (ii) Trading volume. (A) Counting the number of contracts in a 
futures contract and its related option contract, on a delta-adjusted 
basis, transacted during the most recent calendar year; and
    (B) Counting the futures-equivalent number of swaps in a particular 
commodity transacted during the most recent calendar year.
    (5) Exemptions--(i) Hedge exemption. Any hedge exemption rules 
adopted by a designated contract market or a swap execution facility 
that is a trading facility must conform to the definition of bona fide 
hedging position in Sec.  150.1.
    (ii) Other exemptions. In addition to the exemptions for bona fide 
hedging positions that conform to paragraph (b)(5)(i) of this section, 
a designated contract market or swap execution facility that is a 
trading facility may grant other exemptions for:
    (A) Financial distress. Upon specific request made to the 
designated contract market or swap execution facility that is a trading 
facility, the designated contract market or swap execution facility 
that is a trading facility may exempt a person or related persons under 
financial distress circumstances for a time certain from any of the 
requirements of this part. Financial distress circumstances include 
situations involving the potential default or bankruptcy of a customer 
of the requesting person or persons, an affiliate of the requesting 
person or persons, or a potential acquisition target of the requesting 
person or persons;
    (B) Conditional spot-month limit exemption. Exchange-set 
speculative position limits may be exceeded for cash-settled contracts 
provided that such positions should not exceed five times the level of 
the spot-month limit specified by the designated contract market or 
swap execution facility that is a trading facility and the person 
holding or controlling such positions should not hold or control 
positions in referenced spot-month physical-delivery contracts;
    (C) Intramarket spread positions as defined in Sec.  150.1, 
provided that such positions should be outside of the spot month for 
physical-delivery contracts and should not exceed the all-months limit 
when combined with any other net positions in the single month;
    (D) Intermarket spread positions as defined in Sec.  150.1, 
provided that such positions should be outside of the spot month for 
physical-delivery contracts; and/or
    (E) For excluded commodities, a designated contract market or swap 
execution facility that is a trading facility may grant a limited risk 
management exemption pursuant to rules submitted to the Commission, 
consistent with the guidance in Appendix A of this part.
    (iii) Application for exemption. Traders must apply to the 
designated contract market or swap execution facility that is a trading 
facility for any exemption from its speculative position limit rules. 
In considering whether to grant such an application for exemption, a 
designated contract market or swap execution facility that is a trading 
facility should take into account

[[Page 75831]]

whether the requested exemption is in accord with sound commercial 
practices and results in a position that does not exceed an amount that 
may be established and liquidated in an orderly fashion.
    (6) Pre-enactment and transition period swap positions. Speculative 
position limits should not apply to positions acquired in good faith in 
any pre-enactment swap, or in any transition period swap, in either 
case as defined by Sec.  150.1. Provided, however, that a designated 
contract market or swap execution facility that is a trading facility 
may allow a person to net such position with post-effective date 
commodity derivative contracts for the purpose of complying with any 
non-spot-month speculative position limit.
    (7) Pre-existing positions--(i) Pre-existing positions in a spot-
month. A designated contract market or swap execution facility that is 
a trading facility should require compliance with spot month 
speculative position limits for pre-existing positions in commodity 
derivative contracts other than pre-enactment and transition period 
swaps.
    (ii) Pre-existing positions in a non-spot-month. A single-month or 
all-months-combined speculative position limit should not apply to any 
commodity derivative contract acquired in good faith prior to the 
effective date of such limit, provided, however, that such position 
should be attributed to the person if the person's position is 
increased after the effective date of such limit.
    (8) Aggregation. Designated contract markets and swap execution 
facilities that are trading facilities must have aggregation rules that 
conform to Sec.  150.4.
    (9) Additional acceptable practices. Particularly in the spot 
month, a designated contract market or swap execution facility that is 
a trading facility may:
    (i) Impose additional restrictions on a person with a long position 
in the spot month of a physical-delivery contract who stands for 
delivery, takes that delivery, then re-establishes a long position;
    (ii) Establish limits on the amount of delivery instruments that a 
person may hold in a physical-delivery contract; and
    (iii) Impose such other restrictions as it deems necessary to 
reduce the potential threat of market manipulation or congestion, to 
maintain orderly execution of transactions, or for such other purposes 
consist with its responsibilities.
    (c) Securities futures products. For security futures products, 
position limitations and position accountability provisions are 
specified in Sec.  41.25(a)(3) of this chapter.
0
26. Revise Sec.  150.6 to read as follows:


Sec.  150.6  Ongoing application of the Act and Commission regulations.

    This part shall only be construed as having an effect on position 
limits set by the Commission or a designated contract market or swap 
execution facility. Nothing in this part shall be construed to affect 
any other provisions of the Act or Commission regulations including but 
not limited to those relating to manipulation, attempted manipulation, 
corners, squeezes, fraudulent or deceptive conduct or prohibited 
transactions.
0
27. Add Sec.  150.7 to read as follows:


Sec.  150.7  Requirements for anticipatory bona fide hedging position 
exemptions.

    (a) Statement. Any person who wishes to avail himself of exemptions 
for unfilled anticipated requirements, unsold anticipated production, 
anticipated royalties, anticipated services contract payments or 
receipts, or anticipatory cross-commodity hedges under the provisions 
of paragraphs (3)(iii), (4)(i), (4)(iii), (4)(iv), or (5), 
respectively, of the definition of bona fide hedging position in Sec.  
150.1 shall file Form 704 with the Commission in advance of the date 
the person expects to exceed the position limits established under this 
part. Filings in conformity with the requirements of this section shall 
be effective ten days after submission, unless otherwise notified by 
the Commission.
    (b) Commission notification. At any time, the Commission may, by 
notice to any person filing a Form 704, specify its determination as to 
what portion, if any, of the amounts described in such filing does not 
meet the requirements for bona fide hedging positions. In no case shall 
such person's anticipatory bona fide hedging positions exceed the 
levels specified in paragraph (f) of this section.
    (c) Call for additional information. At any time, the Commission 
may request a person who has on file a Form 704 under paragraph (a) of 
this section to file specific additional or updated information with 
the Commission to support a determination that the Form 704 on file 
accurately reflects unsold anticipated production, unfilled anticipated 
requirements, anticipated royalties, or anticipated services contract 
payments or receipts.
    (d) Initial statement. Initial Form 704 concerning the 
classification of positions as bona fide hedging pursuant to paragraphs 
(3)(iii), or (4)(i), (4)(iii), (4)(iv) or anticipatory cross-commodity 
hedges under paragraph (5) of the definition of bona fide hedging 
position in Sec.  150.1 shall be filed with the Commission at least ten 
days in advance of the date that such positions would be in excess of 
limits then in effect pursuant to section 4a of the Act. Such 
statements shall set forth in detail for a specified operating period, 
not in excess of one year for an agricultural commodity, the person's 
anticipated activity, i.e., unfilled anticipated requirements, unsold 
anticipated production, anticipated royalties, or anticipated services 
contract payments or receipts, and explain the method of determination 
thereof, including, but not limited to, the following information:
    (1) Anticipated activity. For each anticipated activity:
    (i) The type of cash commodity underlying the anticipated activity;
    (ii) The name of the actual cash commodity underlying the 
anticipated activity and the units in which the cash commodity is 
measured;
    (iii) An indication of whether the cash commodity is the same 
commodity (grade and quality) that underlies a core referenced futures 
contract or whether a cross-hedge will be used and, if so, additional 
information for cross hedges specified in paragraph (d)(2) of this 
section;
    (iv) Annual production, requirements, royalty receipts or service 
contract payments or receipts, in terms of futures equivalents, of such 
commodity for the three complete fiscal years preceding the current 
fiscal year;
    (v) The specified time period for which the anticipatory hedge 
exemption is claimed;
    (vi) Anticipated production, requirements, royalty receipts or 
service contract payments or receipts, in terms of futures equivalents, 
of such commodity for such specified time period, not in excess of one 
year for an agricultural commodity;
    (vii) Fixed-price forward sales, inventory, and fixed-price forward 
purchases of such commodity, including any quantity in process of 
manufacture and finished goods and byproducts of manufacture or 
processing (in terms of such commodity);
    (viii) Unsold anticipated production, unfilled anticipated 
requirements, unsold anticipated royalty receipts,, and anticipated 
service contract payments or receipts the risks of which have not been 
offset with cash positions, of such commodity for the specified time 
period, not in excess of one year for an agricultural commodity; and
    (ix) The maximum number of long positions and short positions in

[[Page 75832]]

referenced contracts expected to be used to offset the risks of such 
anticipated activity.
    (2) Additional information for cross hedges. Cash positions that 
represent a commodity, or products or byproducts of a commodity, that 
is different from the commodity underlying a commodity derivative 
contract that is expected to be used for hedging, shall be shown both 
in terms of the equivalent amount of the commodity underlying the 
commodity derivative contract used for hedging and in terms of the 
actual cash commodity as provided for on Form 704. In computing their 
cash position, every person shall use such standards and conversion 
factors that are usual in the particular trade or that otherwise 
reflect the value-fluctuation-equivalents of the cash position in terms 
of the commodity underlying the commodity derivative contract used for 
hedging. Such person shall furnish to the Commission upon request 
detailed information concerning the basis for and derivation of such 
conversion factors, including:
    (i) The hedge ratio used to convert the actual cash commodity to 
the equivalent amount of the commodity underlying the commodity 
derivative contract used for hedging; and
    (ii) An explanation of the methodology used for determining the 
hedge ratio.
    (e) Supplemental reports. Whenever the amount which a person wishes 
to consider as a bona fide hedging position shall exceed the amount in 
the most recent filing pursuant to this section or such lesser amount 
as determined by the Commission pursuant to paragraph (b) of this 
section, such person shall file with the Commission a Form 704 which 
updates the information provided in the person's most recent filing and 
supplies the reason for this change at least ten days in advance of the 
date that person wishes to exceed such amount.
    (f) Annual update. Each person that has filed an initial statement 
on Form 704 for an anticipatory bona fide hedge exemption shall provide 
annual updates on the utilization of the anticipatory exemption. Each 
person shall report actual cash activity utilizing the anticipatory 
exemption for the preceding year, as well as the cumulative utilization 
since the filing of the initial or most recent supplemental statement. 
Each person shall also provide a good faith estimate of the remaining 
anticipatory exemption. Such reports shall set forth in detail the 
person's activity related to the anticipated exemption and shall 
include, but not be limited to the following information:
    (1) Information to be included:. For each anticipated activity:
    (i) The type of cash commodity underlying the anticipated activity;
    (ii) The name of the actual cash commodity underlying the 
anticipated activity and the units in which the cash commodity is 
measured;
    (iii) An indication of whether the cash commodity is the same 
commodity (grade and quality) that underlies a core referenced futures 
contract or whether a cross-hedge will be used and, if so, additional 
information for cross hedges specified in paragraph (d)(2) of this 
section;
    (iv) Actual production, requirements, royalty receipts or service 
contract payments or receipts, in terms of futures equivalents, of such 
commodity for the reporting month;
    (v) Cumulative actual production, requirements, royalty receipts or 
service contract payments or receipts, in terms of futures equivalents, 
of such commodity since the initial or supplemental statement;
    (vi) Estimated anticipated production, requirements, royalty 
receipts or service contract payments or receipts, in terms of futures 
equivalents, of such commodity for the remainder of such specified time 
period, not in excess of one year for an agricultural commodity;
    (vii) Fixed-price forward sales, inventory, and fixed-price forward 
purchases of such commodity, including any quantity in process of 
manufacture and finished goods and byproducts of manufacture or 
processing (in terms of such commodity) for the reporting month;
    (viii) Remaining unsold anticipated production, unfilled 
anticipated requirements, unsold anticipated royalty receipts, and 
anticipated service contract payments or receipts the risks of which 
have not been offset with cash positions, of such commodity for the 
specified time period, not in excess of one year for an agricultural 
commodity; and
    (ix) The maximum number of long positions and short positions in 
referenced contracts expected to be used to offset the risks of such 
anticipated activity for the remainder of the specified time period.
    (2) Reserved.
    (g) Monthly reporting. Monthly reporting of remaining anticipated 
hedge exemption shall be reported on Form 204, along with reporting 
other exemptions pursuant to Sec.  19.01(a)(3)(vii).
    (h) Maximum sales and purchases. Sales or purchases of commodity 
derivative contracts considered to be bona fide hedging positions under 
paragraphs (3)(iii)(A) or (4)(i) of the bona fide hedging position 
definition in Sec.  150.1 shall at no time exceed the lesser of:
    (1) A person's anticipated activity (including production, 
requirements, royalties and services) as described by the information 
most recently filed pursuant to this section that has not been offset 
with cash positions; or
    (2) Such lesser amount as determined by the Commission pursuant to 
paragraph (b) of this section.
    (i) Delegation of authority to the Director of the Division of 
Market Oversight. (1) The Commission hereby delegates, until it orders 
otherwise, to the Director of the Division of Market Oversight or such 
other employee or employees as the Director may designate from time to 
time, the authority:
    (i) In paragraph (b) of this section to provide notice to a person 
that some or all of the amounts described in a Form 704 filing does not 
meet the requirements for bona fide hedging positions;
    (ii) In paragraph (c) of this section to request a person who has 
filed a Form 704 under paragraph (a) of this section to file specific 
additional or updated information with the Commission to support a 
determination that the Form 704 filed accurately reflects unsold 
anticipated production, unfilled anticipated requirements, anticipated 
royalties, or anticipated services contract payments or receipts; and
    (iii) In paragraph (d)(2) of this section to request detailed 
information concerning the basis for and derivation of conversion 
factors used in computing the cash position provided in Form 704.
    (2) The Director of the Division of Market Oversight may submit to 
the Commission for its consideration any matter which has been 
delegated in this section.
    (3) Nothing in this section prohibits the Commission, at its 
election, from exercising the authority delegated in this section.
0
28. Add Sec.  150.8 to read as follows:


Sec.  150.8  Severability.

    If any provision of this part, or the application thereof to any 
person or circumstances, is held invalid, such invalidity shall not 
affect other provisions or application of such provision to other 
persons or circumstances which can be given effect without the invalid 
provision or application.
0
29. Add appendix A to part 150 to read as follows:

[[Page 75833]]

Appendix A to Part 150--Guidance on Risk Management Exemptions for 
Commodity Derivative Contracts in Excluded Commodities

    (1) This appendix provides non-exclusive interpretative guidance 
on risk management exemptions for commodity derivative contracts in 
excluded commodities permitted under the definition of bona fide 
hedging position in Sec.  150.1. The rules of a designated contract 
market or swap execution facility that is a trading facility may 
recognize positions consistent with this guidance as bona fide 
hedging positions. The Commission recognizes that risk reducing 
positions in commodity derivative contracts in excluded commodities 
may not conform to the general definition of bona fide hedging 
positions applicable to commodity derivative contracts in physical 
commodities, as provided under section 4a(c)(2) of the Act, and may 
not conform to enumerated bona fide hedging positions applicable to 
commodity derivative contracts in physical commodities under the 
definition of bona fide hedging position in Sec.  150.1.
    This interpretative guidance for core principle 5 for designated 
contract markets, section 5(d)(5) of the Act, and core principle 6 
for swap execution facilities that are trading facilities, section 
5h(f)(6) of the Act, is illustrative only of the types of positions 
for which a trading facility may elect to provide a risk management 
exemption and is not intended to be used as a mandatory checklist. 
Other positions might also be included appropriately within a risk 
management exemption.
    (2)(a) No temporary substitute criterion. Risk management 
positions in commodity derivative contracts in excluded commodities 
need not be expected to represent a substitute for a subsequent 
transaction or position in a physical marketing channel. There need 
not be any requirement to replace a commodity derivative contract 
with a cash market position in order to qualify for a risk 
management exemption.
    (b) Cross-commodity hedging is permitted. Risks that are offset 
in commodity derivative contracts in excluded commodities need not 
arise from the same commodities underlying the commodity derivative 
contracts. For example, a trading facility may recognize a risk 
management exemption based on the net interest rate risk arising 
from a bank's balance sheet of loans and deposits that is offset 
using Treasury security futures contracts or short-term interest 
rate futures contracts.
    (3) Examples of risk management positions. This section contains 
examples of risk management positions that may be economically 
appropriate to the reduction of risk in the operation of a 
commercial enterprise.
    (a) Balance sheet hedging. A commercial enterprise may have 
risks arising from its net position in assets and liabilities.
    (i) Foreign currency translation. Once form of balance sheet 
hedging involves offsetting net exposure to changes in currency 
exchange rates for the purpose of stabilizing the domestic dollar 
accounting value of net assets and/or liabilities which are 
denominated in a foreign currency. For example, a bank may make 
loans in a foreign currency and take deposits in that same foreign 
currency. Such a bank is exposed to net foreign currency translation 
risk when the amount of loans is not equal to the amount of 
deposits. A bank with a net long exposure to a foreign currency may 
hedge by establishing an offsetting short position in a foreign 
currency commodity derivative contract.
    (ii) Interest rate risk. Another form of balance sheet hedging 
involves offsetting net exposure to changes in values of assets and 
liabilities of differing durations. Examples include:
    (A) A pension fund may invest in short term securities and have 
longer term liabilities. Such a pension fund has a duration 
mismatch. Such a pension fund may hedge by establishing a long 
position in Treasury security futures contracts to lengthen the 
duration of its assets to match the duration of its liabilities. 
This is economically equivalent to using a long position in Treasury 
security futures contracts to shorten the duration of its 
liabilities to match the duration of its assets.
    (B) A bank may make a certain amount of fixed-rate loans of one 
maturity and fund such assets through taking fixed-rate deposits of 
a shorter maturity. Such a bank is exposed to interest rate risk, in 
that an increase in interest rates may result in a greater decline 
in value of the assets than the decline in value of the deposit 
liabilities. A bank may hedge by establishing a short position in 
short-term interest rate futures contracts to lengthen the duration 
of its liabilities to match the duration of its assets. This is 
economically equivalent to using a short position in short-term 
interest rate futures contracts, for example, to shorten the 
duration of its assets to match the duration of its liabilities.
    (b) Unleveraged synthetic positions. An investment fund may have 
risks arising from a delayed investment in an asset allocation 
promised to investors. Such a fund may synthetically gain exposure 
to an asset class using a risk management strategy of establishing a 
long position in commodity derivative contracts that does not exceed 
cash set aside in an identifiable manner, including short-term 
investments, any funds deposited as margin and accrued profits on 
such commodity derivative contract positions. For example:
    (i) A collective investment fund that invests funds in stocks 
pursuant to an asset allocation strategy may obtain immediate stock 
market exposure upon receipt of new monies by establishing a long 
position in stock index futures contracts (``equitizing cash''). 
Such a long position may qualify as a risk management exemption 
under trading facility rules provided such long position does not 
exceed the cash set aside. The long position in stock index futures 
contracts need not be converted to a position in stock.
    (ii) Upon receipt of new funds from investors, an insurance 
company that invests in bond holdings for a separate account wishes 
to lengthen synthetically the duration of the portfolio by 
establishing a long position in Treasury futures contracts. Such a 
long position may qualify as a risk management exemption under 
trading facility rules provided such long position does not exceed 
the cash set aside. The long position in Treasury futures contracts 
need not be converted to a position in bonds.
    (c) Temporary asset allocations. A commercial enterprise may 
have risks arising from potential transactional costs in temporary 
asset allocations (altering portfolio exposure to certain asset 
classes such as equity securities and debt securities). Such an 
enterprise may hedge existing assets owned by establishing a short 
position in an appropriate commodity derivative contract and 
synthetically gain exposure to an alternative asset class using a 
risk management strategy of establishing a long position in another 
commodity derivative contract that does not exceed: the value of the 
existing asset at the time the temporary asset allocation is 
established or, in the alternative, the hedged value of the existing 
asset plus any accrued profits on such risk management positions. 
For example:
    (i) A collective investment fund that invests funds in bonds and 
stocks pursuant to an asset allocation strategy may believe that 
market considerations favor a temporary increase in the fund's 
equity exposure relative to its bond holdings. The fund manager may 
choose to accomplish the reallocation using commodity derivative 
contracts, such as a short position in Treasury security futures 
contracts and a long position in stock index futures contracts. The 
short position in Treasury security futures contracts may qualify as 
a hedge of interest rate risk arising from the bond holdings. A 
trading facility may adopt rules to recognize as a risk management 
exemption such a long position in stock index futures.
    (ii) Reserved.
    (4) Clarification of bona fides of short positions.
    (a) Calls sold. A seller of a call option establishes a short 
call option. A short call option is a short position in a commodity 
derivative contract with respect to the underlying commodity. A bona 
fide hedging position includes such a written call option that does 
not exceed in quantity the ownership or fixed-price purchase 
contracts in the contract's underlying cash commodity by the same 
person.
    (b) Puts purchased and portfolio insurance. A buyer of a put 
option establishes a long put option. However, a long put option is 
a short position in a commodity derivative contract with respect to 
the underlying commodity. A bona fide hedging position includes such 
an owned put that does not exceed in quantity the ownership or 
fixed-price purchase contracts in the contract's underlying cash 
commodity by the same person.
    The Commission also recognizes as bona fide hedging positions 
strategies that provide protection against a price decline 
equivalent to an owned position in a put option for an existing 
portfolio of securities owned. A dynamically managed short position 
in a futures contract may replicate the characteristics of a long 
position in a put option. Hedgers are reminded of their obligation 
to enter and exit the market in an orderly manner.

[[Page 75834]]

    (c) Synthetic short futures contracts. A person may establish a 
synthetic short futures position by purchasing a put option and 
selling a call option, when each option has the same notional 
amount, strike price, expiration date and underlying commodity. Such 
a synthetic short futures position is a short position in a 
commodity derivative contract with respect to the underlying 
commodity. A bona fide hedging position includes such a synthetic 
short futures position that does not exceed in quantity the 
ownership or fixed-price purchase contracts in the contract's 
underlying cash commodity by the same person.
0
30. Add appendix B to part 150 to read as follows:

Appendix B to Part 150--Commodities Listed as Substantially the Same 
for Purposes of the Definition of Basis Contract

    The following table lists core referenced futures contracts and 
commodities that are treated as substantially the same as a 
commodity underlying a core referenced futures contract for purposes 
of the definition of basis contract in Sec.  150.1.

        Basis Contract List of Substantially the Same Commodities
------------------------------------------------------------------------
                                   Commodities
                                   considered           Source(s) for
   Core referenced futures      substantially the     specification of
          contract            same  (regardless of         quality
                                    location)
------------------------------------------------------------------------
NYMEX Light Sweet Crude Oil                         ....................
 futures contract (CL).
                              1. Light Louisiana    NYMEX Argus LLS vs.
                               Sweet (LLS) Crude     WTI (Argus) Trade
                               Oil.                  Month futures
                                                     contract (E5).
                                                    NYMEX LLS (Argus)
                                                     vs. WTI Financial
                                                     futures contract
                                                     (WJ).
                                                    ICE Futures Europe
                                                     Crude Diff--Argus
                                                     LLS vs WTI 1st Line
                                                     Swap futures
                                                     contract (ARK).
                                                    ICE Futures Europe
                                                     Crude Diff--Argus
                                                     LLS vs WTI Trade
                                                     Month Swap futures
                                                     contract (ARL).
NYMEX New York Harbor ULSD
 Heating Oil futures
 contract (HO).
                              1. Chicago ULSD.....  NYMEX Chicago ULSD
                                                     (Platts) vs. NY
                                                     Harbor ULSD Heating
                                                     Oil futures
                                                     contract (5C).
                              2. Gulf Coast ULSD..  NYMEX Group Three
                                                     ULSD (Platts) vs.
                                                     NY Harbor ULSD
                                                     Heating Oil futures
                                                     contract (A6).
                                                    NYMEX Gulf Coast
                                                     ULSD (Argus) Up-
                                                     Down futures
                                                     contract (US).
                                                    NYMEX Gulf Coast
                                                     ULSD (Argus) Up-
                                                     Down BALMO futures
                                                     contract (GUD).
                                                    NYMEX Gulf Coast
                                                     ULSD (Platts) Up-
                                                     Down BALMO futures
                                                     contract (1L).
                                                    NYMEX Gulf Coast
                                                     ULSD (Platts) Up-
                                                     Down Spread futures
                                                     contract (LT).
                                                    ICE Futures Europe
                                                     Diesel Diff- Gulf
                                                     Coast vs Heating
                                                     Oil 1st Line Swap
                                                     futures contract
                                                     (GOH).
                                                    CME Clearing Europe
                                                     Gulf Coast ULSD(
                                                     Platts) vs. New
                                                     York Heating Oil
                                                     (NYMEX) Spread
                                                     Calendar swap
                                                     (ELT).
                                                    CME Clearing Europe
                                                     New York Heating
                                                     Oil (NYMEX) vs.
                                                     European Gasoil
                                                     (IC) Spread
                                                     Calendar swap
                                                     (EHA).
                              3. California Air     NYMEX Los Angeles
                               Resources Board       CARB Diesel (OPIS)
                               Spec ULSD (CARB no.   vs. NY Harbor ULSD
                               2 oil).               Heating Oil futures
                                                     contract (KL).
                              4. Gas Oil            ICE Futures Europe
                               Deliverable in        Gasoil futures
                               Antwerp, Rotterdam,   contract (G).
                               or Amsterdam Area.
                                                    ICE Futures Europe
                                                     Heating Oil Arb--
                                                     Heating Oil 1st
                                                     Line vs. Gasoil 1st
                                                     Line Swap futures
                                                     contract (HOT).
                                                    ICE Futures Europe
                                                     Heating Oil Arb--
                                                     Heating Oil 1st
                                                     Line vs. Low
                                                     Sulphur Gasoil 1st
                                                     Line Swap futures
                                                     contract (ULL).
                                                    NYMEX NY Harbor ULSD
                                                     Heating Oil vs.
                                                     Gasoil futures
                                                     contract (HA).
NYMEX RBOB Gasoline futures                         ....................
 contract (RB).
                              1. Chicago Unleaded   ....................
                               87 gasoline.
                                                    NYMEX Chicago
                                                     Unleaded Gasoline
                                                     (Platts) vs. RBOB
                                                     Gasoline futures
                                                     contract (3C).
                                                    NYMEX Group Three
                                                     Unleaded Gasoline
                                                     (Platts) vs. RBOB
                                                     Gasoline futures
                                                     contract (A8).
                              2. Gulf Coast         ....................
                               Conventional
                               Blendstock for
                               Oxygenated Blending
                               (CBOB) 87.
                                                    NYMEX Gulf Coast
                                                     CBOB Gasoline A1
                                                     (Platts) vs. RBOB
                                                     Gasoline futures
                                                     contract (CBA).
                                                    NYMEX Gulf Coast Unl
                                                     87 (Argus) Up-Down
                                                     futures contract
                                                     (UZ).
                              3. Gulf Coast CBOB    ....................
                               87 (Summer
                               Assessment).

[[Page 75835]]

 
                                                    NYMEX Gulf Coast
                                                     CBOB Gasoline A2
                                                     (Platts) vs. RBOB
                                                     Gasoline futures
                                                     contract (CRB).
                              4. Gulf Coast         ....................
                               Unleaded 87 (Summer
                               Assessment).
                                                    NYMEX Gulf Coast 87
                                                     Gasoline M2
                                                     (Platts) vs. RBOB
                                                     Gasoline futures
                                                     contract (RVG).
                                                    NYMEX Gulf Coast 87
                                                     Gasoline M2
                                                     (Platts) vs. RBOB
                                                     Gasoline BALMO
                                                     futures contract
                                                     (GBB).
                                                    NYMEX Gulf Coast 87
                                                     Gasoline M2 (Argus)
                                                     vs. RBOB Gasoline
                                                     BALMO futures
                                                     contract (RBG).
                              5. Gulf Coast         ....................
                               Unleaded 87.
                                                    NYMEX Gulf Coast Unl
                                                     87 (Platts) Up-Down
                                                     BALMO futures
                                                     contract (1K).
                                                    NYMEX Gulf Coast Unl
                                                     87 Gasoline M1
                                                     (Platts) vs. RBOB
                                                     Gasoline futures
                                                     contract (RV).
                                                    CME Clearing Europe
                                                     Gulf Coast Unleaded
                                                     87 Gasoline M1
                                                     (Platts) vs. New
                                                     York RBOB Gasoline
                                                     (NYMEX) Spread
                                                     Calendar swap
                                                     (ERV).
                              6. Los Angeles        ....................
                               California
                               Reformulated
                               Blendstock for
                               Oxygenate Blending
                               (CARBOB) Regular.
                                                    NYMEX Los Angeles
                                                     CARBOB Gasoline
                                                     (OPIS) vs. RBOB
                                                     Gasoline futures
                                                     contract (JL).
                              7. Los Angeles        ....................
                               California
                               Reformulated
                               Blendstock for
                               Oxygenate Blending
                               (CARBOB) Premium.
                                                    NYMEX Los Angeles
                                                     CARBOB Gasoline
                                                     (OPIS) vs. RBOB
                                                     Gasoline futures
                                                     contract (JL).
                              8. Euro-BOB OXY NWE   ....................
                               Barges.
                                                    NYMEX RBOB Gasoline
                                                     vs. Euro-bob Oxy
                                                     NWE Barges (Argus)
                                                     (1000mt) futures
                                                     contract (EXR).
                                                    CME Clearing Europe
                                                     New York RBOB
                                                     Gasoline (NYMEX)
                                                     vs. European
                                                     Gasoline Euro-bob
                                                     Oxy Barges NWE
                                                     (Argus) (1000mt)
                                                     Spread Calendar
                                                     swap (EEXR).
                              9. Euro-BOB OXY FOB   ....................
                               Rotterdam.
                                                    ICE Futures Europe
                                                     Gasoline Diff--RBOB
                                                     Gasoline 1st Line
                                                     vs. Argus Euro-BOB
                                                     OXY FOB Rotterdam
                                                     Barge Swap futures
                                                     contract (ROE).
------------------------------------------------------------------------

0
31. Add appendix C to part 150 to read as follows:

Appendix C to Part 150--Examples of Bona Fide Hedging Positions for 
Physical Commodities

    A non-exhaustive list of examples meeting the definition of bona 
fide hedging position under Sec.  150.1 is presented below. With 
respect to a position that does not fall within an example in this 
appendix, a person seeking to rely on a bona fide hedging position 
exemption under Sec.  150.3 may seek guidance from the Division of 
Market Oversight. References to paragraphs in the examples below are 
to the definition of bona fide hedging position in Sec.  150.1.

1. Portfolio Hedge Under Paragraph (3)(i) of the Bona Fide Hedging 
Position Definition

    Fact Pattern: It is currently January and Participant A owns 
seven million bushels of corn located in its warehouses. Participant 
A has entered into fixed-price forward sale contracts with several 
processors for a total of five million bushels of corn that will be 
delivered by May of this year. Participant A has no fixed-price corn 
purchase contracts. Participant A's gross long cash position is 
equal to seven million bushels of corn. Because Participant A has 
sold forward five million bushels of corn, its net cash position is 
equal to long two million bushels of corn. To reduce price risk 
associated with potentially lower corn prices, Participant A chooses 
to establish a short position of 400 contracts in the CBOT Corn 
futures contract, equivalent to two million bushels of corn, in the 
same crop year as the inventory.
    Analysis: The short position in a contract month in the current 
crop year for the CBOT Corn futures contract, equivalent to the 
amount of inventory held, satisfies the general requirements for a 
bona fide hedging position under paragraphs (2)(i)(A)-(C) and the 
provisions associated with owning a commodity under paragraph 
(3)(i).\1\ Because the firm's net cash position is two million 
bushels of unsold corn, the firm is exposed to price risk. 
Participant A's hedge of the two million bushels represents a 
substitute for a fixed-price forward sale at a later time in the 
physical marketing channel. The position is economically appropriate 
to the reduction of price risk because the short position in a 
referenced contract does not exceed the quantity equivalent risk 
exposure (on a net basis) in the cash commodity in the current crop 
year. Last, the hedge arises from a potential change in the value of 
corn owned by Participant A.
---------------------------------------------------------------------------

    \1\ Participant A could also choose to hedge on a gross basis. 
In that event, Participant A could establish a short position in the 
March Chicago Board of Trade Corn futures contract equivalent to 
seven million bushels of corn to offset the price risk of its 
inventory and establish a long position in the May Chicago Board of 
Trade Corn futures contract equivalent to five million bushels of 
corn to offset the price risk of its fixed-price forward sale 
contracts.
---------------------------------------------------------------------------

2. Lending a Commodity and Hedge of Price Risk Under Paragraph (3)(i) 
of the Bona Fide Hedging Position Definition

    Fact Pattern: Bank B owns 1,000 ounces of gold that it lends to 
Jewelry Fabricator J at LIBOR plus a differential. Under the terms 
of the loan, Jewelry Fabricator J may later purchase the gold from 
Bank B at a differential to the prevailing price of the Commodity 
Exchange, Inc. (COMEX) Gold futures contract (i.e., an open-price 
purchase agreement is embedded in the terms of the loan). Jewelry 
Fabricator J intends to use the gold to make jewelry and reimburse 
Bank B for the loan using the proceeds from jewelry sales and either 
purchase gold from Bank B by paying the market price for gold or 
return the equivalent amount of gold to Bank B by purchasing gold at 
the market price. Because Bank B has retained the price risk on 
gold, the bank is concerned about its potential loss if the price of 
gold drops. The bank reduces the risk of a potential loss in the 
value of the gold by establishing a ten contract short

[[Page 75836]]

position in the COMEX Gold futures contract, which has a unit of 
trading of 100 ounces of gold. The ten contract short position is 
equivalent to 1,000 ounces of gold.
    Analysis: This position meets the general requirements for bona 
fide hedging positions under paragraphs (2)(i)(A)-(C) and the 
requirements associated with owning a cash commodity under paragraph 
(3)(i). The physical commodity that is being hedged is the 
underlying cash commodity for the COMEX Gold futures contract. Bank 
B's short hedge of the gold represents a substitute for a 
transaction to be made in the physical marketing channel (e.g., 
completion of the open-price sale to Jewelry Fabricator J). Because 
the notional quantity of the short position in the gold futures 
contract is equal to the amount of gold that Bank B owns, the hedge 
is economically appropriate to the reduction of risk. Finally, the 
short position in the commodity derivative contract offsets the 
potential change in the value of the gold owned by Bank B.

3. Repurchase Agreements and Hedge of Inventory Under Paragraph (3)(i) 
of the Bona Fide Hedging Position Definition

    Fact Pattern: Elevator A purchased 500,000 bushels of wheat in 
April and reduced its price risk by establishing a short position of 
100 contracts in the CBOT Wheat futures contract, equivalent to 
500,000 bushels of wheat. Because the price of wheat rose steadily 
since April, Elevator A had to make substantial maintenance margin 
payments. To alleviate its cash flow concern about meeting further 
margin calls, Elevator A decides to enter into a repurchase 
agreement with Bank B and offset its short position in the wheat 
futures contract. The repurchase agreement involves two separate 
contracts: A fixed-price sale from Elevator A to Bank B at today's 
spot price; and an open-price purchase agreement that will allow 
Elevator A to repurchase the wheat from Bank B at the prevailing 
spot price three months from now. Because Bank B obtains title to 
the wheat under the fixed-price purchase agreement, it is exposed to 
price risk should the price of wheat drop. Bank B establishes a 
short position of 100 contracts in the CBOT Wheat futures contract, 
equivalent to 500,000 bushels of wheat.
    Analysis: Bank B's position meets the general requirements for a 
bona fide hedging position under paragraphs (2)(i)(A)-(C) and the 
provisions for owning the cash commodity under paragraph (3)(i). The 
short position in referenced contracts by Bank B is a substitute for 
a fixed-price sales transaction to be taken at a later time in the 
physical marketing channel either to Elevator A or to another 
commercial party. The position is economically appropriate to the 
reduction of risk in the conduct and management of the commercial 
enterprise (Bank B) because the notional quantity of the short 
position in referenced contracts held by Bank B is not larger than 
the quantity of cash wheat purchased by Bank B. Finally, the short 
position in the CBOT Wheat futures contract reduces the price risk 
associated with owning cash wheat.

4. Utility Hedge of Anticipated Customer Requirements Under Paragraph 
(3)(iii)(B) of the Bona Fide Hedging Position Definition

    Fact Pattern: Natural Gas Utility A is encouraged to hedge its 
purchases of natural gas by the State Public Utility Commission in 
order to reduce natural gas price risk to residential customers. 
State Public Utility Commission considers the hedging practice to be 
prudent and allows gains and losses from hedging to be passed on to 
Natural Gas Utility A's regulated natural gas customers. Natural Gas 
Utility A has about one million residential customers who have 
average historical usage of about 71.5 mmBTUs of natural gas per 
year per residence. The utility decides to hedge about 70 percent of 
its residential customers' anticipated requirements for the 
following year, equivalent to a 5,000 contract long position in the 
NYMEX Henry Hub Natural Gas futures contract. To reduce the risk of 
higher prices to residential customers, Natural Gas Utility A 
establishes a 5,000 contract long position in the NYMEX Henry Hub 
Natural Gas futures contract. Since the utility is only hedging 70 
percent of historical usage, Natural Gas Utility A is highly certain 
that realized demand will exceed its hedged anticipated residential 
customer requirements.
    Analysis: Natural Gas Utility A's position meets the general 
requirements for a bona fide hedging position under paragraphs 
(2)(i)(A)-(C) and the provisions for hedges of unfilled anticipated 
requirements by a utility under paragraph (3)(iii)(B). The physical 
commodity that is being hedged involves a commodity underlying the 
NYMEX Henry Hub Natural Gas futures contract. The long position in 
the commodity derivative contract represents a substitute for 
transactions to be taken at a later time in the physical marketing 
channel. The position is economically appropriate to the reduction 
of price risk because the price of natural gas may increase. The 
commodity derivative contract position offsets the price risk of 
natural gas that the utility anticipates purchasing on behalf of its 
residential customers. As provided under paragraph (3)(iii), the 
risk-reducing position qualifies as a bona fide hedging position in 
the natural gas physical-delivery referenced contract during the 
spot month provided that the position does not exceed the unfilled 
anticipated requirements for that month and for the next succeeding 
month.

5. Processor Margins Hedge Using Unfilled Anticipated Requirements 
Under Paragraph (3)(iii)(A) of the Bona Fide Hedging Position 
Definition and Anticipated Production Under Paragraph (4)(i) of the 
Definition

    Fact Pattern: Soybean Processor A has a total throughput 
capacity of 200 million bushels of soybeans per year (equivalent to 
40,000 CBOT soybean futures contracts). Soybean Processor A crushes 
soybeans into products (soybean oil and soybean meal). It currently 
has 40 million bushels of soybeans in storage and has offset that 
risk through fixed-price forward sales of the amount of products 
expected to be produced from crushing 40 million bushels of 
soybeans, thus locking in its processor margin on one million metric 
tons of soybeans. Because it has consistently operated its plants at 
full capacity over the last three years, it anticipates purchasing 
another 160 million bushels of soybeans to be delivered to its 
storage facility over the next year. It has not sold the 160 million 
bushels of anticipated production of crushed products forward. 
Processor A faces the risk that the difference in price 
relationships between soybeans and the crushed products (i.e., the 
crush spread) could change adversely, resulting in reduced 
anticipated processing margins. To hedge its processing margins and 
lock in the crush spread, Processor A establishes a long position of 
32,000 contracts in the CBOT Soybean futures contract (equivalent to 
160 million bushels of soybeans) and corresponding short positions 
in CBOT Soybean Meal and Soybean Oil futures contracts, such that 
the total notional quantity of soybean meal and soybean meal futures 
contracts are equivalent to the expected production from crushing 
160 million bushels of soybeans into soybean meal and soybean oil.
    Analysis: These positions meet the general requirements for bona 
fide hedging positions under paragraphs (2)(i)(A)-(C) and the 
provisions for hedges of unfilled anticipated requirements under 
paragraph (3)(iii)(A) and unsold anticipated production under 
paragraph (4)(i). The physical commodities being hedged are 
commodities underlying the CBOT Soybean, Soybean Meal, and Soybean 
Oil futures contracts. Long positions in the soybean futures 
contract and corresponding short positions in soybean meal and 
soybean oil futures contracts qualify as bona fide hedging positions 
provided they do not exceed the unfilled anticipated requirements of 
the cash commodity for twelve months (in this case 4 million tons) 
as required in paragraph (3)(iii)(A) and the quantity equivalent of 
twelve months unsold anticipated production of cash products and by-
products as required in paragraph (4)(i). Such positions are a 
substitute for purchases and sales to be made at a later time in the 
physical marketing channel and are economically appropriate to the 
reduction of risk. The positions in referenced contracts offset the 
potential change in the value of soybeans that the processor 
anticipates purchasing and the potential change in the value of 
products and by-products the processor anticipates producing and 
selling. The size of the permissible long hedge position in the 
soybean futures contract must be reduced by any inventories and 
fixed-price purchases because they would reduce the processor's 
unfilled requirements. Similarly, the size of the permissible short 
hedge positions in soybean meal and soybean oil futures contracts 
must be reduced by any fixed-price sales because they would reduce 
the processor's unsold anticipated production. As provided under 
paragraph (3)(iii)(A), the risk reducing long position in the 
soybean futures contract that is not in excess of the anticipated 
requirements for soybeans for that month and the next succeeding 
month qualifies as a bona fide hedging position during the last five 
days of trading in the physical-delivery referenced

[[Page 75837]]

contract. As provided under paragraph (4)(i), the risk reducing 
short position in the soybean meal and oil futures contract do not 
qualify as a bona fide hedging position in a physical-delivery 
referenced contract during the last five days of trading in the 
event the Soybean Processor A does not have unsold products in 
inventory.
    The combination of the long and short positions in soybean, 
soybean meal, and soybean oil futures contracts are economically 
appropriate to the reduction of risk. However, unlike in this 
example, an unpaired position (e.g., only a long position in a 
commodity derivative contract) that is not offset by either a cash 
market position (e.g., a fixed-price sales contract) or derivative 
position (e.g., a short position in a commodity derivative contract) 
would not represent an economically appropriate reduction of risk. 
This is because the commercial enterprise's crush spread risk is 
relatively low in comparison to the price risk from taking an 
outright long position in the futures contract in the underlying 
commodity or an outright short position in the futures contracts in 
the products and by-products of processing. The price fluctuations 
of the crush spread, that is, the risk faced by the commercial 
enterprise, would not be expected to be substantially related to the 
price fluctuations of either an outright long or outright short 
futures position.

6. Agent Hedge Under Paragraph (3)(iv) of the Bona Fide Hedging 
Position Definition

    Fact Pattern: Agent A is in the business of merchandising 
(selling) the cash grain owned by multiple warehouse operators and 
forwarding the merchandising revenues back to the warehouse 
operators less the agent's fees. Agent A does not own any cash 
commodity, but is responsible for merchandising of the cash grain 
positions of the warehouse operators pursuant to contractual 
arrangements. The contractual arrangements also authorize Agent A to 
hedge the price risks of the grain owned by the warehouse operators. 
For the volumes of grain it is authorized to hedge, the agent enters 
into short positions in grain commodity derivative contracts that 
offset the price risks of the cash commodities.
    Analysis: The positions meet the requirements of paragraphs 
(2)(1)(A)-(C) for hedges of a physical commodity and paragraph 
(3)(iv) for hedges by an agent. The positions represent a substitute 
for transactions to be made in the physical marketing channel, are 
economically appropriate to the reduction of risks arising from 
grain owned by the agent's contractual counterparties, and arise 
from the potential change in the value of such grain. The agent does 
not own and has not contacted to purchase such grain at a fixed 
price, but is responsible for merchandising the cash positions that 
are being offset in commodity derivative contracts. The agent has a 
contractual arrangement with the persons who own the grain being 
offset.

7. Sovereign Hedge of Unsold Anticipated Production Under Paragraph 
(4)(i) of the Bona Fide Hedging Position Definition and Position 
Aggregation Under Sec.  150.4

    Fact Pattern: A Sovereign induces a farmer to sell his 
anticipated production of 100,000 bushels of corn forward to User A 
at a fixed price for delivery during the expected harvest. In return 
for the farmer entering into the fixed-price forward sale, the 
Sovereign agrees to pay the farmer the difference between the market 
price at the time of harvest and the price of the fixed-price 
forward, in the event that the market price at the time of harvest 
is above the price of the forward. The fixed-price forward sale of 
100,000 bushels of corn reduces the farmer's downside price risk 
associated with his anticipated agricultural production. The 
Sovereign faces commodity price risk as it stands ready to pay the 
farmer the difference between the market price and the price of the 
fixed-price contract. To reduce that risk, the Sovereign establishes 
a long position of 20 call options on the Chicago Board of Trade 
(CBOT) Corn futures contract, equivalent to 100,000 bushels of corn.
    Analysis: Because the Sovereign and the farmer are acting 
together pursuant to an express agreement, the aggregation 
provisions of Sec.  150.4 apply and they are treated as a single 
person for purposes of position limits. Taking the positions of the 
Sovereign and farmer jointly, the risk profile of the combination of 
the forward sale and the long call is approximately equivalent to 
the risk profile of a synthetic long put.\2\ A synthetic long put 
offsets the downside price risk of anticipated production. Thus, the 
position of that person satisfies the general requirements for a 
bona fide hedging position under paragraphs (2)(i)(A)-(C) and meets 
the requirements for anticipated agricultural production under 
paragraph (4)(i). The agreement between the Sovereign and the farmer 
involves the production of a commodity underlying the CBOT Corn 
futures contract. The synthetic long put is a substitute for 
transactions that the farmer has made in the physical marketing 
channel. The synthetic long put reduces the price risk associated 
with anticipated agricultural production. The size of the 
Sovereign's position is equivalent to the size of the farmer's 
anticipated production. As provided under paragraph (4), the 
Sovereign's risk-reducing position would not qualify as a bona fide 
hedging position in a physical-delivery futures contract during the 
last five days of trading; however, since the CBOT Corn option will 
exercise into a physical-delivery CBOT Corn futures contract prior 
to the last five days of trading in that physical-delivery futures 
contract, the Sovereign may continue to hold its option position as 
a bona fide hedging position through option expiry.
---------------------------------------------------------------------------

    \2\ Put-call parity describes the mathematical relationship 
between price of a put and call with identical strike prices and 
expiry.
---------------------------------------------------------------------------

8. Hedge of Offsetting Unfixed Price Sales and Purchases Under 
Paragraph (4)(ii) of the Bona Fide Hedging Position Definition

    Fact Pattern: Currently it is October and Oil Merchandiser A has 
entered into cash forward contracts to purchase 600,000 of crude oil 
at a floating price that references the January contract month (in 
the next calendar year) for the ICE Futures Brent Crude futures 
contract and to sell 600,000 barrels of crude oil at a price that 
references the February contract month (in the next calendar year) 
for the NYMEX Light Sweet Crude Oil futures contract. Oil 
Merchandiser A is concerned about an adverse change in the price 
spread between the January ICE Futures Brent Crude futures contract 
and the February NYMEX Light Sweet Crude Oil futures contract. To 
reduce that risk, Oil Merchandiser A establishes a long position of 
600 contracts in the January ICE Futures Brent Crude futures 
contract, price risk equivalent to buying 600,000 barrels of oil, 
and a short position of 600 contracts in the February NYMEX Light 
Sweet Crude Oil futures contract, price risk equivalent to selling 
600,000 barrels of oil.
    Analysis: Oil Merchandiser A's positions meet the general 
requirements for bona fide hedging positions under paragraphs 
(2)(i)(A)-(C) and the provisions for offsetting sales and purchases 
in referenced contracts under paragraph (4)(ii). The physical 
commodity that is being hedged involves a commodity underlying the 
NYMEX Light Sweet Crude Oil futures contract. The long and short 
positions in commodity derivative contracts represent substitutes 
for transactions to be taken at a later time in the physical 
marketing channel. The positions are economically appropriate to the 
reduction of risk because the price spread between the ICE Futures 
Brent Crude futures contract and the NYMEX Light Sweet Crude Oil 
futures contract could move adversely to Oil Merchandiser A's 
interests in the two cash forward contracts, that is, the price of 
the ICE Futures Brent Crude futures contract could increase relative 
to the price of the NYMEX Light Sweet Crude Oil futures contract. 
The positions in commodity derivative contracts offset the price 
risk in the cash forward contracts. As provided under paragraph (4), 
the risk-reducing position does not qualify as a bona fide hedging 
position in the crude oil physical-delivery referenced contract 
during the spot month.

9. Anticipated Royalties Hedge Under Paragraph (4)(iii) of the Bona 
Fide Hedging Position Definition and Pass-Through Swaps Hedge Under 
Paragraph (2)(ii) of the Definition

    a. Fact Pattern: In order to develop an oil field, Company A 
approaches Bank B for financing. To facilitate the loan, Bank B 
first establishes an independent legal entity commonly known as a 
special purpose vehicle (SPV). Bank B then provides a loan to the 
SPV. The SPV is obligated to repay principal and interest to the 
Bank based on a fixed price for crude oil. The SPV in turn makes a 
production loan to Company A. The terms of the production loan 
require Company A to provide the SPV with volumetric production 
payments (VPPs) based on a specified share of the production to be 
sold at the prevailing price of crude oil (i.e., the index price) as 
oil is produced. Because the price of crude oil may fall, the SPV 
reduces that risk by entering into a

[[Page 75838]]

crude oil swap with Swap Dealer C. The swap requires the SPV to pay 
Swap Dealer C the floating price of crude oil (i.e., the index 
price) and for Swap Dealer C to pay a fixed price to the SPV. The 
notional quantity for the swap is equal to the expected production 
underlying the VPPs to the SPV. The SPV will receive a floating 
price at index on the VPP and will pay a floating price at index on 
the swap, which will offset. The SPV will receive a fixed price 
payment on the swap and repay the loan's principal and interest to 
Bank B. The SPV is highly certain that the VPP production volume 
will occur, since the SPV's engineer has reviewed the forecasted 
production from Company A and required the VPP volume to be set with 
a cushion (i.e., a hair-cut) below the forecasted production.
    Analysis: For the SPV, the swap between Swap Dealer C and the 
SPV meets the general requirements for a bona fide hedging position 
under paragraphs (2)(i)(A)-(C) and the requirements for anticipated 
royalties under paragraph (4)(iii). The SPV will receive payments 
under the VPP royalty contract based on the unfixed price sale of 
anticipated production of the physical commodity underlying the 
royalty contract, i.e., crude oil. The swap represents a substitute 
for the price of sales transactions to be made in the physical 
marketing channel. The SPV's swap position qualifies as a hedge 
because it is economically appropriate to the reduction of price 
risk. The swap reduces the price risk associated with a change in 
value of a royalty asset. The fluctuations in value of the SPV's 
anticipated royalties are substantially related to the fluctuations 
in value of the crude oil swap with Swap Dealer C.
    b. Continuation of Fact Pattern: Swap Dealer C offsets the price 
risk associated with the swap to the SPV by establishing a short 
position in cash-settled crude oil futures contracts. The notional 
quantity of the short position in futures contracts held by Swap 
Dealer C exactly matches the notional quantity of the swap with the 
SPV.
    Analysis: For the swap dealer, because the SPV enters the cash-
settled swap as a bona fide hedger under paragraph (4)(iii) (i.e., a 
pass-through swap counterparty), the offset of the risk of the swap 
in a futures contract by Swap Dealer C qualifies as a bona fide 
hedging position (i.e., a pass-through swap offset) under paragraph 
(2)(ii)(A). Since the swap was executed opposite a pass-through swap 
counterparty and was offset, the swap itself also qualifies as a 
bona fide hedging position (i.e., a pass-through swap) under 
paragraph (2)(ii)(B). If the cash-settled swap is not a referenced 
contract, then the pass-through swap offset may qualify as a cross-
commodity hedge under paragraph (5), provided the fluctuations in 
value of the pass-through swap offset are substantially related to 
the fluctuations in value of the pass-through swap.

10. Anticipated Royalties Hedge Under Paragraph (4)(iii) of the Bona 
Fide Hedging Position Definition and Cross-Commodity Hedge Under 
Paragraph (5) of the Definition

    Fact Pattern: An eligible contract participant (ECP) owns 
royalty interests in a portfolio of oil wells. Royalties are paid at 
the prevailing (floating) market price for the commodities produced 
and sold at major trading hubs, less transportation and gathering 
charges. The large portfolio and well-established production history 
for most of the oil wells provide a highly certain production stream 
for the next 24 months. The ECP also determined that changes in the 
cash market prices of 50 percent of the oil production underlying 
the portfolio of royalty interests historically have been closely 
correlated with changes in the calendar month average of daily 
settlement prices of the nearby NYMEX Light Sweet Crude Oil futures 
contract. The ECP decided to hedge some of the royalty price risk by 
entering into a cash-settled swap with a term of 24 months. Under 
terms of the swap, the ECP will receive a fixed payment and make 
monthly payments based on the calendar month average of daily 
settlement prices of the nearby NYMEX Light Sweet Crude Oil futures 
contract and notional amounts equal to 50 percent of the expected 
production volume of oil underlying the royalties.
    Analysis: This position meets the requirements of paragraphs 
(2)(i)(A)-(C) for hedges of a physical commodity, paragraph (4)(iii) 
for hedges of anticipated royalties, and paragraph (5) for cross-
commodity hedges. The long position in the commodity derivative 
contract represents a substitute for transactions to be taken at a 
later time in the physical marketing channel. The position is 
economically appropriate to the reduction of price risk because the 
price of oil may decrease. The commodity derivative contract 
position offsets the price risk of royalty payments, based on oil 
production, that the ECP anticipates receiving. The ECP is exposed 
to price risk arising from the anticipated production volume of oil 
attributable to her royalty interests. The physical commodity 
underlying the royalty portfolio that is being hedged involves a 
commodity with fluctuations in value that are substantially related 
to the fluctuations in value of the swap.

11. Hedges of Services Under Paragraph (4)(iv) of the Bona Fide Hedging 
Position Definition

    a. Fact Pattern: Company A enters into a risk service agreement 
to drill an oil well with Company B. The risk service agreement 
provides that a portion of the revenue receipts to Company A depends 
on the value of the light sweet crude oil produced. Company A is 
exposed to the risk that the price of oil may fall, resulting in 
lower anticipated revenues from the risk service agreement. To 
reduce that risk, Company A establishes a short position in the New 
York Mercantile Exchange (NYMEX) Light Sweet Crude Oil futures 
contract, in a notional amount equivalent to the firm's anticipated 
share of the expected quantity of oil to be produced. Company A is 
highly certain of its anticipated share of the expected quantity of 
oil to be produced.
    Analysis: Company A's hedge of a portion of its revenue stream 
from the risk service agreement meets the general requirements for 
bona fide hedging positions under paragraphs (2)(i)(A)-(C) and the 
provisions for services under paragraph (4)(iv). The contract for 
services involves the production of a commodity underlying the NYMEX 
Light Sweet Crude Oil futures contract. A short position in the 
NYMEX Light Sweet Crude Oil futures contract is a substitute for 
transactions to be taken at a later time in the physical marketing 
channel, with the value of the revenue receipts to Company A 
dependent on the price of the oil sales in the physical marketing 
channel. The short position in the futures contract held by Company 
A is economically appropriate to the reduction of risk, because the 
total notional quantity underlying the short position in the futures 
contract held by Company A is equivalent to its share of the 
expected quantity of future production under the risk service 
agreement. Because the price of oil may fall, the short position in 
the futures contract reduces price risk from a potential reduction 
in the payments to Company A under the service contract with Company 
B. Under paragraph (4)(iv), the risk-reducing position will not 
qualify as a bona fide hedging position during the spot month of the 
physical-delivery oil futures contract.
    b. Fact Pattern: A City contracts with Firm A to provide waste 
management services. The contract requires that the trucks used to 
transport the solid waste use natural gas as a power source. 
According to the contract, the City will pay for the cost of the 
natural gas used to transport the solid waste by Firm A. In the 
event that natural gas prices rise, the City's waste transport 
expenses will increase. To mitigate this risk, the City establishes 
a long position in the NYMEX Henry Hub Natural Gas futures contract 
in an amount equivalent to the expected volume of natural gas to be 
used over the life of the service contract.
    Analysis: This position meets the general requirements for bona 
fide hedging positions under paragraphs (2)(i)(A)-(C) and the 
provisions for services under paragraph (4)(iv). The contract for 
services involves the use of a commodity underlying the NYMEX Henry 
Hub Natural Gas futures contract. Because the City is responsible 
for paying the cash price for the natural gas used under the 
services contract, the long hedge is a substitute for transactions 
to be taken at a later time in the physical marketing channel. The 
position is economically appropriate to the reduction of price risk 
because the total notional quantity of the long position in a 
commodity derivative contract equals the expected volume of natural 
gas to be used over the life of the contract. The position in the 
commodity derivative contract reduces the price risk associated with 
an increase in anticipated costs that the City may incur under the 
services contract in the event that the price of natural gas 
increases. As provided under paragraph (4), the risk reducing 
position will not qualify as a bona fide hedge during the spot month 
of the physical-delivery futures contract.

12. Cross-Commodity Hedge Under Paragraph (5) of the Bona Fide Hedging 
Position Definition and Inventory Hedge Under Paragraph (3)(i) of the 
Definition

    Fact Pattern: Copper Wire Fabricator A is concerned about 
possible reductions in the

[[Page 75839]]

price of copper. Currently it is November and it owns inventory of 
100 million pounds of copper and five million pounds of finished 
copper wire. Currently, deferred futures prices are lower than the 
nearby futures price. Copper Wire Fabricator A expects to sell 150 
million pounds of finished copper wire in February of the following 
year. To reduce its price risk, Copper Wire Fabricator A establishes 
a short position of 6000 contracts in the February COMEX Copper 
futures contract, equivalent to selling 150 million pounds of 
copper. The fluctuations in value of copper wire are expected to be 
substantially related to fluctuations in value of copper.
    Analysis: The Copper Wire Fabricator A's position meets the 
general requirements for a bona fide hedging position under 
paragraphs (2)(i)(A)-(C) and the provisions for owning a commodity 
under paragraph (3)(i) and for a cross-hedge of the finished copper 
wire under paragraph (5). The short position in a referenced 
contract represents a substitute for transactions to be taken at a 
later time in the physical marketing channel. The short position is 
economically appropriate to the reduction of price risk in the 
conduct and management of the commercial enterprise because the 
price of copper could drop. The short position in the referenced 
contract offsets the risk of a possible reduction in the value of 
the inventory that it owns. Since the finished copper wire is a 
product of copper that is not deliverable on the commodity 
derivative contract, 200 contracts of the short position are a 
cross-commodity hedge of the finished copper wire and 400 contracts 
of the short position are a hedge of the copper inventory.

13. Cross-Commodity Hedge Under Paragraph (5) of the Bona Fide Hedging 
Position Definition and Anticipated Requirements Hedge Under Paragraph 
(3)(iii)(A) of the Definition

    Fact Pattern: Airline A anticipates using a predictable volume 
of jet fuel every month based on scheduled flights and decides to 
hedge 80 percent of that volume for each of the next 12 months. 
After a review of various commodity derivative contract hedging 
strategies, Airline A decides to cross hedge its anticipated jet 
fuel requirements in ultra-low sulfur diesel (ULSD) commodity 
derivative contracts. Airline A determined that price fluctuations 
in its average cost for jet fuel were substantially related to the 
price fluctuations of the calendar month average of the first nearby 
physical-delivery NYMEX New York Harbor ULSD Heating Oil (HO) 
futures contract and determined an appropriate hedge ratio, based on 
a regression analysis, of the HO futures contract to the quantity 
equivalent amount of its anticipated requirements. Airline A decided 
that it would use the HO futures contract to cross hedge part of its 
jet fuel price risk. In addition, Airline A decided to protect 
against jet fuel price increases by cross hedging another part of 
its anticipated jet fuel requirements with a long position in cash-
settled calls in the NYMEX Heating Oil Average Price Option (AT) 
contract. The AT call option is settled based on the price of the HO 
futures contract. The sum of the notional amounts of the long 
position in AT call options and the long position in the HO futures 
contract will not exceed the quantity equivalent of 80 percent of 
Airline A's anticipated requirements for jet fuel.
    Analysis: The positions meet the requirements of paragraphs 
(2)(i)(A)-(C) for hedges of a physical commodity, paragraph 
(3)(iii)(A) for unfilled anticipated requirements and paragraph (5) 
for cross-commodity hedges. The positions represent a substitute for 
transactions to be made in the physical marketing channel, are 
economically appropriate to the reduction of risks arising from 
anticipated requirements for jet fuel, and arise from the potential 
change in the value of such jet fuel. The aggregation notional 
amount of the airline's positions in the call option and the futures 
contract does not exceed the quantity equivalent of anticipated 
requirements for jet fuel. The value fluctuations in jet fuel are 
substantially related to the value fluctuations in the HO futures 
contract.
    Airline A may hold its long position in the cash-settled AT call 
option contract as a cross hedge against jet fuel price risk without 
having to exit the contract during the spot month.

14. Position Aggregation Under Sec.  150.4 and Inventory Hedge Under 
Paragraph (3)(i) of the Bona Fide Hedging Position Definition

    Fact Pattern: Company A owns 100 percent of Company B. Company B 
buys and sells a variety of agricultural products, including wheat. 
Company B currently owns five million bushels of wheat. To reduce 
some of its price risk, Company B establishes a short position of 
600 contracts in the CBOT Wheat futures contract, equivalent to 
three million bushels of wheat. After communicating with Company B, 
Company A establishes an additional short position of 400 CBOT Wheat 
futures contracts, equivalent to two million bushels of wheat.
    Analysis: The aggregate short position in the wheat referenced 
contract held by Company A and Company B meets the general 
requirements for a bona fide hedging position under paragraphs 
(2)(i)(A)-(C) and the provisions for owning a cash commodity under 
paragraph (3)(i). Because Company A owns more than 10 percent of 
Company B, Company A and B are aggregated together as one person 
under Sec.  150.4. Entities required to aggregate accounts or 
positions under Sec.  150.4 are the same person for the purpose of 
determining whether a person is eligible for a bona fide hedging 
position exemption under Sec.  150.3. The aggregate short position 
in the futures contract held by Company A and Company B represents a 
substitute for transactions to be taken at a later time in the 
physical marketing channel. The aggregate short position in the 
futures contract held by Company A and Company B is economically 
appropriate to the reduction of price risk because the aggregate 
short position in the CBOT Wheat futures contract held by Company A 
and Company B, equivalent to five million bushels of wheat, does not 
exceed the five million bushels of wheat that is owned by Company B. 
The price risk exposure for Company A and Company B results from a 
potential change in the value of that wheat.
0
32. Add appendix D to part 150 to read as follows:

Appendix D to Part 150--Initial Position Limit Levels

------------------------------------------------------------------------
                                                                Single
                   Contract                      Spot-month   month and
                                                              all months
------------------------------------------------------------------------
                           Legacy Agricultural
------------------------------------------------------------------------
Chicago Board of Trade Corn (C)...............          600       53,500
Chicago Board of Trade Oats (O)...............          600        1,600
Chicago Board of Trade Soybeans (S)...........          600       26,900
Chicago Board of Trade Soybean Meal (SM)......          720        9,000
Chicago Board of Trade Soybean Oil (SO).......          540       11,900
Chicago Board of Trade Wheat (W)..............          600       16,200
ICE Futures U.S. Cotton No. 2 (CT)............          300        8,800
Kansas City Board of Trade Hard Winter Wheat            600        6,500
 (KW).........................................
Minneapolis Grain Exchange Hard Red Spring              600        3,300
 Wheat (MWE)..................................
------------------------------------------------------------------------
                           Other Agricultural
------------------------------------------------------------------------
Chicago Board of Trade Rough Rice (RR)........          600        2,200
Chicago Mercantile Exchange Class III Milk             1500        3,400
 (DA).........................................
Chicago Mercantile Exchange Feeder Cattle (FC)          300        3,000
Chicago Mercantile Exchange Lean Hog (LH).....          950        9,400

[[Page 75840]]

 
Chicago Mercantile Exchange Live Cattle (LC)..          450       12,900
ICE Futures U.S. Cocoa (CC)...................        1,000        7,100
ICE Futures U.S. Coffee C (KC)................          500        7,100
ICE Futures U.S. FCOJ-A (OJ)..................          300        2,900
ICE Futures U.S. Sugar No. 11 (SB)............        5,000       23,500
ICE Futures U.S. Sugar No. 16 (SF)............        1,000        1,200
------------------------------------------------------------------------
                    Energy
------------------------------------------------------------------------
New York Mercantile Exchange Henry Hub Natural        1,000      149,600
 Gas (NG).....................................
New York Mercantile Exchange Light Sweet Crude        3,000      109,200
 Oil (CL).....................................
New York Mercantile Exchange NY Harbor ULSD           1,000       16,100
 (HO).........................................
New York Mercantile Exchange RBOB Gasoline            1,000       11,800
 (RB).........................................
------------------------------------------------------------------------
                                  Metal
------------------------------------------------------------------------
Commodity Exchange, Inc. Copper (HG)..........        1,200        5,600
Commodity Exchange, Inc. Gold (GC)............        3,000       21,500
Commodity Exchange, Inc. Silver (SI)..........        1,500        6,400
New York Mercantile Exchange Palladium (PA)...          650        5,000
New York Mercantile Exchange Platinum (PL)....          500        5,000
------------------------------------------------------------------------


    Issued in Washington, DC, on November 7, 2013, by the 
Commission.
Melissa D. Jurgens,
Secretary of the Commission.

    Note:  The following appendices will not appear in the Code of 
Federal Regulations.

Appendices to Position Limits for Derivatives--Commission Voting 
Summary and Statements of Commissioners

Appendix 1--Commission Voting Summary

    On this matter, Chairman Gensler and Commissioners Chilton and 
Wetjen voted in the affirmative. Commissioner O'Malia voted in the 
negative.

Appendix 2--Statement of Chairman Gary Gensler

    I support the proposed rule to establish position limits for 
physical commodity derivatives.
    The CFTC does not set or regulate prices. The Commission is 
charged with promoting the integrity of the futures and swaps 
markets. The Commission is charged with protecting the public from 
fraud, manipulation and other abuses.
    Since the Commodity Exchange Act passed in 1936, position limits 
have been a tool to curb or prevent excessive speculation that may 
burden interstate commerce.
    For a fuller understanding of this long history, refer to the 
excellent testimony of our former General Counsel Dan Berkovitz from 
July of 2009 titled: ``Position Limits and the Hedge Exemption, 
Brief Legislative History.''
    In the Dodd-Frank Act, Congress directed the Commission to 
impose limits on speculative positions in physical commodity futures 
and options contracts and economically equivalent swaps.
    The CFTC finalized a rule in October 2011 that addressed 
Congress' direction to prevent any single trader from obtaining too 
large a share of the market to ensure that derivatives markets 
remain fair and competitive. Last fall, a federal court vacated the 
rule.
    It is critically important, however, that these position limits 
be established as Congress required.
    The agency has historically interpreted our obligations to 
promote market integrity to include ensuring that markets do not 
become too concentrated. When the CFTC set position limits in the 
past, it sought to ensure that the markets were made up of a broad 
group of participants with no one speculator having an outsized 
position. This promotes the integrity of the price discovery 
function in the market by limiting the size of any one speculator's 
footprint in the market.
    Position limits further protect the markets and clearinghouses, 
as such limits diminish the possible burdens when any individual 
participant may need to sell or liquidate a position in times of 
individual stress.
    Thus, position limits help to protect the markets both in times 
of clear skies and when there is a storm on the horizon.
    With a strong proposal ready for the Commission's consideration 
today, we determined that the best path forward to expedite position 
limits implementation was to pursue the new rule and dismiss the 
appeal of the court's ruling, subject to the Commission's approval 
of this proposal.
    Today's proposed rule is consistent with congressional intent. 
The rule would establish position limits in 28 referenced 
commodities in agricultural, energy and metals markets as part of a 
phased approach.
    It would establish one position limits regime for the spot month 
and another for single-month and all-months-combined limits.
    Spot-month limits would be set for futures contracts that can be 
physically settled, as well as those swaps and futures that can only 
be cash settled. We are seeking additional comment on alternatives 
to a conditional spot-month limit exemption with regard to cash-
settled contracts.
    Single-month and all-months-combined limits, which the 
Commission currently sets only for certain agricultural contracts, 
would be reestablished in the energy and metals markets and be 
extended to swaps. These limits would be set using a formula that is 
consistent with that which the CFTC has used to set position limits 
for decades. The limits will be set based upon data on the total 
size of the swaps and futures market collected through the position 
reporting rules for futures, options on futures, and swaps.
    Consistent with congressional direction, the rule also would 
allow for a bona fide hedging exemption for agricultural and exempt 
commodities. Also following congressional direction, there is a 
narrower exemption for swap dealers with regard to their use of 
futures and swaps to facilitate the bona fide hedging of their 
customers.
    Today's proposed position limits rule builds on over four years 
of significant public input. In fact, this is the ninth public 
meeting during my tenure as Chairman to consider position limits.
    We held three public meetings on this issue in the summer of 
2009 and got a great deal of input from market participants and the 
broader public.
    We also benefited from the more than 8,200 comments we received 
in response to the January 2010 proposed rulemaking to reestablish 
position limits in the energy markets.
    We further benefited from input received from the public after a 
March 2010 meeting on the metals markets. In response to the January 
2011 proposal, we received more than 15,100 comments.

Appendix 3--Statement of Commissioner Bart Chilton

    For two reasons, this is a significant day for me. I am reminded 
of that great Etta James song, At Last.
    The first reason is that, at last, we are considering what I 
believe to be the signal rule of my tenure here at the Commission; 
I've been working on speculative position

[[Page 75841]]

limits since 2008. The second reason today is noteworthy is that 
this will be my last Dodd-Frank meeting. Early this morning, I sent 
a letter to the President expressing my intent to leave the Agency 
in the near future. I've waited until now--today--to get this 
proposed rule out the door, and now--at last--with the process 
coming nearly full circle, I can leave. It's with incredible 
excitement and enthusiasm that I look forward to being able to move 
on to other endeavors.
    With that, here is a bit of history on the position limits 
journey that has led us, and me, to this day. The early spring of 
2008 was a peculiar time at the Commission. None of my current 
colleagues were here. I and my colleagues at that time watched Bear 
Stearns fail. We had watched commodity prices rise as investors 
sought diversified financial havens. When I asked Commission staff 
about the influence of speculation on prices, some said speculative 
positions couldn't impact prices. It didn't ring true, and as 
numerous independent studies have confirmed since, it was not true.
    I began urging the Commission to implement speculative position 
limits under our then-existing authority. And I was, at that time, 
the only Commissioner to support position limits. Given the 
concerns, I urged Congress to mandate limits in legislation. A 
Senate bill was blocked on a cloture vote that summer, but late in 
the session, the House actually passed legislation. Finally, in 
2010, as part of the Dodd-Frank law, Congress mandated the 
Commission to implement position limits by early in 2011.
    Within the Commission, I supported passing a rule that would 
have complied with the time-frame established by Congress--by any 
other name--federal law. A position limits rule was proposed in 
January of 2011 and finally approved in November.
    In September 2012, literally days before limits were to be 
effective, a federal district court ruling tossed the rule out, 
claiming the CFTC had not sufficiently provided rationale for 
imposing the rule. We appealed and I urged us to address the 
concerns of the court by proposing and quickly passing another new 
and improved rule. I thought and hoped that we could move rapidly. 
After months of delay and deferral, it became clear: We could not.
    But today--at last--more than three years since Dodd-Frank's 
passage, we are here to take it to the limits one more time.
    Thankfully, we have it right in the text before us. The 
Commission staff has ultimately done an admirable job of devising a 
proposed regulation that should be unassailable in court, good for 
markets and good for consumers.
    I thank everyone who has worked upon the rule: Steve Sherrod, 
Riva Adriance, Ajay Sutaria, Scott Mixon, Mary Connelly, and many 
others for their good work. In addition, I especially thank 
Elizabeth Ritter, my Chief of Staff, Nancy Doyle, and also Salman 
Banaei who has left the Agency for greener pastures. I thank them 
for their tireless efforts on the single most important, and perhaps 
to me the most frustrating, policy issue of my tenure with the 
Commission. I have had the true honor of working with Elizabeth 
since prior to my confirmation. I would be remiss if I did not 
reiterate here what I have often said; nowhere do I believe there is 
a brighter, smarter, more knowledgeable and hard-working derivatives 
counsel. She has served the public and me phenomenally well. Thank 
you, Elizabeth.
    And finally to my colleagues, past and present, my respect to 
those whom we have been unable to persuade to vote with us on this 
issue, and my thanks to those who will vote in support of this 
needed and mandated rule. At last!
    Thank you.

Appendix 4--Dissenting Statement of Commissioner Scott D. O'Malia

    I respectfully dissent from the Commission's decision to approve 
the Notice of Proposed Rulemaking for Position Limits for 
Derivatives. I have a number of serious concerns with the position 
limits proposed rule and its interpretation of section 4a(a) of the 
Commodity Exchange Act (``CEA'' or ``Act'').\1\ Regrettably, this 
proposal continues to chip away at the commercial and business 
operations of end-users and the vital hedging function of the 
futures and swaps markets.
---------------------------------------------------------------------------

    \1\ 7 U.S.C. 6a(a).
---------------------------------------------------------------------------

    I cannot support the position limits proposed rule that is 
before the Commission today because the proposal: (1) Fails to 
utilize current, forward-looking data and other empirical evidence 
as a justification for position limits; (2) fails to provide enough 
flexibility for commercial end-users to engage in necessary hedging 
activities; and (3) fails to establish a useful process for end-
users to seek hedging exemptions.

We are the experts, but where's the evidence?

    Recently, in connection with the Commission's vote to dismiss 
its appeal \2\ of the vacated 2011 position limits rule,\3\ I 
reiterated that the federal district court \4\ had instructed the 
Commission to go back to the drawing board and do its homework.\5\ 
As I have consistently stated, the Commission must perform a 
rigorous and objective fact-based analysis in order to determine 
whether position limits will effectively prevent or deter excessive 
speculation.\6\ Not only that, but the Commission must also, in 
establishing any limits, ensure that there is sufficient market 
liquidity for hedgers and prevent disruption of the price discovery 
function of the underlying market. Unfortunately, the position 
limits rule that is being proposed today is not based upon a 
careful, disciplined review of market dynamics or the new data 
collected under our expanded oversight responsibilities provided for 
by the Dodd-Frank Act.\7\
---------------------------------------------------------------------------

    \2\ ISDA & SIFMA v. CFTC, No. 12-5362 (D.C. Cir.).
    \3\ 76 Fed. Reg. 71626 (Nov. 18, 2011).
    \4\ Int'l Swaps & Derivations Ass'n v. CFTC, 887 F. Supp. 2d 
259, 280-82 (D.D.C. 2012).
    \5\ http://www.cftc.gov/PressRoom/SpeechesTestimony/omaliastatement102913.
    \6\ http://www.cftc.gov/PressRoom/SpeechesTestimony/omaliadissentstatement111512.
    \7\ Dodd-Frank Wall Street Reform and Consumer Protection Act, 
Pub. L. 111-203, 124 Stat. 1376 (2010).
---------------------------------------------------------------------------

    In its second attempt at establishing a broad position limit 
regime that is in accordance with the statutory language amended by 
Dodd-Frank, the Commission relies on a new legal strategy--but not 
new data--in order to circumvent the spirit of the district court's 
decision. Surprisingly, the Commission now accepts that the 
statutory language in CEA section 4a(a)(1) \8\ is ambiguous and that 
there is not a clear mandate from Congress to set position limits, 
contrary to the arguments made by the Commission both in court and 
in the vacated rule. Notwithstanding that concession, the proposed 
rule now hides behind Chevron deference and invokes the Commission's 
``experience and expertise'' in order to justify setting position 
limits without performing an ex ante analysis using current market 
data.\9\
---------------------------------------------------------------------------

    \8\ 7 U.S.C. 6a(a)(1).
    \9\ NPRM pp. 12-14, 24, 32, 171.
---------------------------------------------------------------------------

    I am troubled that the proposal uses only two examples from the 
past--one of them as far back as the 1970s--to cobble together a 
weak, after-the-fact justification that position limits would have 
prevented market disruption. This is glaringly insufficient. 
Instead, the Commission should have taken the time to analyze the 
new data, especially from the swaps market, that has been collected 
under the Dodd-Frank Act. It is especially troubling that the large 
trader data being reported under Part 20 of Commission 
regulations\10\ is still unreliable and unsuitable for setting 
position limit levels, almost two full years after entities began 
reporting data, and that we are forced to resort to using data from 
2011 and 2012 as a poor and inexact substitute.
---------------------------------------------------------------------------

    \10\ 17 C.F.R. part 20.
---------------------------------------------------------------------------

    Today, the Commission proposes to set position limits for the 
futures and swaps markets in the future, not the past. I fail to see 
how we can be ``experts'' if we do not have the data to back us up. 
I fear that this reliance on a new legal strategy, instead of 
evidence-based standards, does little to affirm the Commission's 
self-proclaimed ``expertise'' and could result in another long and 
costly court challenge that will strain our limited resources.

Preserving Flexibility for Commercial End-Users

    I am also concerned that the position limits proposed rule may 
not preserve enough flexibility for commercial end-users to hedge 
risks inherent in their business operations. Hedging is the 
foundation of our markets, and the intent of the Dodd-Frank Act was 
not to place excessive and unnecessary new regulatory burdens on 
end-users and make it more complicated and more costly to undertake 
risk management. That was strongly underlined in the letter sent to 
the Commission by Senators Dodd and Lincoln in June 2010.\11\
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    \11\ Letter from Chairman Christopher Dodd, Committee on 
Banking, Housing, and Urban Affairs, United States Senate, and 
Chairman Blanche Lincoln, Committee on Agriculture, Nutrition, and 
Forestry, United States Senate, to Chairman Barney Frank, Financial 
Services Committee, United States House of Representatives, and 
Chairman Colin Peterson, Committee on Agriculture, United States 
House of Representatives (June 30, 2010).

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[[Page 75842]]

    Regrettably, the Commission's rules implementing Dodd-Frank have 
not adhered to that directive. This position limits proposal is just 
the latest in this disturbing trend of narrowly interpreting the 
statute to foreclose viable risk management functions that did not 
contribute to the financial crisis. This trend is nowhere more 
apparent than in how narrowly the proposal defines the concept of 
bona fide hedging.
    The position limits proposed rule does away with Commission 
regulation 1.3(z),\12\ which has been in effect since the 1970s, and 
sets forth new regulations that narrow the bona fide hedging 
definition, in particular the treatment of anticipatory hedging. 
This is despite the fact that the vacated position limits rule 
explicitly recognized certain anticipatory hedging transactions as 
falling within the statutory definition of bona fide hedging and 
consistent with the purposes of section 4a of the Act, and provided 
exemptions for such transactions given the condition that the trader 
was ``reasonably certain'' of engaging in the anticipated activity. 
In this proposal, based on an unsatisfactory ``further review,'' the 
Commission has changed its mind and has scaled back exemptions for 
anticipatory hedging. In all, the Commission has rejected half of 
the common hedging scenarios described by a working group of end-
users in their petition for exemption.
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    \12\ 17 CFR 1.3(z).
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    I question whether the Commission has fulfilled Congress' intent 
to protect end-users by proposing a new position limits rule that 
articulates a far too narrow conception of bona fide hedging and 
does not reflect the realities of end-users' commercial and business 
operations.

A Workable, Practical Process for Non-Enumerated Hedging Exemptions

    I am especially troubled by the proposed rule's elimination of 
Commission regulations 1.3(z)(3) and 1.47,\13\ which is the 
framework for market participants to seek a non-enumerated hedging 
exemption. I question whether eliminating a workable, practical 
process that has been outlined in Commission regulations for decades 
will make it more difficult for end-users to seek exemptions for 
legitimate hedging transactions and will cause unnecessary delay and 
interference with business operations.
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    \13\ 17 CFR 1.3(z)(3) and 1.47.
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Aggregation Proposed Rule

    While I believe that today's aggregation proposed rule is more 
responsive than the vacated rule to the realities that market 
participants face in their utilization of the futures and swaps 
markets, some important concerns still remain.
    First, the aggregation standards in the proposal present 
significant technology challenges for compliance, especially across 
affiliates. I would support a phase-in period to meet those 
challenges.
    Second, I am concerned that there is insufficient consideration 
and flexibility in the ownership tiers that are used as a proxy for 
control. I would be interested in reviewing comments on pro rata 
aggregation, banding/tiering of ownership interest instead of full 
aggregation, and other issues with beneficial ownership. Further, I 
question whether the possible exemption for ownership in excess of 
50% is of use to any market participants, given the additional 
conditions that are imposed.

Cost-Benefit Considerations

    It is imperative that market participants carefully review the 
new position limits and aggregation proposed rules and provide 
comments. I especially encourage market participants to include any 
comments on the cost impact of the proposed position limits. I would 
also like to receive input from market participants about the cost 
of changes to their operations that were undertaken in order to 
prepare for compliance with the previous position limit rules, 
before those rules were vacated by the court. While the Commission 
failed to give enough weight to these consequences, I intend to 
carefully consider the comments and the critical information they 
provide in evaluating any draft final rule put before the 
Commission.

Conclusion

    It is rare to get a second chance to do things right. I am 
disappointed by the Commission's approach today because the 
Commission has not taken advantage of the opportunity for a second 
chance presented by the district court decision to vacate the 2011 
position limits rule. The Commission has failed in its duty as a 
responsible market regulator by not taking the time to gather the 
evidence and establish sound justifications for position limits ex 
ante that are based on data. Because of this failure, as well as the 
narrowing of the bona fide hedging definition and the elimination of 
the existing process for end-users to seek non-enumerated hedging 
exemptions, I cannot support this proposal.

[FR Doc. 2013-27200 Filed 12-11-13; 8:45 am]
BILLING CODE 6351-01-P